Overhaul (35 page)

By mid-April, we presented Larry and Tim with a plan that we believed would turn the tables and force Delphi into a reasonable negotiation. Would Delphi or any of its investors really want to be perceived as holding GM hostage at such a precarious economic moment? After our confrontation with the Chrysler banks, Larry was at first hesitant to pick another public fight, but Tim backed our strategy, and Larry came around.

On April 23, GM announced it would shut down thirteen North American plants for an extended period. While the closure was partly aimed at reducing the bloated supply of cars on dealers' lots, the accompanying news release—drafted in large part by us—was blunt. Unless Delphi came to terms with GM, it said, "Delphi or its lenders could force GM into an uncontrolled shutdown, with severe negative consequences for the U.S. automotive industry."

Shortly thereafter, the creditors released cash to provide liquidity to Delphi. We had won round one. The negotiations with Delphi continued, but with Matt and Harry forcing GM to bargain hard and strike a deal that satisfied GM's operating needs at the lowest cost to the taxpayer. They began laying the groundwork for GM to take back control of the steering-assembly business as well as of four "keep sites"—Delphi factories that made other key components.

GM's far-flung international empire was its other great cash sponge. We regularly received requests to fund subsidiaries abroad, and just as regularly rejected them. While we were legally permitted to approve these requests—and some may have represented good business decisions—I knew that part of my job was to be sensitive to the politics, particularly where taxpayer dollars were concerned. I developed what I thought of as "the
Washington Post
test": How would the public react to a headline that said the Obama administration was in effect allocating hundreds of millions of dollars of public money to shore up GM Australia, or GM Korea? We managed never to violate this principle, but GM Europe tested it most sorely.

GM Europe, with its flagship business in Opel, was a major automaker in itself. It had $34 billion in annual sales, making it about 70 percent the size of all of Chrysler. It sold about two million vehicles a year, employed 55,000 people across the continent, and was GM's biggest international headache. Not surprisingly, it and other European automakers were suffering many of the same woes as their U.S. counterparts, with the complexity of European regulation and politics layered on. Like its Detroit parent, Opel was broke and in urgent need of capital.

Opel's main creditor was something called the General Motors European Treasury Center, or ETC. This was a kind of offshore kitty where GM pooled excess cash from subsidiaries around the world, sort of a central bank for its non-U.S. operations. The ETC would lend the money, in turn, to other subsidiaries in need. Over the years, Opel had borrowed more than $1 billion from the ETC, and a failure by Opel to repay these debts would hobble other, healthier operations in places like Brazil and China.

We wanted the German government to do as ours and Canada's had done—pony up to rescue one of its biggest employers. With our encouragement, GM informed the German government in mid-March that it was willing to cede majority control of Opel to anyone willing to put up the 3.3 billion euros (approximately $4.4 billion) that the business needed to turn itself around. But while the government expressed a willingness to help, it faced domestic opposition. Instead of being on a postelection honeymoon like President Obama, Chancellor Angela Merkel was just six months from her next trip to the polls. She decided that bailing out Opel would be political suicide unless the company could arrange at least a modest infusion of fresh capital from commercial sources, ideally GM or, alternatively, a private investor.

No European nation wanted to see its Opel facility close, but neither was any eager to put up cash, certainly not without assurances that its jobs would be preserved. I was witnessing a small example of what I had written in op-eds: Europe is not a nation but a collection of countries loosely affiliated by ambition (to be like the United States) and fear (of repeating past mistakes, including two world wars). Each country worked furiously to protect its own interests—ambassadors would call on us to lobby the Germans to treat them fairly in the Opel situation!—but closing factories and shrinking capacity, though needed just as urgently in Europe as in the United States, was almost unthinkable. European mores placed too much emphasis on preserving jobs, however uneconomical they might have been.

The Germans continued to pester us for aid; we kept asserting our unwillingness to let GM divert capital to a European problem, particularly in the absence of meaningful European support. Eventually, Germany agreed to provide a 1.5 billion euro bridge loan to enable Opel to seek a private-sector partner. (I was amused to note that this bridge loan included the condition that none of the money was allowed to "leak" from Opel back to the United States.)

From GM's perspective, Opel posed a tough dilemma. If forced to give it up, GM would cease to be a global company at a time when Ford and other rivals were trumpeting their ability to produce models that could be marketed around the world. In addition, GM's midsize-car design and engineering operations were based in Europe and would have to be replicated if Opel was severed. (Korea would have been the most likely place.) But given the sensitivity to how
TARP
dollars were used—not to mention the bigger challenges GM faced—we felt we had to take a hard line. Opel was secondary; we needed to concentrate on building Shiny New GM.

Throughout these sometimes fraught dealings with GM and Chrysler, Ford made sure it was never completely out of mind. Alan Mulally phoned Tim regularly and often sent emissaries to me. Ford's message was always the same: We're struggling too, but we're fixing the problems ourselves. Don't penalize us because we didn't take your money. At the same time, Mulally was generally supportive of our work—he knew that the failure of GM and Chrysler would wipe out much of the supply base and make it difficult or impossible for Ford to produce its cars.

One of Mulally's delegations showed up at Treasury in late April: Lewis Booth, a crisp Englishman who was the CFO; Tony Brown, the tall, heavyset, mustachioed African-American global purchasing chief; and Ziad Ojakli, a compact, garrulous Brooklynite and former Bush White House official who was head of governmental affairs and seemed never to stop talking. "Our plan is working. We are viable," Booth told us as we sat around the conference table in the yellow-walled room 2428.

All three had been in the main conference room at Ford headquarters a month earlier, the day President Obama briefed the nation about his decisions on Chrysler and GM. The Thunderbird Room, as it was called, was adorned with eight clocks, showing the time at Ford installations around the world, and black-and-white photos of the Model T and Henry Ford. Mulally had turned it into Crisis Central as he and his team grappled with the present dramatic downturn.

Like GM and Chrysler, Ford had been fighting a losing battle for more than thirty years to maintain consumer confidence and auto sales. Despite the boom in SUVs, it had spent many recent years bleeding cash while shedding jobs and plants. Yet because of its bold decision in December 2006 to raise $23.5 billion by hocking everything it owned, the company that had long trailed GM now found itself just enough better off not to be in the throes of an impending bankruptcy.

All the same, the deepening recession was brutal. Ford, like GM, was saddled with too many dealers, uncompetitive labor rates, and a dependency on gas-guzzling trucks and SUVs. Ford had burned through nearly $21 billion in 2008. In January 2009, after reporting a $5.9 billion fourth-quarter loss, it drew down its remaining $10.1 billion line of credit. It had a quarterly cash drain of about $5.5 billion, and if business didn't pick up within a year, Chapter 11 would threaten it too. Meanwhile, its giant finance arm, Ford Motor Credit, was paying sky-high interest rates for the capital it needed.

Before the crisis, the Thunderbird Room had been the site of once-a-week meetings in which the top two dozen Ford executives around the world—from marketing to product development to Ford Credit to human resources—would deliver rapid-fire reports on their operations. Now the meetings were happening every day, sometimes twice a day, and often on Saturdays and Sundays too, as the executives confronted the effects of collapsing sales and the question of what would happen to Ford if its Detroit rivals went down in a heap.

Mulally was a relative newcomer. A former Boeing executive who'd lost the race to become CEO, he was a Kansas native who sprinkled his speech with expressions like "neat" and "gosh." That Boy Scout demeanor concealed a fierce drive to win. Bill Ford Jr. had given him the reins in September 2006 when the forty-nine-year-old scion decided he wasn't the right guy to ruthlessly pare down and fix his great-grandfather's century-old business. The massive borrowing initiative was already under way; Mulally encouraged Ford, who remained as chairman, to raise even more. At the time, the received wisdom on Wall Street and in auto circles was that Ford's fundraising was an act of desperation, necessary because Ford was so far behind GM in product development and modernization.

The new CEO's second boost to the company was working with Bill Ford to sell off Land Rover, Aston Martin, and Jaguar, high-end brands the company had acquired. They'd been meant to become the centerpiece of Ford's growth strategy, but instead they had cost billions of dollars, in one fix-it attempt after another, and were a constant distraction for management. Ford pursued a dual strategy in response to the bailout. In the press and congressional hearings, it applauded Washington's efforts to help GM and Chrysler. Mulally had gone to Washington in November and December 2008 to support his rivals and to underscore the need for a healthy U.S. auto industry.

The second part of the strategy was more private and less benevolent. Ford did everything it could, in its business operations and its lobbying, to ensure that it would not be hurt by the rescues. "Disadvantaged" became the watchword—as in "we should not be disadvantaged by what the government does to help GM and Chrysler."

This aspect of the strategy was tricky, because Ford in essence wanted the benefits and advantages that GM and Chrysler were poised to get, namely a cleaner balance sheet, lower labor costs, and access to cheap money from the Fed. But it didn't want the negatives, like the executive-compensation restrictions, the elimination of the Ford family's super-voting stock that allowed them to control the company, or the stigma that came with taking taxpayer money. And of course it didn't want to consider, or even let anyone think it would entertain, a Chapter 11 bankruptcy filing.

Senior executives like Booth and Brown closely tracked what the government did to aid GM and Chrysler. They monitored press re-leases, statements, Chrysler and GM submissions, and news stories about the task force. They watched how developments at the two automakers compared with Ford's own efforts. Special attention was paid on five fronts: labor, dealers, suppliers, debt, and credit. Ford's status vis-à-vis its Detroit rivals was a regular and frequent topic in the Thunderbird Room.

Mulally interrupted this particular meeting—now four hours in—for Obama's speech. The President's image came up on the oversize screen, and the executives around the large circular table listened as he delivered his restructure-or-liquidate ultimatum to Chrysler and GM. Some, like Ojakli, wondered whether government-backed warranties would be enough to keep customers buying. When Obama finished, Mulally flipped off the TV and said, "This is our time to be humble and focused. We need to show that what we are doing here works."

So Ford moved aggressively to keep pace with the forced restructurings. In April it reduced its debt by $9.9 billion by offering a mix of cash and common stock, one of the largest debt exchanges in corporate history. It won relief from the UAW akin to what GM and Chrysler achieved (although the rank-and-file members voted down the new Ford contract in the fall of 2009.) It cut hundreds of dealers. To Ford's giant purchasing arm, which spent about $65 billion annually for everything from steel to seats to floor mats, Obama's speech had already brought relief it could not have secured by itself. By Ford's estimate, some 70 percent of its suppliers also did business with Chrysler, GM, or another big automaker. A free-fall, Lehmanlike collapse by a major rival could take down a supplier and shut down Ford as well; to protect itself as best it could against that eventuality, Ford had reserved hundreds of millions of dollars for supplier support. Obama, with his implicit promise that the White House would not let GM and Chrysler collapse, enabled Ford to free those reserves and apply them to other headaches.

My own sense, watching these executives operate, was that Ron Gettelfinger had been right. Months before, asked by a congressman to rank the automakers' leadership, he'd testified under oath that Ford's was the best management in Detroit.

By late April, Harry had the rudiments of an operating plan for GM. It dramatically accelerated and magnified the restructuring the company had originally proposed. Pontiac, Saturn, Saab, and Hummer would be eliminated almost immediately. By concentrating GM's focus, the number of new launches and "refreshes" of existing models could be increased from thirty-nine to forty-four over the coming five years. There would be five hundred fewer dealers four years earlier than in the previous plan. Plant closures would be accelerated by six to twenty-four months. A further 8,000 hourly workers and 1,250 white-collar executives would go. All told, the restructuring was expected to reduce North American operating costs by $8 billion a year. And while GM had been comfortable with a plan that allowed the company to break even at U.S. sales figures of 11.5 to 12 million a year, Harry was prepared to fight to cut costs until GM could break even in a 10-million-sales environment, still slightly higher than the depressed levels of early 2009.