Rick Wagoner Gone

Rick Wagoner is finally out as CEO as GM. He left at the urging of the Obama administration. Finally there has been some accountability Should there be rejoicing or dancing in the streets? Will Wagoner's successor be able to sprinkle magic dust on a system that is headed toward failure?

Rick Wagoner has been in a position to save GM since 1992 when he was the CFO. That's 17 years to turn the company around. Yet since 1992, GM's market share has dropped from 33% to 17%. I believe that GM's performance would have been the same regardless of who was in charge.

Why did I single out Wagoner if the system he was running was destined for failure? Because he was the poster child for the systemic failure of American manufacturing businesses. He also representative of a system of leaders that put themselves first. While he knew his company was failing, he along with thousands of GM executives were happy to take massive salaries from a dying company.

What Rick and other business leaders have failed to realize is that the environment has changed. What worked in American business, what is still taught at our greatest MBA factories, no longer works.

In his article for Forbes entitled "Why Rick Wagoner Had To Go", Jerry Flint agrees that Rick had to go but rightfully wonders is there anyone who can do better?

"it might be a mistake to cheer Wagoner's leaving, because we don't know if his replacement will be any better. The second in command, the president and chief operating officer, is Fritz Henderson, and he is expected to succeed Wagoner, at least for now. Frankly, it is difficult to see what he did to become president of the once largest automaker in the world. "

There will always someone who will step in to take the large salary and say they can do it better (will Fritz now take a $1 per year salary?). The data says that GM will continue on it's sad path to nothingness.

Updated Chart

I wanted to update GM's scorecard. GM released their 2008 earnings. The good news is that Rick's performance improved by $7 Billion from 2007. The bad news is that GM still lost over $30 Billion in 2008. That's a whopping (negative) $327,000 per employee!

Now during Rick's tenure, GM has lost a cumulative $67 Billion. I hate to break the news to GM shareholders but this guy is not a winner. He looks like a winner but he is NOT a winner.

GM has asked for a total of $25 Billion to save the company. That comes out to over $250,000 for every single employee at GM (most of whom will be laid off over the next few years). I wonder if we wouldn't all be better off giving this money to the employees to start their own businesses or maybe just to give them a 4 year vacation.

I have one simple question, why does Rick still have a job?

Greed is Good?

Is it greed that truly makes American Industry successful? I was watching an interview discussing how Barack Obama could cause long-term harm on Wall Street by limiting the salaries of firms that take Federal aid to $500,000. The pundit said you won't get the best people by limiting salaries. That's socialism!

Somehow it's just good capitalism when the government bails out inept firms run by greedy (greed is good remember?) executives. Maybe its possible that the greed caused the problems in the first place. Is any individual worth $14 million a year or $200 million a year in the case of Wall Street executives? If you only offered $500,000 would you be excluding the best people to run the company?

Does it truly take millions of dollars to attract the best leaders? If we follow that logic then we have to believe that our President ($400,000 per year) and General Patraeus ($216,000 per year) are flawed as leaders. We know this isn't the case. Perhaps lower salaries will attract the right kind of leaders for our nation's companies.

GM's Prescription for Profitability

GM and many other U.S. Companies have followed a prescription that is taught at all major business schools that are supposed to lead to long term profitability. The formula looks like this:

• Outsource work
• Reduce workforce
• Sell off business units

This formula always works: In the short term. When labor accounts for 30-40% of the business costs, a 25% cut in employment results in an immediate 10% gain to the bottom line.

Outsourcing work also has an immediate positive impact. Often, by outsourcing, companies like GM can get an immediate 20% cost cut. Again when 60% of your costs are in-sourced this is a powerful lever. But each time you pull the outsourcing lever, it is less and less effective.

There is a delayed cost increase with the outsourcing. Often, overhead costs do not keep pace with the outsourcing so the remaining business becomes even more expensive leading to more outsourcing. Additionally, as more work is outsourced, both knowledge and power shifts to the suppliers and supplier costs actually begin to creep up.

Finally companies sell off entire parts of the business for a one time gain. In the past decade, GM sold off Delphi and Alison Transmission. Each time the company justifies this by saying "this isn't our core business".

The results speak for themselves. The prescription works in the short-term but destroys the company over the long-term.

What's Wrong With GM? It must be their workers!

We have heard it over and over again. GM is failing because of the unions. No unionized company can compete. Do GM's problems really lie with the UAW? The answer is no ... and yes.

Let's look at the high costs of labor. According to GM's annual report they are paying the unions $73 per hour in wages and benefits. This has been picked up by newspapers and news outlets. If this were true it would be outrageous. My company has a pension plan and full medical benefits. They are kind enough to let me know the cost of each. My medical benefits run around $13,000 per year for my family. That comes to around $6.50 per hour. My retirement plan costs the company around $10,000 per year or approximately $5 per hour. Vacation costs around $1.50 per hour. The average union wage is between $25 and $32 per hour. At $32 per hour this comes to $45 per hour.

So how does GM come up with $73 per hour? Well the $73 per hour includes costs of retiree pensions and retiree health care. All this is borne by the current workers in the $73 rate. Those costs should have already been charged to previous years. What it means is that GM did not set the money aside over the past 30 years. They sacrificed long-term viability for short term profitability and now GM is bearing the burden of their short term thinking.

Even when you evaluate GM's labor costs that include post retiree benefits, it accounts for a meager 8% of GM's total costs. GM must have bigger problems than just labor costs.

The problem that GM does have with the unions is that neither trusts the other. Seventy-five years of animosity has bred a relationship that prevents the trust needed to work together to solve GM's problems. Labor is the answer to developing the long-term productivity but the productivity gains have to come with more job stability. These gains are worth billions per year but the real fear of job loss from productivity gains prevents the steps needed to realize this potential. Can trust truly be the answer?

Four Charts - GM's Scorecard

These four charts tell the story of GM over the past decade. While Rick Wagoner has pulled in a total of $67 million, GM has continued on its downward trend.

Rick's Red Herring - Health Care Costs

I have been watching Rick do interviews for several years. It seems that he never fails to talk about the health care cost disadvantage at GM. The number that he uses is $1,600 in health care costs in each car that GM sells. This number has been repeated by business reporters and pundits. I decided to check the facts. In 2007, GM's health care costs were $4.6 Billion. That is a huge number but when you look at health care costs as a percentage of total costs it come to 2.1% of total costs. Additionally 2/3 of the health care costs are for retirees.

Lets do the math.

GM built over 9,000,000 cars in 2007 when you divide the $4.6 billion in health care costs you get $511 per car. If you only include US manufactured cars the cost per vehicle is increased to $1022 per vehicle. It is still far less than the $1600 that Rick has used consistently over the past several years.

So we've done the math and we are doing exactly what Rick wants us to do. Focus on health care. GM's 2007 annual report mentions health care 91 different times. The annual report doesn't mention poor management even once. If GM's health care costs were zero in 2007 GM would still have lost over $34 Billion dollars. Simple analysis show there are much greater problems at GM than health care.