Email | Print    Type Size  -  +

Rick Wagoner tries to catch a falling knife - and fails

General Motors announces trims and cuts, but not the structural changes or big ideas that the company desperately needs.

By Alex Taylor III, senior editor
July 15, 2008: 12:00 PM EDT

GM CEO Rick Wagoner announced Tuesday that the company will cut jobs and suspend its dividend.

NEW YORK (Fortune) -- The notion that General Motors is destined to be the eternal leader of the U.S. market seems to be embedded in the DNA of every GM executive.

So when horrific market share declines and horrendous financial losses reappear every decade or so, the company makes only the most minimal trims and adjustments - in the expectation that once this temporary downturn is over, GM (GM, Fortune 500) will regain its rightful place in the universe.

At times, current chairman and CEO Rick Wagoner has exhibited great foresight and courage, notably in winning wage and health care concessions from the United Auto Workers and dramatically expanding GM's presence in China, Russia and Latin America.

But when it comes to dealing with GM's 40-year decline in North America, Wagoner is following in the footsteps of predecessors like Robert Stempel - addressing the symptoms but not the underlying causes.

So it was again on Tuesday, when Wagoner announced a series of actions that seemed almost designed to be the most incremental he could take.

They were accompanied by a set of economic assumptions that Wagoner termed "conservative," but that given recent events, appear to be borderline reckless:

  • Wagoner expects GM's U.S. market share to level off at 21%, this despite removing about one million units of light truck capacity. A couple of years ago, Wagoner expected GM to be cruising at 30% market share. Given GM's ability to stabilize sales in the past, 21% is surprisingly optimistic.
  • Wagoner expects oil to prices to remain in the range of $130 to $150 between now and the end of 2009. A couple of months ago, that would seem outrageous. But since oil prices seem capable of violating the laws of gravity and growing to the sky, even $150 sounds more hopeful than realistic.
  • Wagoner expects to improve working capital by $2 billion by tightening up operations, notably by reducing in raw materials, work-in-progress, and finished goods inventory. This is the Detroit equivalent of balancing the federal budget by cutting pork barrel spending. If it was so easy to do, why hasn't it been done already?

Once again, GM is reacting to events instead of anticipating them. Nowhere in Tuesday's announcement is there any mention of the structural changes that will allow GM to compete with a smaller market share shorn of its high-profit light trucks. No product lines were killed, no brands were euthanized, no big budget items wiped off the books. GM still has too many dealers selling too many individual models - and now it has even less money than before to market them.

Wagoner likes to say that nobody could have foreseen the spike in oil prices that made GM's old business model in North America obsolete. But he might have picked up a report titled "In the Tank: How Oil Prices Threaten Automakers' Profits and Jobs" that was produced by research operations just a few miles from GM's headquarters, in cooperation with the Natural Resources Defense Council.

It predicted that "sales, profits, and American jobs are at risk if Detroit automakers continue with their current business strategy in the face of higher oil prices."

That report was published in July 2005 - exactly three years ago.

Wagoner also likes to point out that GM decided not to market gas-saving hybrid vehicles until very recently because there wasn't a significant market for them.

That didn't stop Toyota (TM), which started work on what became the hybrid Prius in 1993 and now has a stranglehold on the hybrid market.

Great companies must anticipate events and trends, not react to them. That's particularly important in a long-lead-time industry where new models need four years or more to move from the drawing board to the showroom.

When GM has tried to get ahead of the curve by anticipating trends, it has failed. Witness its unsuccessful efforts at cylinder deactivation, diesel engines and electric vehicles. It has to make the big leaps better because time is running out. Halfway measures like those announced Tuesday aren't going to cut it. To top of page

Company Price Change % Change
Ford Motor Co 8.29 0.05 0.61%
Advanced Micro Devic... 54.59 0.70 1.30%
Cisco Systems Inc 47.49 -2.44 -4.89%
General Electric Co 13.00 -0.16 -1.22%
Kraft Heinz Co 27.84 -2.20 -7.32%
Data as of 2:44pm ET
Index Last Change % Change
Dow 32,627.97 -234.33 -0.71%
Nasdaq 13,215.24 99.07 0.76%
S&P 500 3,913.10 -2.36 -0.06%
Treasuries 1.73 0.00 0.12%
Data as of 6:29am ET

Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.