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The Call Continues

Wednesday, April 12, 2006

Street Patrol
GM's CEO must go

The sale of a majority stake of its finance unit can't boost car sales and the board shouldn't use it as an excuse to keep Chief Executive Rick Wagoner.

By Robert Walberg

GM remains a mess.

Even though management found a buyer to pay $14 billion for 51% of its profitable GMAC financing unit, investors just need to look at other recent GM headlines.

GM (GM, news, msgs) recently discovered that it underreported its 2005 losses by $2 billion.

The company faces a costly strike at key supplier Delphi.

Its credit rating, already sitting at junk status, was downgraded again due to concerns it might not be able to access a $5.6 billion line of credit. Credit downgrades make access to capital more difficult and potentially more expensive.

GM is being outspent on research and development by its foreign competitors and its global market share continues to erode.

And the company still hasn't figured out how to sell its cars. March sales fell 14% compared to the year-ago period, with car sales down a staggering 22%. For the first quarter, sales were down 5.1% compared to last year. Other than that Mrs. Lincoln, how was the play?

Time for Wagoner to go
About the best thing that can be said about GM's current condition is that it moves Chief Executive Rick Wagoner one step closer to joining the hundreds of white-collar workers -- not to mention thousands of blue-collar folks -- that the company recently fired to save money.

To lead a turnaround effort at a company as big and as turbulent as GM, the CEO must inspire confidence and command respect. It's obvious that Wagoner no longer boasts these attributes. He is the corporate equivalent of a lame-duck president. The sooner the board of directors replaces him, the better for the company.

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In all fairness, Wagoner is not to blame for all that ails GM. He inherited a bloated product mix, high legacy costs and a paralyzed corporate culture. And to his credit, he jettisoned the Oldsmobile line, aggressively attacked the company's cost structure and bolstered the company's short-term finances by selling the GMAC stake.

But he has failed to change the corporate culture, hasn't gone far enough in streamlining the product mix, and has overseen a further reduction in GM's market share and a significant deterioration of the company's finances.

Losing GMAC stake could lead to even bigger losses
Even Wagoner's most recent triumph -- getting Cerberus Capital Management to pay up to $14 billion over three years to GM for a majority stake in GMAC -- might prove to be a long-term disaster. Though the deal gives GM some much-needed cash to help turn around its North American auto business, the company loses more than half of the profits of the one unit making good money.

Last year, GM earned nearly $3 billion in profits from GMAC. This year the automaker can expect to receive no more than half that total, putting tremendous pressure on the auto division to reverse its fortunes. Otherwise, last year's $10 billion loss might seem small by comparison.

Crippling strike is a real possibility
Unfortunately for GM, before it can focus on redesigning its cars and light trucks, management faces yet another distraction: the threat of a debilitating strike at leading parts maker, Delphi.

As part of its own restructuring plan, Delphi filed motions with the federal bankruptcy court in an effort to void its labor contracts. The bankruptcy court judge won't entertain the motion until early May 9. If the judge rules to throw out Delphi's union contracts, look for UAW workers to go on strike.

Delphi, the UAW and GM have less than two months to reach a settlement and avoid a work stoppage that would cost GM billions.

A lack of parts caused by a strike would force GM to close additional plants, hitting the automaker hard in two ways:

Car sales decline further.

GM's UAW contract calls for it to pay employees, even if plants are closed.

Earlier this month, in an attempt to avoid strike, GM agreed to pay some UAW members at Delphi $35,000 if they agreed to retire. GM also offered its own workers up to $140,000 to retire and agreed to rehire 5,000 UAW members at Delphi.

Why would Delphi listen to Wagoner?
GM already indicated that Delphi's bankruptcy could cost it more than $5 billion. But the automaker could now be forced to shell out even more money in any settlement between the UAW and Delphi. That's not good, but it's better than the alternative.

Wagoner chastised Delphi for seeking to void its contracts, but if he doesn't have the support of his own team, does he really think the folks at Delphi care what he wants? It's just another sign of Wagoner's diminished capacity as GM's top executive.

GM is at a critical juncture in its corporate history. Despite assurances over the weekend that the board has "great confidence" in Rick Wagoner, the CEO clearly doesn't have the confidence of Wall Street, investors or employees.

With the complex sale of the GMAC stake now behind GM, and pressure on a turnaround at the auto unit at an all-time high, it's time for Rick Wagoner to go. Not tomorrow or next month, but today, right now.

At the time of publication, Robert Walberg did not own or control shares of companies mentioned in this column.