The Tragedy Of General Motors

It is the instinctive wish of most American businesspeople, even those unlikely to be directly affected, that General Motors not go bankrupt. True, some people will say, "They had it coming to them." But the majority will be more practical, telling themselves that the company is so central to the economy, so sprawling in its commercial reach, that bankruptcy--"going into chapter," as restructuring folks say--is ominous almost beyond contemplation. And yet the evidence points, with increasing certitude, to bankruptcy. Rick Wagoner, GM's 53-year-old chairman and CEO, may say, as he did in a January interview with FORTUNE in his aerie of an office high above the Detroit River, "I know that things will turn around." But he cannot know that. He may not, deep down, even believe it himself.

Bankruptcy isn't going to occur next week. But down the road--say, past 2006 --its probability is high. That point of view seems supported by the opinions of the bond-rating agencies, which troubled companies must keep informed and which become virtual insiders in their understanding of a company's finances and operations. In recent months both Moody's and Standard & Poor's have made increasingly grim statements, bald in their talk of bankruptcy and laden with doubts that GM (Research) can turn around its reeling North American auto operations, now reduced to an embarrassing market share of 26%.

In that percentage lies a harrowing, and maybe intractable, revenue problem. Says one GM executive: "There's no fix for us unless we get revenues stabilized."

Nonetheless, Wagoner and crew must also deal with the full range of GM's problems, and they add up to a Hummer-sized load. The company lost $8.6 billion last year, burning up billions of dollars in North America, earning too little back overseas. Its product mix in the U.S., heavily weighted toward trucks, pickups, and SUVs, is on the wrong side of gas prices. It has a finance subsidiary, GMAC, whose majority interest it needs to sell to keep that business healthy and itself in cash--and so far, no buyer has emerged. It is inextricably entangled in the bankruptcy of its biggest supplier, Delphi. In that imbroglio, as in countless others, it is up against a formidable and sometimes militant union whose ability to accept the full reality of GM's problems is not assured. The company is even under investigation by the SEC for accounting sins, as yet unrevealed.

And gravely, it is burdened by health costs, which it supplies for a population bigger than Detroit's--that is, for a total of 1.1 million employees, retirees, and dependents. Its thriving Japanese competitors, such as Toyota (Research), pay health benefits for their U.S. active employees and dependents too. But Toyota does not have GM's retiree health burden, a mountain that at year-end totaled an unfunded $64 billion and that, in annual effect on the bottom line, adds about $1,300 to the cost of every car and truck GM makes in the U.S.

Wagoner is exultant that he and the UAW gruelingly managed last year to make a deal that, if blessed by a federal judge, will cut GM's unfunded liability by around $15 billion and pare cash outlays as well. But that will still leave Wagoner facing a colossal competitive disadvantage. The cost is not his fault. Rather, it is a legacy dumped on him by CEOs of decades ago who gained a certain amount of wage restraint from the union--and labor peace for their own terms of office--by granting retiree health benefits that had neither large, immediate cash costs nor, under the accounting rules then applying, much effect on the bottom line. Today, with health-care costs exploding and the accounting rules stiffened, this mess has come home to roost. It is the problem, says Wagoner (almost certainly giving too little weight to his shortage of revenues), that more than anything else "affects the future viability of GM."

In character, today's GM is a weird and painfully scarred combination of businesses. It is a car company doing poorly, and it is an insurance company engulfed by obligations way beyond its ability to pay. Such an enterprise probably cannot escape bankruptcy. The securities markets flash their warnings with regularity. The prices of GM's bonds have fallen severely, and its stock plunged in December to below $19, the lowest price since 1982. In early February the stock was $23. Were it not for GM's dividend, $2 annually, the price would surely be lower than it is.

Is there anything optimistic to say? Well, it is important to remember that giant auto companies have been turned around before. In 1980, aided by $1.5 billion in loan guarantees from the U.S. government and his own pitchman routines on television, Lee Iacocca brought Chrysler back from the abyss. Nearly 20 years later Carlos Ghosn, an improbable mixture of Lebanese blood, Brazilian birth, French education, and American business experience, grabbed tight hold of Japan's sinking Nissan Motor and restored it to industry prominence.

Yet these rescue jobs surely pale in comparison to what it would take to turn around General Motors, this giant so large that in the FORTUNE 500's first half-century it ranked No. 1 on the list in 37 years. (In our last list it was No. 3.) One Wall Streeter deeply familiar with the company recently stated the challenge starkly: "I would say that turning GM around is a harder logistical and managerial task than the invasion of Iraq."

This same Wall Streeter is not kind to the GM generals charged with the rescue job. Describing the company as a "sclerotic bureaucracy," he says a good remedy might be firing the top five people and replacing them with outsiders. A less acid form of criticism has been laid on by the camp of Kirk Kerkorian, whose Tracinda Corp. owns just under 10% of GM's stock. In January, Kerkorian's advisor Jerry York, a turnaround veteran himself (at Iacocca's Chrysler and Lou Gerstner's IBM), gave a long luncheon speech at the Detroit auto show that accused GM's executives of lacking "urgency" and "sense of purpose." York's reason for growling: Kerkorian's losses, about $172 million of them realized at this point, with the rest--another $223 million--sitting as unrealized losses on his books. York and Wagoner have talked about York's going on the GM board, but--as of early February, at least--they had not had a meeting of the minds. Maybe, one might guess, the Kerkorian camp has wanted both board representation and complete freedom to sell its stock.

That could have been a problem because GM's general counsel sent a memo last May to a sizable layer of GM executives telling them--for reasons he left quite vague--that they should refrain throughout 2005 from