Sunday, November 05, 2006

Daniel Howes: GM gains traction but can't afford a letdown

Thursday, October 05, 2006
Daniel Howes: GM gains traction but can't afford a letdown
Automaker needs successes to last more than a quarter

Now it's up to General Motors Corp. Chairman Rick Wagoner to finish what he started.

As he explained the automaker's rationale for breaking off alliance talks with Renault-Nissan CEO Carlos Ghosn on Wednesday, Wagoner referred to the "shocking" and "dramatic" progress of GM's North American turnaround -- "progress that's well ahead of what the skeptics thought possible."

There were "big moves" on health care costs for union retirees, plant closings, cuts in salaried and executive benefits and an unprecedented buyout that will cut 35,000 workers from the payroll. There were asset sales -- exiting foreign alliances and peddling a majority stake in its finance arm -- accelerated product launches, a new marketing strategy and introduction of what GM calls "the industry's best warranty."

Necessary steps, as Wagoner would say, but not sufficient. While Ghosn mulls whether to call Ford Motor Co. Chairman Bill Ford in an effort to find the North American partner he craves -- the two did not talk Wednesday, three ranking Ford sources tell me -- Wagoner needs to punctuate GM's "shocking" and "dramatic" turn with an all-too-rare commodity in Detroit these days.

That would be positive financial results sustainable for more than a quarter or two.

Without saying so, because he can't, Wagoner signaled as much was coming. If he doesn't deliver -- beginning with the traditionally tough third-quarter earnings later this month -- GM's purported shock and awe will be dismissed as just more Detroit denial masquerading as bold action.

That would, of course, mean two things:

First, that Wagoner's nemesis, billionaire shareholder Kirk Kerkorian, would use his likely-soon-to-be 12 percent stake to make the chairman's life miserable. Even if quarterly numbers don't justify it, the rejection of the Renault-Nissan tie-up and Kerkorian's call for an independent committee to review it probably will.

And second, that Wall Street's cynicism about GM's ability to fix itself, grounded in a long history of uncomfortable facts and broken promises, once again would be justified.

GM nears turning point

That's not what the body language or the tones of voice or the workmanlike "we-have-more-work-to-do" attitude at GM say. They say GM insiders believe they're approaching a historic turn, which won't be much of a turn at all unless it's accompanied by growth in revenue, earnings and, especially, cash flow.

From Toyota execs who privately express admiration for new GM products and quality to Ford rivals who grudgingly acknowledge the global reach and integration of GM's operations, the conclusion is the same -- GM is getting traction.

To listen to Wagoner on Wednesday, to hear assessments of how fundamental the changes at GM really are, to see Kerkorian losing leverage, his beloved tie-up with Renault-Nissan and his play for Ghosn because GM is making more progress than he and his deputy, GM director Jerry York, thought possible is to conclude that GM may be near the kind of tipping point this town badly needs.

GM's brass exudes a calm confidence that's new for folks accustomed to being bloodied by competitors, Wall Street, the union and the media -- often at the same time. These are people who, with the help of their hired guns at Goldman Sachs and Morgan Stanley, looked under the hood at Ghosn's Renault-Nissan and said, "No thanks. We're fine."

That's either confidence or, with Kerkorian out there, an invitation to open corporate warfare. In the real world, it's probably some of both.

Wagoner "knows something is coming," says David Cole, chairman of the Center for Automotive Research in Ann Arbor. "What is really important is a trend change in earnings. That's really what Rick has to deliver."

There are no guarantees

Slowly, that possibility is dawning on corners of Wall Street. In a note to investors, Merrill Lynch's John Murphy predicted "upside surprises" to third- and fourth-quarter "earnings estimates as cost savings and operating leverage kick in."

Add two more important factors:

First, talks with bankrupt Delphi Corp., GM's former parts unit, are nearing completion and likely will conclude without the strike that could threaten GM's fragile North American turnaround.

Second, GM is on track to consummate the spinoff of a majority stake in GMAC's captive finance arm, a transaction expected to net some $11 billion and improve the earnings potential of the finance company.

Does any of this guarantee Wagoner's turnaround is assured? Hardly. GM still needs to sell more cars and trucks to more Americans. It has slowed its market share slide, but still commands roughly four points of market share less -- or 680,000 vehicles -- than three years ago.

Gas prices easily could spike again, though the uncomfortable fact is that the pain of declining truck and SUV sales this year fostered a crisis GM exploited -- just ask the United Auto Workers.

Still, GM shares are one of the top performers this year in the Dow Jones Industrials. Even news that alliance talks had broken off with Renault-Nissan didn't prompt a massive sell-off, partly because escalating pressure from Kerkorian is likely to be the hammer that won't allow Wagoner & Co. to ease up.

This comeback is far from complete, but it's moving.

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

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