A Bailout Dilemma: Why Reward General Motors For Lousy Managers & Products?

I keep going back and forth on whether America's Big three automakers should be bailed out. On the one hand, the collapse of General Motors, Ford and Chrysler would have an immense psychological impact in the depths of a recession, not to mention the loss of as many as 2.9 million jobs, according to one estimate. On the other hand, why reward managers and boards of directors so inept that they couldn't figure out how to remain competitive over the 30 years since the Japanese Invasion began?

General Motors is especially problematic.

The beginning of its downturn from innovative colossus to the maker of boring rental cars can be traced back to 1976 when a peppy little import called the Honda Accord first arrived in the U.S.

The Accord had just about everything that the GM cars of that era didn't.

It was attractive, albeit in a cute sort of way. It was larger on the inside than it appeared from the outside, not the other way around. It had a rear hatch that opened to a collapsible back seat, offering lots of storage space. It handled well, had oomph and was economical, which was no small thing arriving as it did between the 1970s oil crises. A practical friend who had owned GM cars for ever bought a silver '76 Accord and was hooked. I drove it and was hooked, too.

GM's response to the Accord and subsequent waves of hot selling offerings from Honda and later Toyota and Nissan (nee Datsun) was to continue churning out unattractive and uneconomical cars of dubious quality. In fact, GM's only direct response in the early years of the Japanese Invasion was an abomination called the Chevette.

The General's fortunes briefly improved after Rick Wagoner (small photo) took over as CEO and GM's share price soared to a record $90. Today it is hovering around $3 (yes, three dollars) and Toyota's stock-market value stands at $162 billion compared to just $6 billion for GM. Meanwhile, Ford Motor is trading at a robust $1.80.

But the same institutional problems persisted on Wagoner's watch, eating into the underbelly of the huge corporation like rust spreading through an old Cadillac Coupe de Ville.

These problems included overcapacity, sweetheart contracts with the United Auto Workers union and an unwillingness to confront staggering legacy costs.

But the biggest problem was that Wagoner's GM was coasting along with that same tired product line while most of the rest of the automotive world was stealing a march on Detroit with attractive and innovative products.

One GM brand was virtually undistinguishable from another. Calls to cut back on the duplication of models between brands and to even fold the lesser selling brands went unheeded until Oldsmobile was belatedly put out of its misery in 2004. Most ominously for GM, Japanese automakers were opening U.S. plants and turning out cars (and later trucks) that were as well made as those at their vaunted home plants while GM's U.S. plants continued to produce poorly made vehicles.

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Hindsight being what it is, it's now easy to see that Wagoner was the wrong choice to turn GM around. Wall Street knows that. The car dudes who write for Motor Trend and Automobile know that. Consumers know that. Wagoner and the GM board just happen to be the last people to know that, and now they're rattling the tin cup like there's no tomorrow. Which there may not be considering that GM's meager cash reserves are expected to dry up by January, forcing it into bankruptcy, which Wagoner adamantly opposes, or outright liquidation.

Wagoner came up through GM's financial division rather than manufacturing or sales, which may explain why he has been slow to recognize virtually every major automotive trend that has occurred on his watch.

These trends include minivans, smaller SUVs (Wagoner bought the Hummer brand just as the mega-SUV bubble was bursting) and an increased environmental awareness. GM has been ridiculously slow to embrace now popular gas-electric hybrid vehicles while Toyota/Lexus will soon have 20 in all shapes and sizes.

GM has survived because it still makes a heck of a lot of cars -- and trucks. It just doesn't make money and its ossified dealer network is in even worse shape than the mother ship. But that's another story.

In flailing around for a way out of its torpor, GM became addicted to big rebates and zero-interest financing plans. Things got so bad that it offered deep employee discounts to the general public. Sales perked up, but plummeted when the discounts ended. GM even ran a national ad campaign apologizing for its lousy performance and promised a return to the glory years. The background music was the sound of my GM-proud father spinning in his grave. Now big truck and SUV sales, which are GM's bread and butter, have tanked.

There have been successes on Wagoner's watch, but I can count only three of consequence.

He has cut costs and manufacturing capacity. Whoopie! He also has encouraged the near-death Cadillac division to shed its Geritol image. It now caters to the Led Zeppelin crowd and offers a line of trendy and well-made models, which while not my cup of tea, show that there's life yet in the General.

But Cadillac is a niche brand and GM has yet to offer a mainstream success remotely approaching the VW Passat or Toyota Camry, which is the best selling car in America, although its new Malibu is a belated breakthrough, just not enough of one to work magic in the midst of a recession.

No, make that only two successes on Wagoner's watch.

After successfully nurturing Saturn as the un-GM brand, Wagoner allowed the once innovative spinoff to be dumbed down into the rest of the corporation. Saturn sales tanked and are only now recovering as it refreshes its line with rebadged German imports.

So what would a bailout buy?

Some time, but that is about it because the products in GM's pipeline do not look promising.

The only potential ace up its sleeve is the plug-in hybrid Volt, which won't be introduced until the 2011 model year, while the second-generation of the aforementioned Malibu is on hold. There are, however, new gas guzzlers, including a retro Camaro muscle car and more SUVs. Oh, and new Buick LaCrosse.

Ahem.

Rick Wagoner had 16 years to fix GM's problems. He has only added to them, and the proof is that he and his board of directors are still determined to make an enormous amount of crap.

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With President-Elect Obama and Senate Democrats pushing a bailout, whether it be a standalone appropriation or part of the $700 billion bailout passed last month (something that Treasury Secretary Paulson correctly opposes), it may be a done deal unless Republicans balk. Which I sense they are not likely to do amidst their party's suicide watch.

Bailout non-starters include two especially dumb ideas that are being kicked around: Giving everyone who buys a new American car or truck a hefty tax rebate and forcing automakers to convert their entire fleets to hybrid technology.

(As it is, automakers were given a $25 billion lollipop earlier this year to encourage innovation; that's right, we're already underwriting a crucial aspect of a business that forgot how to innovate. And recall the $1.2 billion taxpayer-funded bailout of Chrysler in 1979, worth $3.6 billion in today's dollars. Chrysler avoided bankruptcy and went on to thrive for a while because of minivan and SUV sales, but never dealt with the same fundamental problems that have dogged GM.)

Bailout package starters have to include stiff penalties for automakers who fall short of performance goals established by a receiver. As well as Congress, and most especially the self-interested Michigan delegation, acknowledging that they have been Big Three enablers lo these many years in keeping fleet gas mileage averages ridiculously low, thumbing their noses at environmental concerns and blithely ignoring the impact of globalization.

And yes, investing more in mass transit.

Insofar as GM is concerned, its entire board of directors should be sacked, as well as Vice President Bob Lutz, who famously remarked that "global warming is a bunch of shit," which nicely explain why the General is so pathetically behind the times when it comes to alternative fuel technologies.

Rick Wagoner also has to be out to pasture -- minus the customary golden parachute. Maybe he and Lutz could be comped nice gas-guzzling Hummers, since GM is practically giving away these two-ton losers.