BIG AUTO:In the summer of 2008, the US auto industry was on its knees. So desperate was GM that its chief executive approached Ford to discuss a merger. The future of Detroit's Big Three would depend on how Ford responded
‘Hi, Bill, it’s Rick Wagoner. You know, I think it’s really time we put our companies together.”
Bill Ford wasn’t sure he’d heard right. Wagoner, the chairman and chief executive of General Motors, wanted to talk about a merger between Ford and GM? He did.
Wagoner and GM’s operating chief, Fritz Henderson, would come by to talk. Ford was stunned.
He knew GM was desperate. But even now, in July 2008, he had no idea it was this desperate. And he couldn’t snub Rick Wagoner. Sure, Ford said. Come on over, and bring Fritz. The idea had been the subject of theoretical debate for years. What if GM and Ford joined forces? Even in their shrunken state, they would have a combined 38 per cent share of the US market and a huge international presence. All that purchasing power, manufacturing muscle and technical skill under one roof. Thousands of overlapping jobs could be eliminated. Painful as that might be, it could save billions. Chrysler? Forget it. Instead of a Big Three, there would be a Big One.
But could it even be done? GM and Ford had competed head-on for decades. This was not just a rivalry. This was opposite sides of town, you-stay-on-yours-and-I’ll-stay-on-mine. So, as a practical matter, a merger had never been seriously considered – until now. Bill Ford didn’t like the sound of it. GM must be in serious trouble if its executives were coming to Ford for help or answers. The idea of a merger nauseated him. The unions, particularly the United Auto Workers (UAW) would go nuts. Ford spoke with his chief executive, Alan R Mulally, and they agreed that they had to talk to GM, if only to find out what was going on. Wagoner’s approach was out of character. Maybe GM was in even worse shape than it was letting on.
The meeting that followed would profoundly affect the course of both automakers. Wagoner and Henderson arrived with Ray Young, GM’s chief financial officer. Don Leclair, Ford’s CFO, joined, too. Wagoner began. GM and Ford should merge, he said. The synergies would be phenomenal. Savings would be huge. The possibilities were endless. Bill Ford was shocked. GM was serious. Who, he asked, would run this new company? As bad as Ford’s stock price was, Ford still had a higher market value than GM. Wagoner noted that GM was bigger in terms of sales. So, by all rights, it should probably be in charge.
But maybe they could share management, or discuss it later, he suggested. Mulally mostly listened. He wanted to know more about GM’s true state. He surely didn’t want any part of any merger. As far as he was concerned, GM was a roaring fire. Why, he asked, was it coming to Ford now? Wagoner and Henderson explained that GM was running low on cash and was having trouble borrowing money. By merging with Ford, it could go back to Wall Street. So that’s what this is about. GM is going broke, Bill Ford realised. Ford had $30 billion in the bank, and that’s what GM really wanted. It wasn’t about Ford at all. It was about saving GM. Ford didn’t need to hear any more.
“No thanks,” he said. “This would never work out.” Henderson jumped in, reiterating how good a marriage could be. “Don and I did a lot of work on this earlier,” he said. “I know GM inside and out, and Don knows Ford inside and out. Between the two of us we could figure it out pretty quickly.”
Leclair kept his mouth shut. Ford was doing the talking. “No,” Ford said. “No, thanks.” Wagoner understood. This wasn’t happening. “Well if you don’t do it with us,” he said, “we’re going to look elsewhere.” With that, the GM execs left. At first, Ford was angry. GM could be so arrogant. But the overture was disturbing. If GM went bankrupt, a big part of the automotive supply chain could collapse. That would hurt the entire industry, including Ford. Bill Ford respected GM’s power and mass. After all, he is a great-grandson of Henry Ford.
“I grew up in this town, and GM was the giant,” he later recalled. “That was just the reality of life for me from childhood.” Mulally was amazed at GM’s desperation. From the day he came to Ford, he wanted to beat GM, and to beat it badly. So if GM was going belly-up or merging with someone, he wanted to know. But Ford was on its own road, and he wasn’t turning over the wheel to Rick Wagoner or anyone else.
A few weeks before the GM-Ford meeting, Rick Wagoner assembled his senior executives at GM’s base in the Renaissance Center downtown for an announcement: GM was not going under – not yet. “We are highly confident that we have ample liquidity through 2009,” he told reporters. But could GM really survive for 18 months, given that it was burning through more than $1 billion a month? Wagoner said GM would raise a $15 billion “cushion”, primarily by cutting thousands of salaried jobs, suspending its stock dividend, freezing wages, cancelling executive bonuses and eliminating health-care coverage for white-collar retirees over 65. On top of that, it would cut 300,000 more units of truck production, cut marketing costs (including dropping its giant Nascar and professional golf sponsorships), reduce spending on new products by 20 per cent and delay its first big payment into the UAW health care trust. All of that would save about $10 billion, Wagoner said. After that, GM hoped to raise $5 billion by selling everything it could – real estate and the rest of its GMAC finance unit, as well as its Hummer brand and maybe others. Finally, it would borrow whatever it could on Wall Street, using assets in the United States and abroad as collateral.
It sounded as if GM was burning the furniture so it wouldn’t freeze to death. Bob Lutz, GM’s vice chairman, swore the company would not compromise on the quality of its new models. But this was the first time it had decided to cut capital spending this much since the recession of the early 1990s.
Wagoner looked grim. He wore a gray suit, a yellow-striped tie and a long face, the corners of his mouth frozen in a frown. As he sat with his hands folded in front of the bright blue GM logo, he appeared to be trying to convince the reporters of something he had a hard time believing himself.
“Our plan is not a plan to survive,” he said flatly. “It is a plan to win.” Questions were taken, but not really answered. Before the press conference ended, Moody’s Investors Service had downgraded GM’s credit rating deeper into junk status. Afterward, when Henderson made the first calls to big banks in New York, it was as if no one even wanted to answer the phone.
Asking investment banks to raise even a few billion dollars was a joke. He swallowed hard. “It was bad,” he later recalled. “Things just kept getting worse and worse and worse.” GM needed something to open Wall Street’s spigots. That something, he told Wagoner, was a merger with Ford. To his surprise, Wagoner agreed. After Ford rejected GM’s proposal, Henderson felt as if someone had popped his balloon. So much for the event that would convince Wall Street to lend to GM. “That would have been the catalyst,” he would recall later. “You could actually use it to raise capital because the amount of synergies would be massive. Massive!”
Now he felt a growing sense of dread. He had been counting on Ford to be a lifeline. At this point, he knew GM’s financial status better than anyone, even Wagoner.
He couldn’t blame Ford for slamming the door. His idea might have worked, he said later. “But sitting in their shoes, I could understand why they didn’t want to do it,” he said. “It wasn’t a simple call for them.”
Lutz was disappointed to hear how the Ford meeting had gone. To him, a merger would prove once and for all that a U.S. company could whip Toyota, or anyone else. “It could be one large, enormously powerful global automobile company,” he had argued. “You could shut one proving ground, one finance department, one tax department, a bunch of plants, get rid of a lot of engineering. We could get rid of the fixed costs even before the acquisition.”
Wagoner didn’t even want to talk about it. He had tried and failed. Move on. It was another example of GM’s dysfunction at the top. There was something missing among Wagoner, Lutz and Henderson, some chemistry or cover-my-back mentality. They worked together, but not “together”, as the Ford guys did.
Nobody outside the tight inner circles at GM and Ford knew of the secret meeting. To much of the world, the two companies were joined at the hip. The public and cable TV’s talking heads were no longer distinguishing among the Big Three. It was everybody’s turn in the barrel.
That was driven home with the financial results for the 2008 spring quarter: an $8.7 billion loss at Ford, the worst quarter in its 105-year history, and a $15.5 billion loss at GM, its third worst in a century. The numbers were staggering.
GM’s revenue in North America had fallen $10 billion – a breathtaking 33 per cent – from the year-earlier quarter. Ford took an $8 billion charge just to write down assets. The whole US car market had imploded.
Yet GM’s board seemed to be in denial. The lead director, George Fisher, jumped to the company’s defence. “I’m reading too much stuff in the papers these days that is wrong,” Fisher grumbled in an interview. “It’s a distraction to the board and a distraction to management.” Was GM headed for bankruptcy? “The answer is no, absolutely not,” he said.
His optimism seemed remarkable. Wagoner and Henderson had just hurled a Hail Mary pass in Ford’s direction. Sales were atrocious and getting worse. Cash reserves were dwindling, and more expenses were coming in. Delphi, the big auto parts maker that had been spun off from GM, was trying to find a private-equity buyer to emerge from bankruptcy. And it looked as if GM would be on the hook for another $3 billion to $4 billion to cover pension obligations of Delphi workers.
No happy talk was coming from Ford. Mulally, in daily sessions with senior executives, kept raising the volume. “What does a sustainable Ford look like, gentlemen?” he asked at one point. “Why are we in business? We are in business to create value. And we can’t create value if we go out of business.” Excuses were unacceptable. “Why can’t we make money on small cars?” he asked. “Do you think Toyota can’t make money on small cars?”
On the day Ford reported its huge loss, it rolled out the next phase of Mulally’s transformation plan – converting three truck plants in Michigan, Kentucky and Mexico to small-car production, ramping up the output of four-cylinder engines and introducing a new feature in “EcoBoost”, an engine technology that simultaneously increased power and fuel economy. Industry analysts were floored that Ford was pouring so much money into capital improvements under such dire circumstances. But Mulally seemed impervious to the sense of panic building in Detroit.
On August 4th, as Mulally huddled with his team, Bill Ford was en route to Lansing to meet Barack Obama, then running for president. The one-on-one had been arranged by Governor Jennifer Granholm of Michigan, a personal friend of Ford. Bill Ford wanted to get to know this young, environmentally minded candidate. The election was three months away, and Obama looked like a winner.
Much of what was happening to the US auto industry had political overtones. Ford was aware that GM was planning to go to Washington to lobby for aid. Specifically, Wagoner wanted some of the $25 billion in Department of Energy loans authorised by Congress the previous year, when lawmakers passed new fuel-economy standards. The loans were intended as seed money for technology to meet the tougher guidelines. But the $25 billion wasn’t in the budget yet, and GM was taking no chances. It needed that money – and not just for greener cars.
Ford had a growing sense that whatever went down in Detroit, the federal government would be intimately involved. And he wanted to make a personal connection with the man who could be the next president. Obama had a huge crowd for his speech at Michigan State University. Cheers came in waves when he promised to help Michigan out of its woes.
“I know how much the auto industry and the autoworkers of this state have struggled,” he said. “But I also know where I want the fuel-efficient cars of tomorrow to be built – not in Japan, not in China, but right here in the United States of America. Right here in the state of Michigan.”
Afterward, he and Ford met alone. Obama had been forthright on the campaign trail about Detroit’s past, its dependence on gas-guzzling trucks and its reluctance to change. He had echoed those points in his speech, speaking of ending America’s dependence on foreign oil.
“We desperately need a new energy policy in this country,” he told Ford. “And I would like the domestic auto industry to be part of the solution, not part of the problem.” Ford had a ready reply: “We’d love to work with your administration. I passionately believe that Ford can and should be part of the solution.”
Then he went through Ford’s transformation: smaller cars, cleaner engines, electric vehicles in development. “The vision I have is for us to be a global, green, high-tech company,” he said. “And that’s not just a vision.”
The two hit it off and then got technical – how to build batteries for electric cars, create an infrastructure of charging stations, target tax credits to shift consumers into super-efficient vehicles. When it was over, they shook hands like new friends. Ford felt great. Everything Obama wanted, he wanted, too. “I think he’s exactly in line,” Ford said after the meeting, “with where society wants us to go.”
Green cars were also very much on Wagoner’s mind. In late summer 2008, he told Lutz that the single biggest product responsibility on his plate was to deliver a working version of the Chevrolet Volt plug-in hybrid in time for GM’s 100th birthday celebration that September.
Wagoner was gearing up for the ultimate sales job: to persuade Washington to help GM. The presidential campaign was about to kick into overdrive. The Bush administration was already swamped with Wall Street’s crisis, and Congress was in its re-election frenzy. If GM was to win over Capitol Hill and the White House, it needed a powerful message. It couldn’t come limping in, begging. It had to represent progress, innovation, a bright future. That’s where the Volt came in. It was a blend of electric power and convenience. When the battery ran down, a small petrol engine kicked in and kept it going.
GM needed that car. In the end the Volt wouldn’t even go on sale for another two years, and by the time the first one rolled off the line on November 30th, 2010, Wagoner had been forced out by the Obama administration as part of a $50 billion bailout.
GM’s recovery continues to this day and there are signs that it may once more become the world’s biggest auto maker, while Ford is now in its stride towards a greener future. Yet the idea of a single Detroit giant – once raised – will always linger.
Once Upon a Car: The Fall and Resurrection of America's Big Three Automakers – GM, Ford and Chryslerby Bill Vlasic, the Detroit bureau chief of the New York Times,is published by William Morrow
