Other Editorials

Case Closed

Peter Morici
Tuesday, March 21, 2006

Why It Is Time for Rick Wagoner to Go

Last week we learned that mistakes in GM accounting raised its 2005 losses above $10 billion. That is well over $5000 per vehicle. With Toyota earning money on its cars, GM's disadvantage vis-à-vis Toyota must be in the range of $7000 per vehicle.

Quite simply, GM has higher costs than Toyota, and Toyota can fetch higher prices for its durable vehicles than Rick Wagoner can command for his more trouble ridden contraptions.

On the cost side, all the propaganda Rick Wagoner has been flinging about, just like the company accounts, does not add up. Repeatedly, GM officials have pointed to health care costs for retirees, dependents and employees. Toyota contributes to health care for employees too. Not as much, but I bet you can't find much more than $1600 in the difference.

GM pays it workers a bit more, it gives them better benefits, gives them more time off, and permits them to retire sooner than does Toyota and other foreign companies operating in the United States. GM is bound by more rigid work rules and job classifications, and does not communicate effectively with its workers. It relies too much on the United Autoworkers Union, which massages and filters information.

And then there is the jobs bank for workers idled but not required to relocate. At the end of 2005, GM was paying 5200 a cool $500 million plus to play checkers, do charity work and the like. No doubt many other active employees are being sent work better done in other places but for the fact that GM does not want to add more sinecures to this private welfare program.

In addition, GM's marketing arm is more bureaucratic than pre-Revolutionary France and equally decadent. It commits faux pas like featuring a Cadillac plowing through snow on TV ads in Miami.

GM's design and engineering are equally screwed up. New vehicle development takes too long, and even successful GM products like the Impala go much longer without redesigns than their Japanese competitors. When new additions arrive, they often lack the latest features in core components'engines and transmissions.

In both the marketing and design departments lines of authority are so jumbled and confused, no one is accountable or appropriately rewarded. Whether you perform badly or well, chances are nothing will happen.

Not that GM does not have its hits. You can't find a better large SUV than the Suburban or Yukon, and the Impala, while technically lagging the Camry, is reliable and delivers a lot of car for the middleclass dollar. Yet there are just not enough of those hits to maintain a market share close to 25 percent and pay GMs massive overhead.

Then there is the quality issue. Cadillac and Chevy are less reliable by miles than Lexus and Toyota. Even Hyundai has better five year reliability, and it offers a 100,000 mile warranty. If GM did that, the repair bills would likely break it.

GM's brands are poorly aligned to key demographic groups. It does not have a credible answer to BMW and Lexus sedans, nor does it have a youth label with the pizzazz of Scion.

What Rick Wagoner needs to do is both simple but hard.

GM needs a less expensive and more flexible labor contract, less overhead and red tape in marketing and design, brands realigned to attainable markets, and a CEO who can convince employees and consumers he is serious about making good cars.

That's tough because the United Autoworkers Union has blue collar workers believing management is bluffing, white employees are suspended in a Brigadoonean mentality, franchised dealers resist change like Soviet plant managers, and Rick Wagoner appears to lack the public confidence to speak to consumers effectively about his products.

Turning GM around requires that its CEO be candid, take on vested interests with vigor, and think outside the box about labor contracts and organizational change.

Sadly, Rick Wagoner lives inside a box and is confused by or afraid of the challenges before him.

He has never adequately enumerated what must be accomplished. Instead, GM statements and advertising seek to convince Americans GM cars are better than they are, and leave us to believe GM's cost problems could be solved by national health insurance. Wagoner appears to fear the union like a freshman fears final exams. A former Chief Financial Officer, he is neither a car guy nor a corporate visionary or strategist.

For years, as CFO, he milked the General Motors Acceptance Corporation to cover up cost problems in manufacturing. Now we learn as CEO he has been engaging in very aggressive accounting and been caught. That is hardly an example of creativity and integrity to offer employees engaged in a struggle for survival.

As Lee Iacocca used to say, "Lead or get out of the way."

We know Wagoner can't lead, so Rick, please exit stage left.

Peter Morici
Robert H. Smith School of Business
University of Maryland
College Park, MD 20742-1815
703 549 4338
cell 703 618 4338