GM's Wagoner Faces Turnaround Task

General Motors Corp. (GM) chairman and chief executive Rick Wagoner (search) has little time to formulate solutions for the company's perfect storm of problems: mounting losses, rising competition, shrinking market share and increasing health care and pension costs.

Wagoner will face shareholders at GM's annual meeting June 7 in Wilmington, Del., and he'll have to say more than GM did Thursday, when the credit rating of the world's largest automaker was reduced to "junk" status. Among those shareholders is billionaire Kirk Kerkorian (search), who is out to increase his stake in the company and is not known for his patience with poor performance.

GM has provided little insight into how it plans to turn around its business. In a brief statement after Standard & Poor's knocked GM's $291 billion in debt to below investment grade, the company said it was "firmly committed to improving its performance as quickly as possible."

GM emphasized that S&P's downgrade will not deter the automaker from "achieving its objectives," and it noted it has adequate cash and liquidity. But the company offered no other specifics.

Now the onus is squarely on 52-year-old Wagoner, who will be expected in Wilmington to articulate a comeback strategy for an iconic company that's facing huge challenges in virtually every aspect of its global business.

"I don't know how much pressure he'll feel from shareholders, but I do think he's feeling it from his board and has been since the earnings collapse last month," said Burnham Securities analyst David Healy, referring to GM's $1.1 billion first-quarter loss reported April 19.

The news hasn't gotten much better since then, particularly in the past several days.

On Tuesday, GM reported its vehicle sales fell again in April, a downer for the company's already-slumping share price. On Wednesday, GM's value soared on news that Kerkorian wants to up his stake in the company from nearly 4 percent to roughly 9 percent. Some analysts say Kerkorian could be a distraction to Wagoner and others trying to stabilize the business.

Then, on Thursday, came the S&P blow.

If these were isolated events, investors and others might be able to look forward with a degree of optimism. But GM's situation is unlikely to improve soon, as the company wrestles with rising health care and legacy costs, sluggish demand for the company's most profitable vehicles and increasing competition from Asian rivals.

GM management has declined to offer an earnings forecast for the remainder of 2005, but some analysts say the company will likely break even at best.

"In reality, GM's conundrum is much deeper than they're letting on," said Peter Morici, an economist and professor at the University of Maryland who closely follows the automotive industry. "It's in the overhead of the company, it's in the work rules, it's in the wages they pay themselves. The company needs wholesale structural reform."

GM insists that producing "gotta-have" vehicles is the key to improving its business, but that's proven to be a significant challenge of late. The company rolled out an industry-leading 29 new vehicles in 2004, yet its U.S. sales so far this year are off nearly 5 percent.

What's more, the vehicles that generate its largest profits, big SUVs, are tough sells these days given higher gasoline prices and GM's aging lineup.

S&P cited stalling SUV sales at GM as one of the biggest factors in its downgrade decision.

GM has said it will continue to invest billions of dollars in new vehicle programs and try to get them on the market as quickly as possible. A hitch, says Morici, is it costs GM far more to develop and manufacture those vehicles than its more-efficient Asian competitors, whose labor expenses are far less.

GM has said providing health care benefits alone to its 1.1 million active employees, retirees and dependents adds about $1,400 to the sticker price of each car and truck built in the United States. Foreign competitors don't encounter the same obstacles because, for the most part, they have younger employees, fewer retirees and different systems for paying for health care.

For now, GM looks to be stuck with the costs. The United Auto Workers (search) union has said it's not interested in reopening contract talks before 2007, when the current pact expires, to address those expenses. The UAW on Friday said it had no comment on GM's S&P downgrade.

A wild card for now is Kerkorian, the 87-year-old casino magnate, and how he might go about trying to foster change and create value at GM. His investment company, Tracinda Corp. (search), said his proposed purchase of additional GM shares — valued at nearly $870 million — was for investment purposes only. But his motives prompted speculation on a variety of scenarios, including that he might desire a controlling stake in the automaker.

In a research note, Credit Suisse First Boston analyst Chris Ceraso said Kerkorian might push for a seat on GM's board, suggest management changes or encourage the current team to take a more aggressive stance on issues such as reducing GM's production overcapacity. Whatever route Kerkorian takes, his goal will be to unlock value at GM.

"Of course, all of this is easier said than done," Ceraso said. "We're not clear as to how Mr. Kerkorian will effect that kind of change."