Corner Office

GM’s Dan Akerson on the restructuring of the auto industry

Marketplace Staff Aug 17, 2011
Corner Office

GM’s Dan Akerson on the restructuring of the auto industry

Marketplace Staff Aug 17, 2011

Kai Ryssdal: On a program the theme of which is businesses and how they’re dealing what seems to be the new economic normal, it’d be handy, don’t you think, to chat with a major American industrial conglomerate?

Especially one that’s been on a tear this year. Back in place as the number one global leader in its sector, almost $3 billion in quarterly profits. And yet, also one beholden to taxpayers for its $50 billion bailout and still, in fact, part-owned by the government.

I’m here with General Motors CEO Dan Akerson. Good to have you with us.

Dan Akerson: Thank you.

Ryssdal: You have made a career of turning around companies and restructuring them. I wonder if you would give me some sense of where GM falls on that spectrum. Was it easier than most; harder than most?

Akerson: Well it is still a work in progress as first order of business. Second order of business is although we’ve made good progress, if you were to make a baseball analogy I’d say we are maybe in the second or third inning. So we have a ways to go. We’re proud of how far we’ve come, but there is still great opportunity and with opportunity the associated challenges before us.

Ryssdal: To continue with baseball, are you guys throwing mostly strikes or is it mixed up?

Akerson: Well we’ve been throwing more strikes than balls, but I think we are doing better than many people thought we might be doing and not as well as we’d like to be doing.

Ryssdal: So what could you be doing better?

Akerson: One of the things that we are trying to address and improve upon is the degree of complexity within our business. There’s just too much friction in terms of our product development, which manifests itself in speed to market. And that would be first order of business. And then just culturally we made a strong statement about putting the customer to become a customer-centric organization. I think most of the automotive industry is technically driven, manufacturing-driven. And once we kind of come up with a concept, then we try to incorporate a customer’s perspective and we’re trying to come at it from a slightly different perspective, actually almost a diametrically opposite perspective. We want the customer to be first and from everything that we see in the marketplace: whether it be design, styling trends, propulsion, advanced propulsion and from there and as we say here, everything starts and ends with product. And the kind of manifestation of that is we want to design, build and sell the world’s best vehicles. But I would say central to that mantra, if you will, that goal would be: what is the market, what does the customer want, what does the customer demand?

Ryssdal: Well let me ask you about that as long as we’re talking about sort-of mind-set within the company: You have been quoted as saying that you want GM to take an attack mentality toward designing, making and selling cars. Have you been able to do that so far?

Akerson: When you look at some of our new products just in the last year — the Chevy Volt — I think that people sometimes say that’s a step forward. I would disagree. That was a leap forward. It was a non-linear move within the market and we hope to significantly ramp production here and at year-end, ramp it up progressively through between now and the end of the year and then really be producing at a completely different level in 2012.

We came out with the Chevy Volt. I remember I wasn’t with the company or associated with the company and prior to the bankruptcy, President Obama made a comment, “Why can’t they build a Corolla?” I think he was talking about the American industry generally. Well the number one car in that segment today is the Chevy Cruze. And that’s a statement about a company that was largely known for trucks, large SUVs and crossovers. Now in a smaller, down-market segment — and I don’t mean down-market in terms of quality but down-market in terms of size — an American company is standing number one in that segment. We introduced the Chevy Sonic, which is a segment below the Corolla that’s coming out late August, early September and we’ll fill the pipeline between now and end of year. That’s going to be another strong statement about a car company that has really evolved to not compete at the large, high-end of the market but really wants to compete across the board. And I think that is a manifestation of, hey we can’t be playing defense all the time. The best defense is a good offense and that’s, if you will, an attack culture that we’re going to go out, we’re going to not metric off of internal standards but we’re going to look for standards set by the competition and we’re going to try to exceed those.

Ryssdal: Let me ask you this though: For all the success you’ve had selling Chevy Cruzes and other down-market cars, smaller cars, don’t Americans still want the big ones, the SUVs, and the trucks and the pick-ups?

Akerson: Sure they do and I’ll give you a good example. You look at Buick. Buick is what I would say kind of an understated, growing, premium brand. Probably had no right to expect two years ago coming out of bankruptcy, but Buick today, believe it or not, outsells Lexus, outsells Infinity, outsells Acura. The only two “premium foreign brands” that outsells Buick in this country right now are Mercedes and BMW. But it’s quite a statement to say that here we are seven months into the year and Buick is outselling Lexus as a quasi-premium brand.

Why? Well Buick LaCrosse, which is really a great mid-size sedan, and — I drive one. It’s one of the best cars on the market and starting in August and September time frame, it’s going to become a light hybrid, if you will. We’re going to put some batteries in it and we’re going to jump the fuel efficiency by 25 percent so on the road it will make upwards of 36, 38 miles per gallon. That’s a very competitive mid-size sedan that’s high quality. You look at the Buick Enclave, it’s the fastest growing brand, Buick, generally and the Enclave is the major reason why as a crossover in the U.S. today. Cadillac is doing well and of course our trucks are very competitive so we are not trying to compete in a segment, we’re trying to attack across the board.

Ryssdal: Since you mentioned Buick, let me take you sideways for two seconds. I was over in China a couple of months ago reporting a bunch of stories for the show. You can’t turn around without seeing a Buick over there. How important are overseas sales, trying specifically to the future your company?

Akerson: Well, if you look at the brick countries, China being one of the brick, then you also have Brazil, Russia and India. They will comprise about 50 percent of the global incremental growth in the next roughly four to five years. Those four countries alone will be about a third of the total growth of global vehicle demand in the globe. So how are we doing in China? Well, we have the number one markets here in China and you’re right; Buick has been a strong brand in China for a number of years. But what the unwritten story is, we sell roughly the same number of Chevrolets in China as we do Buicks. It’s our intention over the next 15 to 18 months to start manufacturing Cadillacs as a premium brand in China.

So China is critical to the growth and development of General Motors, and the good thing about it is, ’cause I think a lot of people get concerned, we don’t export jobs. We hire where we build and we build where we sell ’cause the margins are reasonably thin in the automotives industry. So you can’t export too many places without having foreign currency risk — it can take your profitability very quickly. So the Cadillacs, we produce a small number in China today, and we export a larger number to China today, but the import duties going into China for Cadillac are very high. So if we want to create Cadillac as a global brand, and that’s one of our goals over the longer term, I think we’re going to have to manufacture Cadillacs in China as well.

Ryssdal: Let me bring you back here for a second. For the people who are listening to this for whom General Motors represents a government bailout and the worst of the financial crisis, what can you do to reassure people that the taxpayers of this country got their money’s worth?

Akerson: Well, this is a complex question but I’ll do my best to try and answer it. First of all, the employees and the suppliers and our supply chain — the government essentially saved an industry. It didn’t save General Motors alone or Chrysler alone. There was about a $50 billion hand extended to the company. We’ve paid back over $30 billion of that thus far; and as you say, the government still owns roughly a third of the company. That being said, when you look at what has happened and the progress that the company has made, we have restructured; we’re making money and we’re producing cash. Had the company gone into bankruptcy and stayed there for a long time, or God forbid had gone into liquidation, it’s estimated there would have been roughly a million jobs lost. Well, that would have shown up across this region and many regions, and many states across the United States and been a strong negative.

The other thing is, coming out of bankruptcy, we are the largest, private pension fund in the world. We had a huge pension liability and we’ve supplemented that over the last two years, which I think we owe our retirees as much as we can provide in this area, and we’re trying to fulfill those commitments, and we’ve got it down by over half since we came out of bankruptcy. I think that’s a strong statement and many of the listeners may not know this, but when companies go bankrupt, there’s a Pension Guarantee Corporation that the government has and they have to back that up. So that would have been a liability that a lot of people don’t factor into this. So it’s a complex question at many different levels. So far, I think we’ve lived up to the hope and to the promise of the American taxpayers, and we’re doing our level best to finish off that commitment and say “thank you” for the hand extended.

Ryssdal: This is a little bit counterintuitive, but is it fair to say that the restructuring in the bankruptcy that you guys went through, and the associated cost cutting you were able to do, is that why you’re having such a good run the first two years out of bankruptcy?

Akerson: Well, there’s no question that our cost structure is much more efficient. To give you an idea, back in I think it was 2007, the average sales rate for the industry in North America was at, maybe, a decade high of roughly 16 million vehicles sold in North America. It dipped to a 40-year low of roughly 10.5 to 11. In doing so, at the peak in ’07, our cost structure was such that we could not make money — we were losing money. And so the concessions made, the cost taken out, concessions made by the union, our partners, UAW members, by management, our retirees. It was very difficult, it was very painful, but it was part of the process to get this company back into fighting trim. So the cost is reduced significantly, but at the same time, in a difficult economic environment, our sales this year alone are up 16, 18 percent. So we are producing great vehicles, very competitive vehicles, not only in terms of styling and design but comfort and fuel efficiency.

I mean, this is a strong statement that General Motors has made coming out of bankruptcy. Whether it be electric cars, the Volt in particular, we’re working on battery electric vehicles only. We’re looking at compressed, natural gas vehicles and we’re advanced further down, probably 10 years, we’re looking at hydrogen fuel cell vehicles. So this company is a repository of a tremendous amount of intellectual property, combined with today, in the current time frame, we’re performing quite well because of great cars. Our revenue grew by $5 billion, $6 billion, quarter over quarter, and most recently reported quarter, and our profits were up 89 percent. So it’s a combination of, again, offense; we’re growing in the marketplace. We’re now number one largest vehicle producer in the world, which we lost that title for about 18 months, and our cost structures in line, and we’re producing profits and cash flow, and it’s represented of the amount that we have been able to pay the American taxpayer back as well.

Ryssdal: You know, I had a conversation with Alan Mulally on this program about two, three years ago before everything went south, and I asked him about market share versus profitability, and he said, “Oh yeah, I’ll sacrifice market share for profitability any day.” Seems that you have an opposite viewpoint? You want market share and profitability.

Akerson: Our first priority is profitability. We’d like to get market share because we’re not going to price incent, discount if you will, to buy market share. In fact, our incentives are down year over year and are consistently below our domestic competitors, quite frankly. That speaks about brand; it speaks about the quality of our product and the market reception of our products. But of course, if you’re producing great products and it’s what the market wants and are willing to pay for it and you gain market share, that’s a nice secondary consideration, because I agree with Alan, you should price for profitability or else this could be a corrosive business environment otherwise.

Ryssdal: We have gone, as you know, from a recovering economy in the past couple of months and a stable stock market, to a great turmoil in the markets and a recognition that maybe the economy isn’t recovering as we would want. What’s it like for you to run a major American industrial corporation at such a time of uncertainty?

Akerson: Well, recently I said that nature abhors a vacuum and markets abhor uncertainty. And there’s been a tremendous amount of uncertainty, some of it manmade, but I mean, you go back at the start of this year, we seem to come out of the chutes of 2010 in pretty good shape. I thought the economy looked as if it was recovering. Then we have the oil spike to $100 plus per barrel. That’s of particular concern to our industry. And then the tragic earthquake and tsunami that disrupted supply chain around the globe for the automotive industry. Then, you know, this sovereign debt concern just threw a tremendous amount of uncertainty into global markets — not just in the United States. All of this uncertainty really adds up to undermine consumer confidence, and I think the most recent economic report I saw was consumer spending was down for the first time in two years, which means on an individual basis, on a particular household basis, people are probably saving because they are a little less sure about the future. So some of the uncertainty has been created by events that just happened, overtake you; others are manmade.

At the same time, we have to plan for the worst and hope for the best and by virtue of reducing our cost structure, our break-even point, we have been able to make money at a 40-year low, whereas before, we couldn’t make money at a 20-year high, in terms of vehicle production in North America. I think that applies around the globe. So our cost structure is in shape, we’re in good fighting trim; our balance sheet is, we had $40 plus billion of debt for the bankruptcy. Today, we have $4 billion in debt, and we have roughly $40 billion, five of that being revolving line of credit. About $35 billion in cash on the balance sheet. So we think we can sustain ourselves. On a microeconomic basis, we’re like any household: we think we’ve got some savings and you know, we’re not out buying jewelry, and things like that. If you were to make the analogy to a home, we’re very conscious of our cost and so we think we’re in good shape. As I say, we’re going to hope for the best but plan for the worst, and our objective is to get by — not to survive, but to prosper. We are tied to a large degree, to the gross domestic product GDP and an individual country around the globe, we compete in over 140 countries around the world. This is a huge company, as you say.

Ryssdal: Yeah, you’ve said a couple of times though that you’re looking toward September and the rest of the year to keep up the pace that you guys have established since January. How are you going to do that when consumers aren’t spending, when they’re watching the stock market, and saying, “Oh my goodness! I have to stick everything under my mattress”?

Akerson: Well, I wish I was all-powerful, but obviously I’m not.

Ryssdal: Maybe just within GM though?

Akerson: Well, no. This is a team effort, it’s a team game and as I say we’ve got a couple new products coming out that we think could be intriguing. We believe there is a fair amount of pent up demand. The average fleet, the age of the average car on the road, truck on the road in the United States is at a 25-, 30-year high. We know people have postponed purchasing over the last couple of years, with all of the turmoil going back to the start of the Great Recession in 2008. So as I say, we keep our breakeven point as low as we possibly can. We continue to invest in new products, new development, whether it be new cars, new models, but also new propulsion, advanced propulsion and technologies. We’re playing for the long run, not the next three, four months, but over the next five, 10, 15, 20 years. That’s one of the things I have tried to bring to the company, is to project forward to 2025, and 2050: Where do I want this company to be out five, 10, 50 years from now, so that we can be proud that GM is a national champion, if you will, here in the United States, North America, more generally; to grow and to embellish our brand, our reputation on a global basis as well. That’s not going to happen in the next four months or the next four years, it’s going to happen over the next 25 to 50.

Ryssdal: One of the things you have been able to do, Mr. Akerson, as GM has gotten more profitable and begun selling more cars in the past couple of years, is to hire back some of the people who you were forced to lay off as you closed plants. Do you worry that the economic weakness now might force you to rethink some of those hires?

Akerson: Well, I don’t think so. I mean I worry about it — about everything. I think we’ve been very prudent in hiring people back and obviously we can’t control everything, and if things were to get a lot worse, obviously we’re going to have to review the bidding. But we’ve been cautious in our hiring. That being said, we’ve hired back a fair number of folks, and we’ve gone to double and triple shifts in some of our plants. Of course, the question might be asked, “Why aren’t you opening additional plants?” We want to make sure the demand is there and sustainable, because you open another plant and it takes a couple hundred, $300 million to $500 million in tooling and that’s a difficult decision to recover from. So we have been prudent, but at the same time, we have hired folks back and we’ve invested another $5.5 billion roughly in new plant and equipment in this country, in the United States particularly, to try to make sure that we are as efficient and quality based as we can be. I think, as you say, we’ve made great progress but the future is always difficult to read and we just don’t want to overextend ourselves in the current economic environment.

Ryssdal: You know, that investment point you made is a good one, because one of the things that has been happening in the economy is that businesses aren’t really investing because they’re a little uncertain just as consumers are uncertain. Step back from GM for a minute and look at the broader economy and help me understand when major companies in this economy might start investing.

Akerson: Well, you know, job creation is critical to any recovery and central to any recovery and any incremental job growth is productivity — you must be productive — and innovation. So you’re going to have to invest capital to gain productivity, and you’re going to have to spend on research and development to create some dimension of innovation. I think what I’ve been trying to do, and I think met with at least some preliminary success, is to view our industrial relations with the UAW in a completely different way. They are partners. They are our employees, they’re General Motors employees. They’re part of the family. They may be represented by the UAW, but the UAW then is a partner. And we want to have constructive dialogue.

For example, we are in midst of negotiations now, but one of the aspects of that that I have tried to espouse and time will tell if we see any real progress or success in this area, is let’s not increase our structural cost by having commitments to x percent increase in salary every year. I think what would be good in America, to incent management and labor to have a more productive and more constructive dialogue is to say, “You know, let’s all pull in the same oar.” We have four metrics before management gets any bonus at General Motors. I might parenthetically say that the top 25 people don’t get any bonus, period, because of our government ownership and I think that’s fair. It’s reasonable. But for the average manager in the company, say middle-level manager, he or she is measured in four metrics, one of them being quality. It’s a composite; it’s everything from J.D. Power initial quality to our warranties and whatnot and we run up a composite to measure the quality, which quite frankly is second to none. Our quality right now I would put against any of the foreign transplants or any of our domestic competitors and we are proud of that and we want to keep it. So we are going to incent our people alone those lines. What we are trying to do is say, “Look, if management gets a bonus, then I think our hourly people ought to get a bonus.” It’s, if you will, profit-sharing or success-sharing.

Of course one of the concerns is how are we going to know that you are not going to game it? Well, if we have a great year and management gets a bonus then you will get a bonus. And we will argue about how to feather that in and what’s the mechanism for determining the amount, but let’s agree in principal on that. By the way, if we have a bad year and management doesn’t get a bonus, it’s very clear then that the union wouldn’t get a bonus. And that way we share in each other’s success, we are all motivated along the same lines. And I think that would make it easier for companies to say, and tech companies in Silicon Valley have a different paradigm than we do in industrial America, but this would be a way to open up a new era I think of more productive dialogue between management and labor and not have this great divide, but rather let’s close the divide and all be on the same team and we all would be incented on the same four things. Going into the bankruptcy of one portion of your employees by virtue of a union contract, and no, not saying this has happened to General Motors, but it seems strange somebody would be getting a raise whether it would be 1, 2 or 3 percent while at the same time you’re slashing head count and salaries for management.

So let’s all get us on the same sheet and let’s all get everybody aligned so I think whether it would be on a microeconomic basis within a company or quite frankly on a global basis or on a national basis. I think America is known for its generosity, and quite frankly in the past, I think we’ve been known for our ability to compromise and play on the same team and that’s the environment here that I hope to, and the management team hopes to create here at General Motors.

Ryssdal: Let me see if I can re-ask that same question in a slightly different way and maybe get you away from GM and management and bonuses and labor relations. And it’s a pretty simple question: How are we going to get out of this?

Akerson: I think the first thing you have to do is you’ve got to get your financial house in order. You’ve got to create a constructive economic environment. Look, there have been so many things that have happened over the last decade and I’m not a politician and I’m not a policymaker and I don’t want to be one, but we can’t run the deficits we’re running. I think both the political parties and the president of the United States, we all agree to that. Once you kind of get things more in balance and I’m not a person — I don’t know anything about that — but you look at everything from entitlements to stimulus packages to bailouts and it has all got to be factored in. We’ve all got to come up with a plan that gets our financial house in order where in the businesses of the world that are profit-oriented, that are going to operate to the benefit of their shareholders, not for necessarily the social good — although I do think there should be a component of that in any profitable and thriving company.

But what you do when you create some certainties, some predictability where business feels that they understand the rules; if there’s a new tax regime I would like to understand what it is. Is there going to be incentive for research and development? Are there job credits or not? Is there a payroll tax or not? And I’m not espousing one way or the other. I want to know what the rules are going to be. Right now I know that there’s this new committee that as a result of the new compromise that was made — what are the rules going to be? I think we are kind of caught in this moment. There is a pause. There is hesitancy if you will, on a corporate perspective. What are the rules that by which we operate so we can get the engine started and we can progress down the road? Right now we are standing at a red or yellow light saying, “OK, when and how do we proceed and what’s the speed limit?” I think it goes back to the initial part of our discussion that uncertainty it drives people like me and our team here at General Motors to distraction, and it’s not a particularly pleasant experience to try to guess what is the environment going to be a year or two down the road.

Ryssdal: Dan Akerson, the CEO of General Motors. Mr. Akerson, thank you so much for your time, sir.

Akerson: Thank you.

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