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For GM, what might have been

General Motors might be earning extra $10 billion annually if it teamed up with Renault-Nissan in 2006, according to report obtained by Fortune.

By Alex Taylor, senior editor
Last Updated: September 10, 2008: 2:24 PM EDT

GM's downward spiral: A timeline GM's downward spiral: A timeline GM's downward spiral: A timeline
The Detroit automaker's desperate bid to stave off bankruptcy is the latest chapter in a steady slide that began more than 20 years ago.

NEW YORK (Fortune) -- General Motors' directors let it be known last week that they are closely watching deteriorating conditions at the automaker. They gave CEO Rick Wagoner a vote of confidence and publicly disclosed that they are monitoring the company's performance on a week-to-week basis.

Before applauding their greater involvement, though, it is worthwhile to revisit a decision the directors made two years ago, under Wagoner's guidance, to scuttle a proposed alliance with Renault-Nissan.

According to recent interviews with parties involved in the discussions, as well as a confidential analysis prepared for the deal that was obtained by Fortune, the tie-up could have produced as much as $10 billion in operating earnings per year for GM (GM, Fortune 500) by 2011. That's a pretty attractive number for a company that has rung up $18.7 billion in losses in just the first six months of this year and needs to borrow $10 billion to $15 billion just to stay in business until 2010.

But the alliance's savings might have come at a steep price for GM's senior management. One proposed strategy called for a "repopulation" of GM's executive ranks with outside talent. That presumably would have forced some incumbent managers out of their jobs - a shocking development at a company where executives seem to enjoy lifetime employment regardless of their performance.

The strategy also called for the creation of a 30- to 50-person SWAT team separate from day-to-day management that would drive the implementation of the pact - another huge blow to GM's status quo.

A GM spokesman said the company couldn't comment on specifics of the proposed deal because all the relevant internal documents had been destroyed. (Editor's note: After this story posted, GM submitted a response to my criticisms. You can read it here.)

To be sure, there are a few things to keep in mind. This analysis comes from Renault-Nissan, and at a time when the auto landscape looked a lot different than it does today, with sky-high gas prices and plunging car sales in the United States. It's not clear if the partnership would have achieved the results the report claims.

What is clear is that the proposed pact represented bold action - something GM has long needed but so far been unwilling to take.

If you'll recall, investor Kirk Kerkorian, who had been amassing shares in GM, proposed in June 2006 that GM explore an alliance with Renault-Nissan, itself a partnership between France's Renault S.A. and Japan's Nissan Motor Co (NSANY). Since joining, the companies had become stronger, and were now both being successfully run by CEO Carlos Ghosn. Wagoner and Ghosn agreed to talks, but after several months the deal was scuttled. GM demanded cash compensation for what it said was the unequal division of synergies; Renault-Nissan refused to make any payments, saying they would be incompatible with the spirit of the alliance.

The analyses obtained by Fortune, which were prepared to support the Renault-Nissan bid, proposed a sweeping consolidation of operations for both sides, with commensurate efficiencies and savings.

For instance, GM would move its small cars onto Renault-Nissan's Micra/Clio platform, while Renault-Nissan would begin building its midsize cars on the same GM platform that underpins the Chevy Malibu. Similarly, GM would take over all work on V-8 engines for the alliance, while responsibility for diesels would fall to Renault, and Nissan would assume leadership in electronics.

The day-to-day plans for the alliance seemed straightforward and relatively easy to execute. For instance, GM would build a Pontiac and Buick version of Nissan's Altima at its underused plant in Spring Hill. Tennessee. And GM would assemble Maximas for Nissan at its Oshawa, Ontario facility. The result: "Nissan grows at lower cost. GM's assets more fully utilized."

In all, the analyses projected savings from purchasing, improved capacity utilization, product sharing, improved quality and reductions in selling, general and administrative expense that were initially forecast at $15.2 billion for both parties, but eventually grew to $20 billion.

Since the proposed alliance collapsed, Nissan has moved on to greener pastures. It has arranged two product-sharing deals with Chrysler, and according to last week's Wall Street Journal, it is talking with Chrysler about expanding the relationship by jointly producing midsize cars.

GM, meanwhile, has been in almost continuous decline, running up huge losses in its North American operations as it tries to restructure its workforce and reengineer its product line. It is racing to develop the kind of small cars that Renault-Nissan are already building and to reduce its dependence on gasoline-powered engines with the kind of power-trains that Renault and Nissan are in the process of developing.

At the time he rejected the Renault-Nissan alliance, Wagoner argued that "It would have potentially been a distraction to our current turnaround efforts...and it could impede our fast-moving efforts to evolve a global management team."

Measured by the progress GM has made since then, that might have been a good thing. To top of page

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