Wednesday, August 02, 2006

This round goes to Wagoner & Co.

Thursday, July 27, 2006
Daniel Howes
Daniel Howes: This round goes to Wagoner & Co.

In the Aesop fable, the hare blasts by the plodding tortoise, falters and loses the race to the slow and steady one.

Can't help but see a little of the tortoise in Rick Wagoner's General Motors Corp., whose second-quarter earnings destroyed Wall Street estimates Wednesday. That should raise a fair question in the minds of GM's most serious critics: Have we underestimated what Wagoner & Co. are doing and how quickly they're doing it?

And, to judge by the disappointing results from superstar CEO Carlos Ghosn's Nissan Motor Co. Tuesday, could the industry chorus that sings the praises of whoever is hot until he is not be about to change its tune? If it does, what does that augur for billionaire GM shareholder Kirk Kerkorian's bid to marry GM with Ghosn's Franco-Japanese alliance of Renault SA and Nissan?

I'd say advantage Wagoner in this round. Between the lines in Wednesday's earnings announcement lurked a clear message from the GM chairman: He's in charge, his slow-but-steady strategy to fix GM is working, there's no need for a Ghosn-style rescue and GM has no intention of seeking federal bankruptcy protection.

"Conventional wisdom is that you can't turn a ship as big as GM around quickly," Wagoner said in a statement full of man-in-a-hurry words like "speed," "gained traction" and "accelerating into high gear." "We aim to prove that conventional wisdom wrong."

All of which may be one significant reason why ol' Kirk and his sidekick, GM director Jerry York, made their GM-Renault-Nissan tie-up gambit public on June 30, the last day of the second quarter.

At least one of them probably had a good idea that Wagoner's strategy was poised to deliver material results and would show folks he isn't yet Detroit's Dead Man Walking -- which makes it hard for Kerkorian to build a case for Ghosn over Wagoner and harder to push an industry-transforming alliance that would risk what GM is doing on its own.

Either way, Kerkorian wins. For every dollar GM shares rise above his break-even point -- and they're above that now -- he books a roughly $60 million paper profit. So if the club York holds with "Ghosn" embossed on one side and "Renault-Nissan" on the other drives change faster than Wagoner otherwise would have, everybody associated with GM gains -- even if Ghosn doesn't get the "prize" he says he wants.

Turnaround fragile, but here

GM is turning itself around. Yes, it could be derailed if gas prices spike higher, if the national economy grinds to a halt, if the Middle East fighting widens, if car and truck sales fall off a cliff and positive cash flow turns into cash conflagration. It could be derailed if the sale of a 51-percent stake in GMAC doesn't happen by year-end (not likely).

If GM, the United Auto Workers and bankrupt Delphi Corp. fail to reach a three-way deal on how and what Delphi will pay its remaining union members when it emerges from bankruptcy, a prolonged strike (also unlikely) could set back GM's turnaround. That would burn precious cash and revive fears of Chapter 11 bankruptcy -- the nuclear option for GM sales, its employees and retirees.

GM can't control many of those "ifs," as much as its leaders might like to and as much as some of its critics think it should. Yet most of what it can control appears to be moving in the right direction, witness the 10-month high in GM shares.

Top-line revenue and revenue per vehicle, a key metric that drives profitability, are up. Health care liability is down. Pensions are fully funded. Billions in structural costs are disappearing. Operating cash flow is positive. An attrition plan to slim down the hourly work force exceeded expectations, from the boardroom to the factory floor.

The new full-size SUVs are contributing lots of fresh dough, despite $3-a-gallon gas and the probability that the momentum will slow. New pickups, a new Saturn midsize and more crossovers come later this year. Even Saab, the quirky Swedish brand that York suggested be euthanized, is setting global sales records.

Look, when's the last time GM, Detroit's chronic underachiever, exceeded expectations ahead of schedule? Or continued to make money in every region outside North America? Or delivered remarkable revenue growth -- $54.4 billion for the quarter, up 11 percent from last year -- that can't all be attributable to one-time asset sales?

Answer: Not recently.

Can't 'just break even'

If Chief Financial Officer Fritz Henderson said it once Wednesday, he said it a half-dozen times: GM's results are encouraging, but they're not what they need to be. GM can't cost-cut its way to profitability (though it sure helps); it needs to book more revenue (which it did last quarter, to the astonishment of many on Wall Street).

"We have to get the job done on both fronts," Henderson said. "The objective is to make a successful business, not just break even."

And he could have added: "Because if we don't get the job done, more customers will desert us and the capital markets will usher us to bankruptcy court unless the directors get rid of us first -- as their final act."

GM's second quarter is welcome news for the company, for Detroit, for the state economy. It's even cause for a few high-fives. But it's hardly the end of GM's painful transition from lumbering industry behemoth -- too bloated, too slow, too far from the cutting-edge -- to a competitive automaker that can lead in foreign markets and make real money here at home.

That story is yet to be written.

Daniel Howes' column typically appears Mondays, Wednesdays and Fridays. He can be reached at (313) 222-2106 or

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