Overhaul (47 page)

The rest of the meeting did not go any better for Fritz. As the directors worked their way through the day's agenda, they came upon a request to finance the development of a new engine called the Ecotec. To GM, this highly efficient four-cylinder design represented a critical improvement. It was slated to become the largest-volume engine in GM's lineup, to be used in small cars, midsize sedans like the Malibu, and crossover vehicles like the Chevy Equinox. Every GM brand except for Cadillac would feature it, and it would occupy three or four engine plants employing thousands of workers. Fritz and his team saw the proposal as routine; at $1.2 billion, in the old days it barely would have qualified for board-level attention. It occupied a single page deep inside the board book, $650 million for Phase I and $550 million for Phase II, with a resolution of approval attached.

Team Auto, of course, had bounced back many such requests for lack of substance and analysis, but the lesson had not sunk in. "What would you do if you got this at Carlyle?" Bonderman asked Akerson, who snorted in response. Other new directors were also perplexed. It didn't help management's cause that John Smith, the stubborn, imperious group vice president, was overseeing both the Ecotec and the troubled Opel deal. Smith bristled when one of the board's newcomers suggested that the proposal should include an analysis showing critical metrics such as return on investment. Car companies need new engines to boost fuel economy and meet U.S. standards, he answered impatiently. They don't calculate what they will get from the investment, another executive added.

This didn't sit well with Bonderman. "Back where I come from, we first have to justify why we need a new engine," he shot back. "Then you would give us a series of materials justifying how much it would cost and why. Let's make it easy. Assume you need an engine. What's the rate of return?"

The executives were now baffled and upset. In their minds, cars need engines, and when an automaker develops a new one like the Ecotec, no one knows for sure which vehicles it will go into. They also did not believe—with some justification—that a rate of return on a single element of a car can be accurately calculated.

They were more baffled when a new board member asked why an engine couldn't just be purchased from somewhere else. Automakers see engines as the core of their business and are very reluctant to farm them out, especially engines expected to be as widely used as this one. Both the executives and the old directors felt that the newcomers had a lot to learn. The new directors viewed exchanges of this sort as further confirmation that Harry and his colleagues had spoken the truth in their August 3 presentation. And the more they got to know GM executives like Smith, the more they thought that a personnel housecleaning was in order.

Fritz eventually tabled the discussion. He told his team to proceed with the design and engineering of the Ecotec while the financial staff developed the analysis the board wanted. In part because of the unusual nature of the request and in part because of GM's hidebound accounting systems, the analysis would take two months and untold man-hours. Bonderman rejected the first version, forcing the work to be redone before the board finally voted to approve the Ecotec.

The confrontation left a bad taste on both sides. Word of friction between management and board began to leak into the press, with anonymous executives accusing the board of wasting time and getting too involved in the nitty-gritty at GM.

Whitacre stayed out of such debates, but the uncertainty in the boardroom about Fritz's status inadvertently seeped into public consciousness when he, and not Fritz, suddenly emerged as GM's TV pitchman. A sixty-second commercial that debuted on September 13 featured the GM chairman wearing a dark suit and a red tie and striding through a brightly lit automotive design studio in a campaign called "May the Best Car Win."

"Before I started this job, I admit I had some doubts—probably a lot like you," he tells the viewer in his soft Texas drawl. "But I like what I found. I think you will too."

He then launches his pitch. "Car for car, when compared to the competition, we win. It is as simple as that ... We're putting our money where our mouth is ... Put us to the test," Whitacre says, offering a sixty-day, money-back guarantee. "Put us up against anyone, and may the best car win."

The commercial was reminiscent of Lee Iacocca's iconic Chrysler ads thirty years earlier, challenging America, "If you can find a better car, buy it." It left industry watchers wondering what was going on inside GM. Some saw it as a signal of Whitacre's interest in being more than a nonexecutive chairman. Others speculated that Fritz had put Whitacre up to it in hopes of ingratiating himself.

In fact, the decision to put Whitacre on the air was made by the GM marketing department. Marketing was among Whitacre's passions, as he'd made clear to me during our first trip together to Detroit. He hammered constantly at the staff, complaining that GM did a poor job of selling people on its cars. He liked the "May the Best Car Win" concept, and wanted somehow to acknowledge taxpayers for the help they'd given GM. The challenge, of course, was to make the message ring true—the bailout was immensely unpopular, and taxpayers didn't like to be reminded of it. Whitacre resisted being in the commercial at first, but then told the marketers, "If you test the crap out of it, I will do it." In market testing he came across as credible. Someone with his folksy drawl obviously wasn't part of the team that had driven GM to ruin.

The commercial ran for barely a week, but with constant replay on cable TV news and on the Internet, it created an impression that Whitacre was now in charge—or soon would be.

For Fritz, the Opel deal was a nightmare. Negotiations dragged on into the fall. Germany's 1.5 billion euro bridge loan was keeping the company solvent, but ironically, it removed any real urgency to close the deal. The European autoworkers still hadn't fully agreed to terms. Magna founder Frank Stronach, a crusty and notoriously tight-fisted Austrian-born entrepreneur, seized every opportunity to haggle. This gave even Ron Bloom misgivings; he called Fritz repeatedly to complain that Magna was continually recutting the deal to squeeze GM.

Then the European Union completed its review, only to kick the problem right back into Fritz's lap. Worried about the impact of Germany's loans on Opel's commitment to other European countries, it requested a formal reevaluation by the GM board. All of this was just as I had told President Obama in regard to Chrysler back in March: a deal that looks iffy at the start typically only gets worse. With so many governments involved, Opel was beyond typical. In fact, GM was on its way to creating an international incident.

By November 3, as the directors assembled for the monthly board meeting, their sentiment had clearly swung toward keeping the European unit. Pat Russo, for example, noted that other automakers make money there, so perhaps it was just a question of improving Opel's management. She also observed that Opel was strategically positioned to take advantage of the growing central European market.

Fritz, who'd run GM Europe and Opel, doubted that the business could ever generate a profit. He believed that GM should finish the deal it had started. Wasn't jettisoning money-losing operations the kind of tough decision the new GM should embrace? Europe was a mature auto market where competition was as ruthless as in the United States, or more so. And tough restructuring moves were harder to make in the heavily regulated EU. The board's resistance started to feel to Fritz like a pretext to run him out of his job.

Kresa and others, meanwhile, were surprised that Fritz didn't respond to the board's increasing skepticism of the Opel deal. The world was different now, and GM actually had cash and no longer needed a fire sale. What the board wanted were options. But all Fritz offered was the Magna transaction.

No one in Detroit appeared concerned, or perhaps even to be aware, that Chancellor Merkel was in Washington that day, where she was to address Congress. This was her first visit to the United States since her reelection in September. Perhaps mindful of that, the Opel union announced that morning it had agreed to concessions that would have saved 265 million euros a year if GM proceeded with the deal, thus removing one of the final obstacles. But none of this seemed of consequence to the GM board, which now voted to back out. Just hours after the union announcement, GM declared that it had decided not to sell Opel, and that it would restructure the company instead.

Merkel was completely blindsided, much to the Obama administration's chagrin. Fritz called her aides to convey the news just before she was to board her plane home. By all accounts, she was furious. She made no public statement, but by the next morning her ministers blasted GM, and one of her aides called for the company to repay the bridge loan. The autoworkers threatened mass demonstrations. Other European leaders, as well as Russian Prime Minister Vladimir Putin, chimed in. And Treasury spokesperson Meg Reilly said in a statement, "The Administration was not involved with this decision, which was made by GM's board of directors."

After that November board meeting adjourned, Fritz and Ed sat down to strategize. Fritz told Ed it "would be hell" in Europe following this decision, but volunteered to cancel a planned trip to Brazil to go to Europe "and take all the bullets on this thing."

It was hard for Fritz not to believe that the unraveling of the deal might cost him his job. So he asked Whitacre point-blank, "If you're going to get rid of me, let me know now because I've got better things to do with my life."

Ed reassured Fritz he was not being fired and should fly to Europe. All the same, rumors continued to swirl, even after Whitacre publicly expressed support for Henderson a week later, telling Bloomberg News, "The Board is fully behind Fritz; he's working hard."

In reality, opposition to Henderson was mounting, especially among the new directors who had always been skeptics. Bonderman and Akerson were thoroughly disenchanted. Girsky was unhappy with what he saw as disarray in GM's sales and marketing. Carol Stephenson, the Ontario business school dean who occupied the Canadian board seat, had arrived under the influence of officials who had negotiated her nation's share of the bailout. The GMers had struck the Canadians as highhanded and dismissive of outside ideas. While generally quiet in board meetings, Stephenson expressed concerns that GM wasn't giving the board the data and details it needed to make informed decisions.

Change—or lack of it—had become a major sticking point. Many directors felt that GM's presentations remained too optimistic, just as the task force had warned. And even though Wagoner was gone, board members saw some of the old arrogance, including a resurgence of the view that GM's bankruptcy was not its fault but rather was due to the financial collapse and economic downturn. Patricia Russo was so put off that she suggested to Fritz that he tell his executives to quit talking as though GM were such a top-notch company; it still had a long way to go.

Some members of the old board, including Laskawy and Kresa, were inclined to give Fritz more time. Compared to Wagoner, he was a believer in change. During his brief tenure as interim chairman, Kresa had coached Fritz about the need to bring in new blood. Fritz had duly read up on other companies and cultures. But recruiting outsiders for top posts wasn't his strength; he remained doggedly loyal to GM people and ways. Ray Young was still CFO. His decision to bring back Bob Lutz left many on the board scratching their heads. And when Katy Barclay, the head of human resources, finally resigned, Fritz proposed a GM manufacturing executive to take her post.

Whitacre and the board had asked Fritz to reduce the number of his direct reports, in part by naming a chief of GM North America, a position Fritz had eliminated when GM emerged from bankruptcy. But Fritz resisted. In one tart exchange, he told Whitacre that people would simply go around the North American head to the CEO to get their way. Whitacre replied that it was the CEO's job not to let that happen.

Throughout the fall, board members discussed among themselves what to do. I talked periodically to a number of the directors and sensed growing and widespread unhappiness with Fritz. But Whitacre put off all talk of replacements; he had promised Henderson at least 120 days—until early December—to show what he could do, and meant to honor that commitment.

By the time of the discussion in the executive session after the November board meeting, it was clear to all that Fritz would be asked to leave in a month's time. The problem was whom to replace him with. For reasons much like our decision to replace Rick with Fritz, no one believed that GM could be left rudderless while a search was conducted. Nor, of course, were there any potential successors within the executive team.

So the board looked in its own midst for at least an interim solution. Girsky wanted the job, but while he was well liked and highly respected, no one thought he was ready to be CEO of General Motors. Akerson, a former CEO, declined to be considered, citing his obligations to Carlyle and lack of enthusiasm for living in Detroit. Directors began to wonder whether Whitacre could be pressed into service.

Fritz could sense rumblings, but he was in the dark. On November 30, the day before the December board meeting, he decided to end the suspense. His calendar called for him to leave right after the meeting to be the keynote speaker at the Los Angeles auto show; he asked Whitacre whether he ought to keep to his travel plan. The chairman told him to hang back. Although the board had not yet made a formal decision, Whitacre knew with virtual certainty what would occur the next day. About the same time, he phoned Ron Bloom to give him a heads-up that the board was likely to fire Fritz. This didn't surprise Ron—he'd been in the camp that had rated Fritz's chances of success at 40 percent.

The next morning, the board plowed through its regular agenda. Afterward, in an executive session that lasted less than five minutes, the directors voted unanimously to relieve Fritz. Then the board turned to Whitacre, securing his assent to become interim CEO while a search for a permanent replacement was conducted.