General Motors Corp. Chairman and CEO Rick Wagoner can see the irony all too clearly.
After years of shouldering higher labor costs and the health-care bills of thousands of retirees (unlike foreign rivals such as Toyota Motor Corp.), GM finally gains the concessions it needs from the United Auto Workers union to place itself in a more competitive position.
Wall Street heralds the 4-year union contract as a game-changer and proclaims GM's turnaround in full swing.
But just weeks later, the world's largest auto maker reports a record third-quarter loss of $39 billion, due almost entirely to an accounting rule that requires companies with three years of historical cumulative losses in a particular period to place a valuation on unused tax credits.
The result was a $38.6 billion non-cash charge that made worldwide headlines.
“That's what the rules said we needed to do, so we did,” Wagoner tells Ward's of the charge. “I think it caught people by surprise, because it seemed a little ironic.”
It also overshadowed GM's gains in the period, which included record revenue from its core automotive business and fairly significant strides in the auto maker's struggling North American unit.
Some analysts suggest the write-down suddenly clouds GM's profit outlook. Wagoner sees it differently.
“It doesn't change our view,” he says, pointing to momentum in GM's core operations. “The auto business is working through some tough issues very well and at an expeditious pace, taking on things no one ever has before.”
Most noteworthy might be the $9 billion in structural costs GM has carved out of its business over the last two years.
Then there is the health-care trust contained in the new UAW agreement, which is pending court approval and will save GM upwards of $3.4 billion annually. And once GM fully leverages the contract's new 2-tier wage structure, its labor costs will be closer in line with those of Toyota.
The auto maker also will continue its aggressive product rollout, which began in 2006 with its redesigned fullsize trucks and all-new cross/utility vehicles, and continues with a third CUV (Buick Enclave) and next-generation passenger cars such as the '08 Cadillac CTS and '08 Chevrolet Malibu.
This year greets a redone Pontiac Vibe, a rumbling Pontiac G8, an all-new Cadillac CTS-V and the Saturn Astra compact car. GM also introduces hybrid-electric versions of its fullsize trucks and SUVs.
“The sense of momentum is palpable,” Wagoner says.
Meanwhile, he admits, GM also must continue to sharpen its sales and marketing strategy. The direction is clear, Wagoner says, but properly positioning GM products in consumers' minds takes time.
“But I do think we are getting crisper in the things we need to do,” he says. “I think the Malibu launch, for example, is being run better than some of the prior launches.”
While the auto maker expects emerging markets to push global sales up by about 2 million units in 2008, it forecasts flat year-over-year deliveries domestically.
The U.S. could show more strength in the second half of the year, Wagoner offers, but he also says much depends on the direction of financial markets presently befuddled by the housing crisis and credit worries.
GM hopes to keep a lid on incentives to sell vehicles. With the exception of an aggressive response to competitive offers in the pickup segment last summer, Wagoner says the auto maker largely has stood by its pledge to use spiffs more surgically.
“We're going to react if the market moves, but our strategy is to continue to drive focus around more retail sales, brand-building advertising, leveraging strength in product (and) high residual values,” he says.
But a lackluster economy and a competitive market count as only two of the challenges facing GM in 2008. Material costs continue to rise, and a weak dollar shows no sign of rebounding soon.
On the flip side, GM now books more automotive revenue in the fast-growing, commodity-based countries that have pushed those material costs up. And perhaps more importantly, its ongoing efforts to operate as a global company, such as building where it sells, will continue to help mitigate some currency disadvantages.
For example, plans call for building more Saab products in the U.S. in coming years in addition to the 9-7.
“We've never liked the idea of building Saabs in Europe and selling them in the U.S.,” he says. “That's a big risk, and over the years that's cost us a lot of money.
Another headwind is a potential increase in corporate average fuel economy requirements. While Wagoner adamantly contends GM and its peers want to trim carbon-dioxide emissions and enhance America's energy security, he also breathes a note of exasperation over recent political one-upmanship that seem to block the path to a reasonable range of solutions.
“Intellectually, it's dishonest to say, ‘Vote for me. I will raise CAFE. Pick your number,’” he says, when asked about a recent rash of CAFE proposals. “The impression is that it's free. It's not free.
“You can get up and say, ‘40, 50, 80 miles per gallon’ but you don't have to say, ‘By the way, to get 80 you're going to have to drive only vehicles of this size, there's going to be safety issues, and it's going to cost you $8,000 more to buy the vehicle.’ There's no truth in disclosure.”
In an 11th-hour compromise Nov. 30, the House agreed on a new bill that calls for a fleet-wide fuel-economy standard of 35 mpg by 2020, a 40% increase. Auto makers were open to the proposal because it retains separate targets for cars and light trucks. It marks the first increase in fuel-economy standards since 1985.
From Wagoner's perspective, the auto industry has done much to improve fuel economy since the U.S. enacted CAFE in 1975 to reduce gasoline consumption. Fuel economy has doubled, he notes, but U.S. oil consumption, as well as the percentage of imported oil, has increased significantly as drivers are logging more miles and consumers have altered their vehicle choices.
“That's pretty good evidence that fixing CAFE, alone, is not going to solve the problem,” he says, adding the debate has not tremendously affected GM's product planning.
