|On the Road to Detroit’s Big Pileup |
If General Motors were any other company, it would probably be dead by now. In the summer of 2008, nearly a year before G.M. filed for bankruptcy, its executives were growing desperate. Rick Wagoner, its chief executive, secretly proposed a merger with Ford, while Bill Ford courted the future president, Barack Obama, in an attempt to safeguard his company. This article is adapted from “Once Upon a Car: The Fall and Resurrection of America’s Big Three Automakers — G.M., Ford and Chrysler” by Bill Vlasic, the Detroit bureau chief of The New York Times. The book, to be published Tuesday by William Morrow, reveals new details of the chaos at the Big Three. Conversations recounted in the book were based on more than 100 interviews.
October 1, 2011
“HI, Bill, it’s Rick Wagoner. You know, I think it’s really time we put our companies together.”
Bill Ford wasn’t sure he’d heard right. Mr. Wagoner, the chairman and chief executive of General Motors, wanted to talk about a merger between Ford and G.M.?
He did. Mr. Wagoner and his operating chief, Fritz Henderson, would come by to talk.
Mr. Ford was stunned. He knew G.M. was desperate. But even now, in July 2008, he had no idea it was this desperate. And he couldn’t snub Rick Wagoner. Sure, Mr. Ford said. Come on over, and bring Fritz.
The idea had been the subject of theoretical debate for years. What if G.M. and Ford joined forces? Even in their shrunken state, they would have a combined 38 percent share of the United States market, and a huge international presence. All that purchasing power, manufacturing muscle and technical skill under one roof. Thousands of overlapping jobs could be eliminated. Painful as that might be, it could save billions. Chrysler? Forget it. Instead of a Big Three, there would be a Big One.
But could it even be done? G.M. and Ford had competed head-on for decades. This was not just a rivalry. This was opposite sides of town, you-stay-on-yours-and-I’ll-stay-on-mine. So, as a practical matter, a merger had never been seriously considered — until now.
Bill Ford didn’t like the sound of it. G.M. must be in serious trouble if its executives were coming to Ford for help or answers. The idea of a merger nauseated him. The U.A.W. would go nuts.
Mr. Ford spoke with his C.E.O., Alan R. Mulally, and they agreed that they had to talk to G.M., if only to find out what was going on. Mr. Wagoner’s approach was out of character. Maybe G.M. was in even worse shape than it was letting on.
The meeting that followed would profoundly affect the course of both automakers. Mr. Wagoner and Mr. Henderson arrived with Ray Young, G.M.’s chief financial officer. Don Leclair, Ford’s C.F.O., joined, too.
Mr. Wagoner began. G.M. and Ford should merge, he said. The synergies would be phenomenal. Savings would be huge. The possibilities were endless.
Bill Ford was shocked. G.M. was serious. Who, he asked, would run this new company? As bad as Ford’s stock price was, Ford still had a higher market value than G.M.
Mr. Wagoner noted that G.M. was bigger in terms of sales. So, by all rights, it should probably be in charge. But maybe they could share management, or discuss it later, he suggested.
Mr. Mulally mostly listened. He wanted to know more about G.M.’s true state. He surely didn’t want any part of any merger. As far as he was concerned, G.M. was a roaring five-alarm fire. Why, he asked, was it coming to Ford now?
Mr. Wagoner and Mr. Henderson explained that G.M. was running low on cash and was having trouble borrowing money. By merging with Ford, it could go back to Wall Street.
So that’s what this is about. G.M. is going broke, Bill Ford realized. Ford had $30 billion in the bank, and that’s what G.M. really wanted. It wasn’t about Ford at all. It was about saving G.M. Mr. Ford didn’t need to hear any more. “No thanks,” he said. “This would never work out. “
Mr. Henderson jumped in, reiterating how good a marriage could be. “Don and I did a lot of work on this earlier,” he said. “I know G.M. inside and out, and Don knows Ford inside and out. Between the two of us we could figure it out pretty quickly.”
Mr. Leclair kept his mouth shut. Mr. Ford was doing the talking.
“No,” Mr. Ford said. “No, thanks.”
Mr. Wagoner understood. This wasn’t happening. “Well if you don’t do it with us,” he said, “we’re going to look elsewhere.” With that, the G.M. execs left.
At first, Mr. Ford was angry. G.M. could be so arrogant. But the overture was disturbing. If G.M. went bankrupt, a big part of the automotive supply chain could collapse. That would hurt the entire industry, including Ford. Bill Ford respected G.M.’s power and mass as no one else at Ford could. After all, he is a great-grandson of Henry Ford.
“I grew up in this town, and G.M. was the giant,” he later recalled. “That was just the reality of life for me from childhood.”
Mr. Mulally was amazed at G.M.’s desperation. From the day he came to Ford, he wanted to beat G.M., and to beat it badly. So if G.M. was going belly-up or merging with someone, he wanted to know. But Ford was on its own road, and he wasn’t turning over the wheel to Rick Wagoner or anyone else.
A FEW weeks before the G.M.-Ford meeting, Rick Wagoner assembled his senior executives at G.M.’s base in the Renaissance Center downtown for an announcement: G.M. was not going under — not yet.
“We are highly confident that we have ample liquidity through 2009,” he told reporters.
But could G.M. really survive for 18 months, given that it was burning through more than $1 billion a month?
Mr. Wagoner said G.M. would raise a $15 billion “cushion,” primarily by cutting thousands of salaried jobs, suspending its stock dividend, freezing wages, canceling executive bonuses and eliminating health care coverage for white-collar retirees over 65. On top of that, it would whack 300,000 more units of truck production, cut marketing costs (including dropping its giant Nascar and professional golf sponsorships), reduce spending on new products by 20 percent and delay its first big payment into the U.A.W. health care trust.
All of that would save about $10 billion, Mr. Wagoner said. After that, G.M. hoped to raise $5 billion by selling everything it could — real estate and the rest of its G.M.A.C. finance unit, as well as its Hummer brand and maybe others. Finally, it would borrow whatever it could on Wall Street, using assets in the United States and abroad as collateral.
It sounded as if G.M. was burning the furniture so it wouldn’t freeze to death. Bob Lutz, G.M.’s vice chairman, swore that the company would not compromise on the quality of its new models. But this was the first time it had decided to cut capital spending this much since the recession of the early 1990s.
Mr. Wagoner looked grim. He wore a gray suit, a yellow-striped tie and a long face, the corners of his mouth frozen in a frown. As he sat with his hands folded in front of the bright blue G.M. logo, he appeared to be trying to convince the reporters of something he had a hard time believing himself.
“Our plan is not a plan to survive,” he said flatly. “It is a plan to win.”
Questions were taken, but not really answered. Before the press conference ended, Moody’s Investors Service had downgraded G.M.’s credit rating deeper into junk status.
Afterward, when Mr. Henderson made the first calls to big banks in New York, it was as if no one even wanted to answer the phone. Asking investment banks to raise even a few billion dollars was a joke. He swallowed hard. “It was bad,” he later recalled. “Things just kept getting worse and worse and worse.”
G.M. needed something to open Wall Street’s spigots. That something, he told Mr. Wagoner, was a merger with Ford.
To his surprise, Mr. Wagoner agreed.
AFTER Ford rejected G.M.’s proposal, Mr. Henderson felt as if someone had popped his balloon. So much for the event that would convince Wall Street to lend to G.M. “That would have been the catalyst,” he would recall later. “You could actually use it to raise capital because the amount of synergies would be massive. Massive!”
Now he felt a growing sense of dread. He had been counting on Ford to be a lifeline. At this point, he knew G.M.’s financial status better than anyone, even Mr. Wagoner. He couldn’t blame Ford for slamming the door. His idea might have worked, he said later. “But sitting in their shoes, I could understand why they didn’t want to do it,” he said. “It wasn’t a simple call for them.”
Mr. Lutz was disappointed to hear how the Ford meeting had gone. To him, a merger would prove once and for all that an American company could whip Toyota, or anyone else. “It could be one large, enormously powerful global automobile company,” he had argued. “You could shut one proving ground, one finance department, one tax department, a bunch of plants, get rid of a lot of engineering. We could get rid of the fixed costs even before the acquisition.”
Mr. Wagoner didn’t even want to talk about it. He had tried and failed. Move on, he figured. It was another example of G.M.’s dysfunction at the top. There was something missing among Mr. Wagoner, Mr. Lutz and Mr. Henderson, some chemistry or cover-my-back mentality. They worked together, but not “together,” as the Ford guys did.
Nobody outside the tight inner circles at G.M. and Ford knew of the secret meeting. To much of the world, the two companies were joined at the hip, Detroit’s version of Dumb and Dumber. The public and cable TV’s talking heads were no longer distinguishing among the Big Three. It was everybody’s turn in the barrel.
That was driven home with the financial results for the 2008 spring quarter: an $8.7 billion loss at Ford, the worst quarter in its 105-year history, and a $15.5 billion loss at G.M., its third worst in a century. The numbers were staggering. G.M.’s revenue in North America had fallen $10 billion — a breathtaking 33 percent — from the year-earlier quarter. Ford took an $8 billion charge just to write down assets. The whole United States car market had imploded.
Yet G.M.’s board seemed to be in denial. The lead director, George Fisher, jumped to the company’s defense. “I’m reading too much stuff in the papers these days that is wrong,” Mr. Fisher grumbled in an interview. “It’s a distraction to the board and a distraction to management.” Was G.M. headed for bankruptcy? “The answer is no, absolutely not,” he said.
His optimism seemed remarkable. Mr. Wagoner and Mr. Henderson had just hurled a Hail Mary pass in Ford’s direction. Sales were atrocious and getting worse. Cash reserves were dwindling, and more expenses were coming in. Delphi, the big auto parts maker that had been spun off from G.M., was trying to find a private-equity buyer to emerge from bankruptcy. And it looked as if G.M. would be on the hook for another $3 billion to $4 billion to cover pension obligations of Delphi workers.
No happy talk was coming from Ford. Mr. Mulally, in daily sessions with senior executives, kept raising the volume. “What does a sustainable Ford look like, gentlemen?” he asked at one point. “Why are we in business? We are in business to create value. And we can’t create value if we go out of business.”
Excuses were unacceptable. “Why can’t we make money on small cars?” he asked. “Do you think Toyota can’t make money on small cars?”
On the day Ford reported its huge loss, it rolled out the next phase of Mr. Mulally’s transformation plan — converting three truck plants in Michigan, Kentucky and Mexico to small-car production, ramping up the output of four-cylinder engines and introducing a new wrinkle in “EcoBoost,” an engine technology that simultaneously increased power and fuel economy. Industry analysts were floored that Ford was pouring so much money into capital improvements under such dire circumstances. But Mr. Mulally seemed impervious to the sense of panic building in Detroit.
ON Aug. 4, as Mr. Mulally huddled with his team, Bill Ford was en route to Lansing to meet Barack Obama, then running for president. The one-on-one had been arranged by Gov. Jennifer Granholm of Michigan, a personal friend of Mr. Ford. Bill Ford wanted to get to know this young, environmentally minded candidate. The election was three months away, and Mr. Obama looked like a winner.
Much of what was happening to the American auto industry had political overtones. Ford was aware that G.M. was planning to go to Washington to lobby for aid. Specifically, Mr. Wagoner wanted some of the $25 billion in Department of Energy loans authorized by Congress the previous year, when lawmakers passed new fuel-economy standards. The loans were intended as seed money for technology to meet the tougher guidelines. But the $25 billion wasn’t in the budget yet, and G.M. was taking no chances. It needed that money — and not just for greener cars.
Mr. Ford had a growing sense that whatever went down in Detroit, the federal government would be intimately involved. And he wanted to make a personal connection with the man who could be the next president.
Mr. Obama had a huge crowd for his speech at Michigan State University. Cheers came in waves when he promised to help Michigan out of its woes.
“I know how much the auto industry and the autoworkers of this state have struggled,” he said. “But I also know where I want the fuel-efficient cars of tomorrow to be built — not in Japan, not in China, but right here in the United States of America. Right here in the state of Michigan!”
Afterward, he and Mr. Ford met alone. Mr. Obama had been forthright on the campaign trail about Detroit’s past, its dependence on gas-guzzling trucks and its reluctance to change. He had echoed those points in his speech, speaking of ending America’s dependence on foreign oil.
“We desperately need a new energy policy in this country,” he told Mr. Ford. “And I would like the domestic auto industry to be part of the solution, not part of the problem.”
Mr. Ford had a ready reply: “We’d love to work with your administration. I passionately believe that Ford can and should be part of the solution.”
Then he went through Ford’s transformation: smaller cars, cleaner engines, electric vehicles in development. “The vision I have is for us to be a global, green, high-tech company,” he said. “And that’s not just a vision.”
The two hit it off and then got technical — how to build batteries for electric cars, create an infrastructure of charging stations, target tax credits to shift consumers into super-efficient vehicles. When it was over, they shook hands like new friends. Mr. Ford felt great. Everything Mr. Obama wanted, he wanted, too. “I think he’s exactly in line,” Mr. Ford said after the meeting, “with where society wants us to go.”
GREEN cars were also very much on Mr. Wagoner’s mind. In late summer 2008, he told Mr. Lutz that the single biggest product responsibility on his plate was to deliver a working version of the Chevrolet Volt plug-in hybrid by Sept. 16 — the day of G.M.’s 100th birthday celebration. “Bob, we need it then,” Mr. Wagoner said.
Mr. Wagoner was gearing up for the ultimate sales job: to persuade Washington to help G.M. The presidential campaign was about to kick into overdrive. The Bush administration was already swamped with Wall Street’s crisis, and Congress was in its re-election frenzy. If G.M. was to win over Capitol Hill and the White House, it needed a powerful message. It couldn’t come limping in, begging. It had to represent progress, innovation, a bright future.
That’s where the Volt came in. It was the one car G.M. had that nobody else had, a blend of electric power and convenience. When the battery ran down, a little motor kicked in and kept it going. What could be smarter?
Mr. Lutz had been riding the Volt team hard. For once, he could stick it to Toyota. But he wasn’t sure about that September timetable. The Volt wouldn’t even go on sale for another two years. Was it really necessary to have it ready for the G.M. birthday party?
Yes, Mr. Wagoner told him. G.M. needed that car.
G.M. got the Volt, but it wasn’t enough. By the time the first one rolled off the line on Nov. 30, 2010, Mr. Wagoner had been forced out by the Obama administration as part of a $50 billion bailout.
Copyright © 2011 by Bill Vlasic. To be published on Oct. 4, 2011, by William Morrow, an imprint of HarperCollins Publishers.