Saving General Motors

The company's chief financial officer on how G.M. can bounce back

Saving General MotorsIn March 2008 Ray Young, a Canadian-born executive at General Motors, became the company’s chief financial officer. On Thursday Maclean’s spoke with Young about GM’s bankruptcy filing, what it’s doing to fix its problems, and what life will be like for the company now that American and Canadian taxpayers are its biggest shareholders.

Q: When you became CFO did you think a year later you’d be guiding the company into one of the biggest bankruptcies in American history?
A: Absolutely not. When I came to the job, the U.S. industry was still running fairly strong, the global industries were very strong, the global credit crisis didn’t exist yet. This clearly is something I never would have imagined would have occurred.

Q: GM had been chipping away at some of these long-term problems for years, and making some headway, but why did it take the collapse of the company to bring about real change?
A: Sometimes you need a crisis in order to affect dramatic change. For instance, the dramatic restructuring of the dealer network. Same thing with closing down 14 plants in the U.S. in a rapid period of time. You hate to have to rely on crisis to affect this level of change, but unfortunately sometimes you do.

Q: So did GM executives feel they had to let the company get into a serious crisis in order to make these changes?
A: You never want to deliberately put the company into a crisis, because that’s high stakes poker. For example, a lot of people have said ‘Why didn’t you force the company into Chapter 11 in 2008 in order to force all these changes?’ Well, there’s one major reason why Chapter 11 in 2008 would not work. That’s because the U.S. government wouldn’t have been there to back us. This Chapter 11 process we’re going through only works with government support in terms of the warranty support on the vehicles, in terms of guaranteeing supplier payments, and in terms of providing the so-called debtor-in-possession financing.

Q: How long will the company be in bankruptcy?

A: The current General Motors will be in bankruptcy for a period of time, we’re talking about several years maybe. That’s because what we’re doing is something called a 363 sale, whereby the new General Motors is going to purchase a lot of the healthy assets from old General Motors as well as assume certain liabilities. So come August, after we close the 363 sale, the new General Motors will emerge and it will be the operating company. The old General Motors will have the closed or idled plants, it will have twenty-something billion dollars of bond debt, it will also own 10 per cent of new General Motors. So this company will remain in bankruptcy until it is actually wound down.

Q: So it’s like a bad GM?
A: I don’t like using the word bad. It’s the old GM. It’s really what we call the non-core part of General Motors.

Q: Taxpayers obviously want to know why the government should be stepping in to help save GM when the majority of the problems were self-inflicted?
A: We’ve made mistakes in the past. We don’t shy away from that. But going forward, we feel a responsibility to make sure General Motors and the American and Canadian automobile industry succeeds. Not only does it employ a lot of people, it is an economic force. I think in terms of the taxpayer support, we’re very appreciative of it. We feel a large responsibility to execute the plan and provide a return on investment to both the U.S. and Canadian taxpayers.

Q: There’s been some confusion about how much disclosure GM is going to make throughout this. Earlier you said it’s going to be more of a private company so there won’t be as much information made available. GM CEO Fritz Henderson then seemed to contradict you when he said GM will be more open and transparent. So how much will taxpayers, the company’s new owners, be told about the company’s operations?
A: The term I used is we’re going to be the most public private company. The only thing different is we will not be able to file SEC statements, such as the 10K, 10Q. But we will still have monthly sales phone calls, we’ll still have probably quarterly updates in terms of our financial performance, we’ll still have all of that disclosure.

Q: You’ve said more sacrifices will be needed? Such as?
A: The dealers are going to be sacrificing. In the U.S. the dealer network will go down from 6,000 dealers to about 3,600 dealers, plus or minus 100. That’s a sacrifice. We know that we’ll be closing 14 plants across the United States. We know there’s going to be sacrifices by the bond holders. We know that the common stock holders, a lot of the value of their shares has been reduced. Salaried employment levels in America will be going through one more series of reductions. And then the retirees of General Motors, for those benefits that are not qualified benefits, they’ll have their pension benefits cut back.

Q: Do you expect there to be further dealer cuts in Canada?
A: No, I think Marc Comeau [vice-president of sales, service and marketing for GM of Canada] and the team have done a great job in reaching agreements with the dealers that are going to be wound down.

Q: What other sacrifices will need to be made on the Canadian side?
A: In terms of the CAW and their workers, they’ve agreed to a contract which does require sacrifice on their part. They’re going to be freezing all their benefits, and have cutbacks in paid time off. We’ve scaled back some of the pension provisions. Lastly in terms of retiree health care, they’ve agreed to work through the concept of the health care trust. Those discussions and finalizations will occur over the months of July and August.

Q: What’s GM going to look like after it emerges from bankruptcy?
A: You’re going to see a General Motors here in North America with four brands: Chevrolet, Cadillac, Buick and GMC. You’re going to see a General Motors that is a leaner organization, both on the salaried side and the hourly side. When you start looking at efficiency metrics versus other automakers, you’ll find that we will be near the top of all the OEMs [original equipment manufacturers] around the world in terms of jobs per hours, hours per vehicle. Over the past year, frankly speaking, we haven’t had enough time to spend on product. You’re going to see our entire organization focused on product after we get through this crisis.

Q: What will GM’s market share be after the dust settles?
A: In the month of May we finished up above 20 per cent market share in the United States. In our viability plans, we’re assuming a market share of between 18 to 19 per cent. We will be a smaller company by dropping four non-core brands, such as Hummer, Saturn and Pontiac, and dropping the size of the dealer network. That will have some marginal impact in terms of sales. But we want to be able to sell vehicles profitably. So the concept of chasing non-profitable fleet sales, we’re not going to do that for the sake of market share.

Q: But by reducing the dealer network by such a large amount, and getting rid of these brands, isn’t it too optimistic to think your market share will only drop from 20 per cent to 19 per cent?

A: Actually no, because when you drop some of these brands, you’re going to be able to pick up sales with the core brands. Point two, one of our biggest challenges, and frankly one of our biggest criticisms, is when we launch products we don’t put enough marketing support behind them. With the new strategy we’re going to have fewer mouths to feed, which means more marketing muscle per launch.

Q: An over reliance on fleet sales was one of GM’s problems, but so too were the giant rebates and steep discounting that was needed in order to get rid of inventory.
A: We’re going to reduce rebates considerably in the future. The level of dealer inventory is going to come down dramatically. That’s part of the reason that we’ve announced extended shutdowns of our plants right now. When dealers have a lot of inventory, they start pushing the product and start offering a lot of incentives, and that’s not healthy. The second factor is by trimming the dealer network to ensure the weak dealers are no longer part of the distribution network, we will be able to reduce the amount of incentives. Strong dealers can sell the product based upon its attributes. Weaker dealers rely too much on price.

Q: What is GM going to do to fight that perception out there that the company doesn’t build cars that people want to buy?
A: Just remember one out of every five cars sold in North America are GM products. That’s a large number of vehicles. But we do have to change that perception. We need to put more marketing dollars per brand in order to communicate the message. We need to have better dealers who treat customers better. And we need to ensure that we get customers to start driving our products. We’ve got work to do. We admit it. But by making exciting products, like the Oshawa-produced Chevrolet Camaro, it’s going to create a halo effect on the Chevrolet brand.

Q: With the U.S. government controlling so much of the company, are you concerned about President Barack Obama’s repeated suggestions that he wants to see the company produce smaller cars? In the U.S. and Canada trucks sell really well. Many people still want to drive bigger vehicles. How will you navigate that?
A: We made a commitment during the UAW negotiations that we will build a new small car in the United States, in a 2012 time frame. We’re not abandoning the truck market, we’re going to defend and grow our presence there. But at the same time we need to make sure we have smaller fuel efficient vehicles recognizing we do believe fuel prices will continue to increase over the next five years.

Q: What impact has the bankruptcy had on product development?
A: There’s been no change. We have a pretty aggressive plan. We’re launching four new products in North America this year, of which three are coming out of the Canadian plants. Next year we’ll have the Chevy Cruze, which will be a significant high volume product for us, as well as the Volt [electric car] in 2010. We haven’t slowed down our product development factory because of Chapter 11. In fact, now that we’ve stabilized, we need to look to see if we need to increase our spending in the future.

Q: Hybrid technology is improving, and costs are coming down. Can the Volt compete?
A: We believe so, because it is a different set of technology compared to the hybrid technology. It’s a revolutionary technology, the extended-range electric vehicle. Also, we’re not abandoning the hybrid market. In fact we have new hybrid vehicles being launched.

Q: What do you say to potential customers out there who are watching what GM’s going through?
A: First, I want to thank the Canadian and American consumers for their support over the past few months. I’d just encourage customers to get into the dealerships and try our products. Ultimately your purchase decision is based upon the product itself and the service that you get from the dealer. From an operating perspective General Motors is open for business. We’re building cars and we’re selling cars. Please try our products. Please give us another chance to delight you with our new products.

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