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Text File | 1993-04-08 | 19KB | 389 lines

                                                                                COVER STORIES, Page 42

GENERAL MOTORS

What Went Wrong?


Everything at once. How the world's largest corporation broke
down, and why the human cost of repairs will be brutal

By JOHN GREENWALD -- With reporting by William McWhirter and
Joseph R. Szczesny/Detroit


    The end came with all the bitterness of a military
surrender. For weeks General Motors chairman Robert Stempel had
tried to ignore the signals of discontent radiating from a
hostile band of outside directors. When Stempel was hospitalized
with an attack of high blood pressure, board members did not
bother to phone him get-well wishes. When rumors flew that
Stempel was about to be ousted, the board issued a statement
that conspicuously lacked a denial. Finally, Stempel, 59, bowed
to a point-blank demand from a third-generation GM board member,
who told him it was time to leave the post he had taken scarcely
two years ago.

    Even then, Stempel showed flashes of defiance, disdaining
an offer that would have allowed him to save face by resigning
for health reasons. Instead, he laid the cause of his departure
at the feet of the directors, thereby calling attention to the
board's handling of the coup they seemed to be planning.
Declaring that "the effects of rumor and speculation" had
crippled his chairmanship, Stempel stepped down on Oct. 26 from
the helm of the world's largest company.

    The resignation of Stempel, a popular "car guy" who was
the first engineer since the 1950s to run the company, stunned
employees who had heralded him not long ago as an automotive
redeemer who would bring out the best in GM. Like soldiers in
a conquered army, many roamed aimlessly last week along the
corridors of the company's limestone-clad Detroit headquarters.
The ouster shook even Stempel's union adversaries, who feared
what life would be like after the boardroom coup led by John
Smale, 65, the hard-charging retired chairman of Procter &
Gamble. Smale has emerged as a possible Stempel successor and
the real power inside the embattled company.

    Employees braced for a take-no-prisoners conquest.
Together with president Jack Smith, 54, the former head of GM's
profitable overseas operations, Smale and the board seemed
poised to purge Stempel's top lieutenants and embark on a
sweeping new round of layoffs to restructure the former flagship
of American industry. "GM is spooked and in complete turmoil,"
said a longtime supplier. "It is faced with total upheaval
caused by an outside force -- something that once was
unthinkable."

    The bloodletting promises to be deep and wide and painful.
Impatient with Stempel's slowness in carrying out plans to close
21 of GM's 120 North American plants and cut 74,000 of its
370,000 employees over three years, directors now want to
eliminate a total of 120,000 jobs during the decade. A major
goal: to slash GM's labor costs of nearly $2,360 per car, which
is almost $800 more than Ford's and $500 more than Chrysler's.
"It's going to be brutal," warns a GM director. "If the unions
won't cooperate, GM will have to play real hardball. We don't
even have the luxury of thinking about a product strategy. We
aren't going to be thinking great thoughts. GM has a three-year
mission to restore its financial soundness."

    That won't be easy for a company whose U.S. market share
has plunged from a peak of 52% in the early 1960s to just 35%
today. GM last week reported a $753 million loss for the third
quarter and is careering through its third straight year of
deficits. GM's North American division, the heart of its
business, lost an astonishing $7.1 billion last year -- $1,700
for every car, truck and van it sold in the U.S., Canada and
Mexico. The red ink was stanched somewhat by GM's car business
outside North America, whose $2.1 billion profit helped cut the
overall yearly loss to $4.5 billion -- still the most dismal
showing ever by an American company.

    The automaking losses have put GM in the kind of financial
position lately associated with dying airlines and retail
chains. The company has been frantically seeking cash to meet
its financial obligations. GM has sold stock and tapped credit
markets to raise $5 billion in the past year alone, mostly to
pay operating expenses. If the financial squeeze grows too
tight, GM might even file for bankruptcy protection under
Chapter 11 to force concessions in its wage, pension and benefit
packages. "This is not the company it once was," says a GM
director. "There is going to have to be special oversight by the
board for the next three years. Our credibility is at stake in
the credit markets."

    As rumor and anxiety racked the company last week, GM
resembled a nation in search of a leader. "People are waiting
for someone to step up and announce they are in control," said
a senior executive of a major supplier. The betting was that
Smale and Smith would divvy up Stempel's job, with Smale
becoming chairman and Smith assuming the post of chief executive
officer. Smith has been virtually running the company since
April, when the directors installed him as president and told
him to speed up the pace of corporate restructuring.

    Once he gets his new job, Smith is apt to launch the new
round of layoffs immediately, since he will be under as much
pressure as Stempel to let the ax fall. Board members picked up
tough ideas about what needs to be done in talks last month with
General Electric chairman Jack Welch, who earned the nickname
"Neutron Jack" by slashing GE's work force in the 1980s. Welch
reportedly huddled with Smale and several other directors during
a two-day forum of CEOs in Hot Springs, Virginia.

    Stempel's ouster is a landmark in the growing shift of
power from U.S. managers to corporate directors, who had
traditionally been viewed more as rubber-stampers than real
decision makers. As recently as the mid-1980s, not even the
bellicose presence of Ross Perot on GM's board could persuade
the firm to shift gears or change direction. "I did everything
I could to get General Motors to face its problems," Perot said
in the presidential debates. "They just wouldn't do it." Rather
than heed Perot's exhortations to cut executive perquisites and
streamline the bureaucracy, GM spent $750 million to buy out his
stock and shut him up.

    In more than just symbolic terms, GM's crisis ranks as the
most dramatic culture shock in the transition of American
industry from the fat years of the postwar era to the lean years
of today. During the 1950s, GM's gas-hogging V-8s and exuberant
tail-finned sedans reflected the confidence of a nation newly
arrived at superpower status, with seemingly unlimited resources
and skyrocketing productivity. "With GM, you were really talking
about a bold vision of America," says Harley Shaiken, a
professor of work and technology at the University of California
at San Diego. Former chairman Charles ("Engine Charlie") Wilson
immortalized GM's role when he told a congressional committee
in 1952 that "what is good for the country is good for General
Motors, and what is good for General Motors is good for the
country."

    While Big Business has become far more circumspect since
then, it has also become more global. The fate of GM (1991
revenues: $123 billion) has an impact on millions of people
around the world. With more than 715,000 employees in 35
countries, GM meets $22.5 billion in payrolls from Prague to
Kuala Lumpur and buys supplies from 28,000 companies. GM's U.S.
auto business accounts for roughly 1.5% of the American economy,
down from about 5% in the 1950s.

    Its sheer size, however, is one of GM's greatest burdens.
Because of arrogance and inertia, GM has fallen out of touch
with its customers. Except for products of GM's Saturn and
Pontiac divisions, young drivers increasingly spurn the
company's cars for Japanese makes or other U.S. models. The
median ages for buyers of GM's bread-and-butter midsize lines
are 45 for Chevrolet, 55 for Old