(FORTUNE Magazine) – Don't bother GM CEO Rick Wagoner with the problems facing Ford and Chrysler. He's looking after his own company--the Big One of the Big Three is what he calls it--and he wants it to grow. An ex-college basketball player who hides an intense competitive drive behind a frat man's affability, Wagoner has pushed hard to boost GM's sales with deep price cuts, and during a trip to Japan in October, he didn't hesitate to bash Japan's intervention for driving down the currency to aid exporters like Toyota, Nissan, and Honda. In Tokyo, Wagoner told senior editor Alex Taylor III why he has gone on the attack to improve GM's position and why he doesn't expect any help from the U.S. government to level the global playing field.

Why have you started complaining about the cheap yen?

We think we have a responsibility to call it as we see it. And--we have to be realistic about it--currency is a huge aspect of competitiveness. The first nine months of the year, the Japanese monetary authorities spent $120 billion intervening in the currency, basically in our view to maintain the yen at a weaker level than where the free market would place it. That has a huge impact on our competitiveness, vis-a-vis some very formidable players in Japan. We can't ask for special benefits, but, gee, that doesn't seem to be playing it straight. So we need to speak out.

Do older manufacturing companies like GM, with huge pension and health-care obligations, deserve special government treatment?

We would welcome that, but realistically I'm not expecting it to happen. It is not just an issue of old manufacturing vs. new manufacturing. It is longstanding companies, including some in tech, that have done what government policy encouraged us to do: offer retirement benefits and health-care benefits to our employees. That has turned out to be a disadvantage for the U.S. compared with countries where health care tends to be offered with much greater government support. We are trying to make a point in Washington that if we're concerned about job growth in a competitive economy, it's important to understand that health-care costs are a significant competitive disadvantage for the U.S. This is the early part of the discussion, and I think our hopes have to be pretty modest.

Are you asking the U.S. government for any relief?

No plans to do that. We obviously are interested in the legislation being discussed regarding pharmaceutical costs in Medicare. That would help us out. Beyond that, we are trying to make the business as competitive as we can, get the right kind of products, and use that to drive cash flow and take care of our obligations.

Some analysts have questioned your decision to fill a gap in your unfunded pension obligations by borrowing $13.5 billion in a bond issue last June. Why did you do that?

Our pension fund pays out a lot of money in the short term because of the size of our retiree base. When we borrowed that $13.5 billion, we borrowed it for the long term--the average term was 20 years--to stretch out our time to pay off these liabilities. We got the money at a very good rate. It took a lot of risk out of the balance-sheet side of the business, gave us time to generate a lot of cash. And if we generate a lot of cash, we can always pay the debt down early. But right now we're focused on getting the pension funded and strengthening our balance sheet, and I think it was really a good move.

Executives from Toyota and Honda are suggesting that GM can't meet its goal to put hydrogen-powered fuel-cell cars on the road within a decade. Do you think you'll make it?

Nobody knows when we're going to solve all the issues and meet the economic requirements [to make fuel-cell cars practicable]. At this point we're saying it's 2010 or 2012, and they are saying it is 2020. It is a little hard for me to convince you that I'm right and they're wrong. But we are convinced that it is the single best bet we can place for the future of our company and for the future of our industry, so we're going to work like crazy on it. We're making excellent progress in our ability to store hydrogen in a safe way and in reducing costs from an incredibly high level, but we still have a lot more work to do.

We need to work a lot harder on hybrid systems as well. Our idea is a little different from the approach at Honda and Toyota, which have primarily [focused on] smaller vehicles. Our approach has been to go after the vehicles that consume the most fuel. We announced a deal for 200 or more hybrid buses in Seattle, and we're going to pursue more of those. We have a mild hybrid system on our pickups, and we've got several things we're going to roll out after that. We think this is an important interim strategy--whether the interim is five years or 20 years. But we also think the technology of hybridization will be useful in making fuel cells more effective.

Toyota and Honda have a big lead in hybrids. Can GM catch them?

Obviously they have taken it seriously and have put a lot of effort into it, [but] the lead is absolutely not insurmountable. Even in the past six weeks, we've been working on several hybrid systems, and we think we're homing in on the right long-term solution. [Subsequently, GM delayed plans to sell a hybrid vehicle until 2007.]

Your decision to use huge customer incentives to defend GM's market share has been called the most significant industry event of the 21st century. Do you agree?

Market share is important for us. Beyond making us feel good and motivating our dealers and supporting our employees, it is very much about the financial structure of the company. We have a large fixed cost base, and a lot of that relates to retirement obligations. To the extent that we sell more products, we amortize those costs over more cars and trucks sold, and the impact [of retiree costs] isn't so great.

It is clear that shrinking the business and focusing only on profitable segments doesn't work for us. I think our weak balance sheet [is caused by the fact] that we have shrunk quite a bit [from 296,000 workers in the U.S. at the end of 1994 to 163,000 at the end of 2002], and enough is enough. If we want to maintain our position as the leading auto player in the world, we need to do that first and foremost with great product, but we also need to get momentum back in a positive direction. We have been aggressive. But I think, frankly, it has been good for the U.S. industry.

Do you see Detroit's market share, which has fallen from 65.6% to 60.1% in just the past three years, stabilizing as the Japanese ability to enter new segments levels off?

Part of the reason [the Japanese] are growing share, besides the fact that they are formidable competitors, is that they are filling out their product line. It is a little hard for me to predict "domestic share" because it is more blurred than that. People here at the Tokyo show have asked me what I think about Big Three market share, and I jokingly say I'm not in charge of Big Three market share, I'm in charge of Big One market share, and our goal is to grow. You have to ask the other two guys what their strategy is. We focus on how we can grow share, and we really don't care who we take it from.

GM is introducing new models at a rapid rate, but it has been spending more on capital expenditures than it can write off in depreciation. Since GM doesn't earn its cost of capital, that means you are eroding your equity base. Are you concerned about that?

If you look at our capital expenditures over the past several years, you'll see a good trend, and you'll also see a whole bunch of new products. That's different from what we could have told you five years ago. What you need to measure us on is whether we can keep a fairly modest level of capital expenditures by historical standards and still bring out new products and technology. There is something going on inside the company I've hoped to see for a long time: We are getting the real cost of engineering new products down, for a variety of reasons, whether it's from better manufacturing flexibility and equipment reuse in plants or our globally integrated powertrain strategy. Rather than having four to six four-cylinder engines around the world, we have two or three. We're using our assets better, we're sharing ideas better across the company, and we're putting a premium on reusing good equipment; we don't just throw stuff out.

Any examples?

I was visiting a GM plant in Lake Orion, Mich., where they are retooling for a completely different product. They took me through and showed me how they were able to keep a lot of the body shop equipment and a lot of the robots and reconfigure them to produce this new model. They were able to reuse 40% to 43% of the equipment in the plant. This is expensive stuff. We're talking $50 million, $100 million. In the old days they would have just torn it all out and brought in all new equipment. I said, "Hey, guys, how come you are able to reuse 40% now? How come you didn't do this in the old days?" The guy says, "Management told us to tear 100% out. If you'd listened to us, you could have saved 40% all along." These guys aren't reusing equipment because Wagoner and [CFO John] Devine say it's a good idea. They're doing what they think is right for the business.

We're getting more money out of our capital-expenditure dollars, and that gets right to the heart of the issue: If we don't provide shareholders with a good return on their capital, our stock price won't go up. We understand that. We've got some balance sheet issues too, but we're very much committed to squeezing every dollar to make sure we're getting a return on the money we put in the business.

You plan to raise your production capacity in China 50% by 2006 and start building Cadillacs there. Aren't you worried that the rush to China will produce enormous overcapacity, just as there is, say, in Brazil?

I don't see it. Since we started there with the Shanghai venture, our problem has consistently been that we haven't had enough capacity. We've added a second shift, more units per hour, a third shift. Now we're building a second plant. We bought a vacant plant in Shandong, and we're beginning to fill that up. We bought an assembler in Wuling with our [Chinese] partners that seems to be running well. Demand is growing like crazy. People say it has grown 30% [a year] for the past three or four years. It is actually more interesting than that because the passenger-car market, the true retail market, is growing more like 50% or 60%. So this place is on fire. Can it keep growing in total at 30% a year? I suspect not. Trucks were more than half the market a few years ago, and now they're growing more like 10%, 15% a year. But even with a 10% overall growth rate, we are all going to be hustling to keep up with demand.

Another thing to keep in mind: A significant portion of the Chinese auto industry is small domestic companies producing fairly antiquated products. There is a reasonable chance that as incomes grow and we introduce retail financing more broadly, Chinese consumers will want to trade up to more modern vehicles. There is going to be a chance to gain share in addition to participating in the growth. It is not without risk, but I really feel it is a good bet to place.

Are you able to send your profits back to Detroit, or do the Chinese try to keep them in the country?

We haven't [taken many profits out of China] because we see the opportunities to grow. We've put in some significant equity--particularly in the Shanghai-GM joint venture--but we've been pretty much able to finance the growth we've had out of profits we've earned. I think that's unusual, considering how rapidly the market is growing and how much we've expanded, both in product and capacity. But I suspect over time we'll be able to pay some dividends out.

How optimistic are you about U.S. business in 2004?

We're bullish on the economy. We see very solid growth. The single biggest predictor of auto sales is economic growth. But we did not have the reduction in automotive sales on a cyclical basis that we normally have when the economy weakens. And that's partly because we were so aggressive on the price side. The interesting question will be whether, when the economy comes back, we'll see as much of a pickup in volume as we've traditionally seen. Sometimes, peak to trough, that can be 25%. I doubt we'll see that bounce up in volume, but that's okay with us; our capacity utilization isn't so bad today. If we get some pickup in volume and maybe some more real demand to ease some of the pricing pressures, that wouldn't be a bad trade for us. That's what we're hoping for. We'll see pretty soon.

Does that explain why you complain about your problems less than some other U.S. manufacturers?

Part of my job is to be optimistic. I do think there are some substantive issues. Part of them we control. We talked about using our assets, funding our pension, bringing in gee-whiz products, playing China right. Part of them are issues that relate to the competitiveness of the U.S. economy. So we're speaking out on the yen, we are concerned about health-care costs, very concerned. Those are things for us to worry about. On balance, if we keep our head down and keep driving our business hard, and we get a little bit of luck--an economy that turns around not just in the U.S., but also in Europe, South America, and a few other places--we have a chance to get back on the track we like and move toward the goal that John Devine has set for us: earnings of $10 per share by the middle of this decade. [Analysts expect GM to earn $5.18 in 2003.] Right now that seems like a stretch objective. But it's a good thing for us to be stretching to.

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