General Motors led the charge against America's post-September 11 blues. Its chief executive, Rick Wagoner, talks to David Teather in Detroit about how its strategy worked - and other clouds on the horizon.
For a few heart-stopping moments last month it looked as though General Motors might be the next victim of the accounting scandals. Trading in the company's shares was briefly suspended amid rumours that the world's largest car-maker was the subject of unspecified accounting woes. After a strong denial, trading was resumed, but investors still marked the shares down.
On the top floor of GM's headquarters in downtown Detroit, chief executive Rick Wagoner eases into a chair and throws his hands in the air. "Wasn't that weird?" he asks. GM, he notes, has independent directors in charge of all key committees including audit, splits the role of chairman and chief executive and has awarded no bonuses to directors for five years. The off-balance sheet special purpose entities used to leverage finance deals were fully detailed to investors in the wake of Enron's collapse, he adds.
"Nobody knows where the rumour came from," he says. "The skittishness in the markets is as high. But I hope things calm down. I think it's having an impact on the consumer side of the economy and it's consumers who have driven the turnaround." The pun may be unintentional but it hits the mark. Throughout last year's "blink and you missed it" recession it has been consumer spending that has propped up the world's largest economy. And with the aggressive level of incentives introduced after last year's terrorist attacks, record-breaking car sales have been the key contributor. GM, of the big three auto manufacturers in the US, has been at the forefront of this higher spending - it was first to introduce zero per cent finance - and has been chief beneficiary.
This year, car sales in the crucial North American market are expected to reach 16.5 million and the benefits, plus the results of some painful restructuring at the big three, appear to have been feeding through to the bottom line. GM last week produced second quarter earnings of $1.29 billion, more than double the same period last year. Ford, undergoing a $9 billion restructuring and having cut 35,000 jobs, returned to profit for the first time in five quarters and DaimlerChrysler improved its outlook for the year end. But can the forward momentum can be maintained?
In the weeks after September 11, GM sales ground to a halt, leaving the company with a choice: cut production or do something to get consumers back into the showrooms. The result was Keep America Rolling, an unabashed appeal to the patriotism of US consumers.
"Sales were down 30 per cent from week to week," Wagoner says. "We felt zero finance was worth a try." The campaign produced record sales in October and subsequent months. Incentives in one form or other have been in place ever since.
"We're not out to take volume by giving cars away but we don't want others to offer greater incentives and take our share," he says. "When we have eased off a bit on incentives somebody else takes the lead, which we saw in May." Determined to recover ground, GM beefed up its discounts last month and lifted sales by 4.3 per cent. Ford declined to follow and suffered an 11 per cent fall. "We need to stay on the edge of our seats," he says.
Wagoner has GM running through his blood. The 49-year-old joined the company straight from Harvard 25 years ago, first as an analyst in the treasurer's office in New York. For two years up to 1991, he was in charge of finance in Europe. An affable character, he says he was perhaps appointed as chief executive too early and needed time to grow into the job.
Wagoner has the finance chief's bent for methodical thinking. He answers questions in carefully laid out points, ensuring each is understood.
Most weekends, he drives home the latest Ford or Toyota. Car companies swap new models, allowing each other to study the competition. After he has tested the steering, the upholstery and no doubt the legroom - he is a towering man - they are sent to a warehouse and taken apart.
But the seemingly cosy arrangement belies an industry that is one of the toughest. GM last year saw its profits slump from $5 billion to $1.5 billion, the result of competition from overseas manufacturers and downward pricing pressure. Retail prices last year were 1.3 per cent lower than 2000. GM expects them to fall another 1 per cent in 2002. Japanese makers, led by Toyota, took a record 26 per cent share in the US.
A decade of improving productivity has allowed GM to weather this better than its rivals and given it the flexibility to be more aggressive. Last year its North American market share improved for the first time in 10 years to 28.1 per cent, partly due to strong sport utility vehicles including the Chevrolet Trailblazer and Suburban. Wagoner says US plants are now running at near full capacity but GM needs to maintain sales if it is to avoid further job losses.
Being a GM lifer might suggest an unwillingness to accept change. But he has quietly changed the culture by hiring high level outside talent. Bob Lutz, a former Chrysler executive, joined as chairman last year.
A key difficulty is Europe, where GM is undergoing pain. In the second quarter, the division, including Vauxhall in Britain, Opel in Germany and Saab in Sweden lost $115 million, although that had narrowed from $154 million a year ago.
THE company is in the midst of a restructuring in Europe, dubbed project Olympia, aimed at taking out 25 per cent of vehicle-making capacity and finding $1.8 billion in savings. The division is forecast to lose $350 million this year. GM has projected a return to profitability in 2003, although downward pressure on pricing and poor sales could undermine those plans. Sales in Europe were down 17.3 per cent for GM in May and 14.7 per cent in June.
"We got way ahead of ourselves in Europe and didn't grow our sales and share so now we have the painful process of getting that aligned," says Wagoner.
With little scope for consolidation in Europe, GM's answer was to acquire 20 per cent of Fiat Auto. Mr Wagoner maintains that the deal has worked in terms of reducing costs but Fiat's own performance has proven abysmal: sales fell by 20.8 per cent in June and the company is expected to lose $661 million this year. GM now looks likely to write off much of the $2.4 billion it paid for it.
GM would certainly like to keep Fiat's losses from its balance sheet at a time when the demands of its pension fund are weighing heavily. Last week, Saul Rubin, an analyst at UBS Warburg, downgraded GM because of the pension liability.
Analysts still fear that next year auto sales in North America will stall, producing flat revenues at best. May and June were not great months for the industry suggesting that the payback for nine months of incentives eating up future demand is coming. Alternatively Mr Wagoner's worst fear could prove correct - that the crisis in confidence on Wall Street is feeding through to the consumer, a dread prospect for the company and the business as a whole if America is to keep its auto industry rolling.
° Guardian News Service