I'm the Right Guy for GM'

On the Friday morning before all of General Motors was to go on its Independence Day holiday, a surprise letter hummed over CEO Rick Wagoner's fax machine. It was from GM's largest individual investor, 89-year-old Vegas billionaire Kirk Kerkorian. And though it was addressed to Wagoner, the June 30 missive was simultaneously telegraphed to the world in an SEC filing. Kerkorian, growing impatient with Wagoner, decided to shake things up by outing top-secret talks he'd initiated to arrange a shotgun marriage between GM, France's Renault and Japan's Nissan. Wagoner, who had just learned of the talks a few days earlier, was stunned. "Well," he recalls thinking ruefully, "this looks like something else we'll have to deal with." He immediately cleared his schedule and got his board on the phone to inform it of a deal that could create a colossus controlling one quarter of the world's auto sales. But he wasn't happy that sensitive negotiations would now be conducted under the media microscope. "It's not the way I would have done it," he told NEWSWEEK. "There's a lot of aspects of all of this that haven't been normal."

Nothing is normal these days at General Motors. A turnaround that was beginning to gain some traction has now been overshadowed by a boardroom battle for control of the ailing automaker, which lost $10.6 billion last year. Many suspect that Kerkorian's real agenda is to shove Wagoner out of the driver's seat and replace him with Renault-Nissan's superstar CEO, Carlos Ghosn, who is revered in the auto industry for bringing Nissan back from the dead. Wagoner, though, is not backing down. He moved quickly to take control of the situation by getting his board's blessing to become GM's point man in the talks with Renault-Nissan. And as soon as he learned of the secret talks, he reached out to Ghosn to arrange a dinner meeting in Detroit last Friday. Afterwards, the two men said they had a good discussion and they expect to conclude their review of the proposed alliance within 90 days. Wagner also passionately defended himself in an interview with NEWSWEEK two days before meeting with Ghosn. "I don't have any problems with Carlos," Wagoner said, "but I'm quite sure that I'm the right guy to run GM."

The once genteel GM boardroom has suddenly become a rough-and-tumble place. Ever since Kerkorian's right-hand man, Jerry York, joined the board in February, reports of disharmony between the directors and their chairman have leaked out. York, a turnaround specialist who helped fix Chrysler and IBM in the '90s, was said to have raised a ruckus when a GM accounting mess was discovered this spring, forcing the automaker to restate five years' worth of earnings. Lately, GM's endless U.S. sales skid has been raising the ire of Kerkorian, York and Wall Street. "GM management has not done a good job," Bank of America analyst Ron Tadross wrote recently, even as he raised his rating on GM stock in hopes that Ghosn would take over. "GM and its shareholders would probably be well served by this proposed management infusion."

The boardroom leaks infuriate Wagoner almost as much as the attacks on his record. "Look at the facts," he says. "The pace of the turnaround is exceptionally fast, faster than anybody would have thought would be possible." Wagoner has extracted $15 billion in health-care concessions from the United Auto Workers and recently persuaded 35,000 GM workers--one third of his American work force--to accept buyouts. That put his staff-cutback plan two years ahead of schedule and allowed him to boost his cost-cutting target to more than $8 billion. "I've come up with a plan that initially cut $5 billion in structural costs, and then $6 billion, and then $7 billion, then $8 billion and now more than $8 billion in the span of one year," he says. "I think that's a rather remarkable accomplishment."

And yet as fast as Wagoner shrinks GM, he's still struggling to get it small enough to fit its rapidly diminishing share of the U.S. auto market. A decade ago, GM controlled one third of the American market, but today has just 24 percent of it. And yet, GM still sells eight car brands--too many, analysts say--and remains reliant on big-gulp SUVs in this new era of $3-a-gallon gasoline. York has pressed Wagoner to dump money-losing Saab and gas-guzzling Hummer, while Wall Street wants Pontiac and Buick euthanized. "The longer GM doesn't confront this problem of too many mouths to feed," says veteran auto analyst John Casesa, "the longer each of its children will remain undernourished."

But how, exactly, would hooking up with Renault-Nissan solve GM's problems? Ghosn believes the companies could share costs on expensive projects like fuel-cell research and that GM's underutilized U.S. factories could be filled up producing Nissan models. He also thinks it's important that the companies swap stock so that they have a sense of shared purpose. Kerkorian has suggested that Renault-Nissan acquire 20 percent of GM, which, along with his stake, would give him a 30 percent voting bloc inside GM's boardroom. Wagoner has promised to conduct these talks with an "open mind." But he's wary of a big stock-swap deal after last year's failure of GM's alliance with Fiat, which cost the Detroit automaker $2 billion to extricate itself. "We need to make sure it's the right thing for everyone," he said. "We need to be clear on what synergies we're targeting, how we would realize them and have a high degree of confidence that we can do it."

Analysts on both sides of the Atlantic aren't seeing much benefit from creating Mega Motors. Simply being big obviously hasn't done much for GM, whose $16.7 billion market value is one tenth of Toyota's. And GM's products don't naturally complement Renault and Nissan like the mass-meets-class marriage of DaimlerChrysler (which is still working out bugs after eight years). Renault also has its own ambitious restructuring plans that require Ghosn's full attention. "Renault needs its chief," says Jacques Radé, an analyst with Roland Berger Strategy Consultants in Paris. "There is still work to do."

The biggest roadblock to a deal, though, is the specter of regime change. At this point, Wagoner doesn't even want Ghosn in his boardroom. "When do you put a competitor on your board?" he asks. "I've never heard of that happening before." He admits that could change if he and Ghosn can work out a partnership. But don't expect Wagoner to head for the exit. With him in charge of GM's side of the talks, it's hard to imagine he'd fire himself to make way for Ghosn. And he sure doesn't buy the idea that Ghosn's more emotional management style is better suited to rallying GM's troops. Wagoner argues that it's his "calm leadership" that has put GM on the road to recovery. "So why would I change that style?" he asks. "Why would anybody want to change that? That's the craziest thing I've ever heard." Chances are it will only get crazier in the battle for the wheel at General Motors.

With Tracy McNicoll in Paris