THE ENDGAME: A SMALLER GM

Will Wagoner be around to make that choice? By approving his plan and his takeover of the troubled North American business, the GM board has signaled that it is being patient -- too patient, some analysts think. All indications are that Wagoner will be given a couple of years to get traction for his strategy. But if the cash burn rate accelerates and GM's stock deteriorates further, outside forces will pressure the board to take action, or will seize the wheel themselves. "If the board feels they're on the right path, they won't make a change that disrupts that," says CAR's Cole, who has close ties to GM's brass. "But in two to three years, if there is not an improvement on the revenue side, it's over for these guys."Private-equity investors seem to believe that the company's global cost handicap will eventually force it into bankruptcy court to shed union and dealer obligations. Wall Street bankers already are salivating over the opportunity to pick off GM's profitable mortgage operations. But the auto business is a whole other animal. For now, the legacy costs are too onerous and the politics of chopping so many jobs just too dicey for it to be worth the trouble of a takeover. Says one senior banker: "The joke used to be that all of the airlines would have to go through a car wash...now the car companies are going to have to go through the car wash. That's the challenge for anyone looking at these businesses and saying, Look, how do you deal with starting at a $2,000-a-car disadvantage vs. the rest of the world?"Just mention the word "bankruptcy" to any of GM's top executives and the mood gets frosty fast. "That's definitely not the plan," Wagoner said in a January interview. No wonder: Bankruptcy would almost certainly follow a catastrophic failure in the marketplace, or a play by a private-equity investor seeking to break up the company. In either case, management would be out on its ear.GM's cash hoard makes a court filing unlikely -- at least for now. If it happened, though, a GM bankruptcy would boggle the mind. The auto maker would bring to a judge four times the assets of the largest case filed so far, by WorldCom Inc. in 2002. Its 324,000 worldwide employees are about 70,000 more than Kmart Corp. (SHLD ) had before it filed that same year. GM could almost certainly find a judge who would allow it to dump many of its most burdensome obligations, says Lynn M. LoPucki, a law professor at UCLA. GM's pension plans are fully funded for now, but if GM's finances worsen or its pension investments sink in the coming years they might still be dumped on the federal Pension Benefit Guaranty Corp. GM also could shed its union contracts, firing anyone who didn't want to take lower wages or benefits. Ending health-care obligations to retirees alone could save $4 billion to $5 billion a year.Imagine the uproar, though, if that happened. Even if GM could demonstrate to a judge that it had negotiated for the cuts in good faith, the UAW would certainly respond with a strike. That would burn up in a few months much of the cash that any raider coveted. And pensioners could still sue for their benefits. "If there was value, you wouldn't get away scot-free," notes Wilbur L. Ross Jr., who has taken interests in bankrupt steel, textile, and coal companies.Bite the BulletBreakup or bankruptcy are the ghosts of GM's future. They become much more substantial threats if current management can't deliver on its promised turnaround over the next couple of years -- or if the board doesn't find someone who has a better idea of how to deploy GM's $468 billion in assets.It was a former General Motors chief -- the legendary Alfred P. Sloan Jr. -- who foresaw the problems that are now tying his company in knots. "Any rigidity by an automobile manufacturer, no matter how large or how well established, is severely penalized in the market," Sloan wrote in his 1965 memoir, My Years With General Motors. Of course, Sloan was talking about a competitor, Henry Ford, and his refusal in the 1920s to change his business model to build different cars to suit the changing tastes of American consumers. But Sloan's indictment stands just as well for today's GM.What would a healthy GM look like? It might have five fewer assembly plants, building around 4 million vehicles a year in North America instead of 5.1 million. That would slash U.S. market share to around 20%, but factories would hum with real demand, stoked less by rebate giveaways and cheapo rental-car sales. Workers would have a cost-competitive health-care plan but would fall back on government unemployment benefits when hard times demanded layoffs. Profitable auto sales and finance operations would fuel a richer research budget, tightly focused on four or five divisions instead of eight.This new GM might make two-thirds as many models: Chevrolet, perhaps its most recognized global brand, handling trucks and mass-market cars; Saturn, behind its cool new Euro styling, selling more expensive cars with design flair. A resurgent Cadillac would parade advanced technology and luxury. Hummer would only last as long as brawny SUVs are hip. GMC, which is very profitable these days, would stick around if Chevy couldn't satisfy America's yen for trucks. Pontiac, Buick, and Saab would follow Oldsmobile to the scrap heap.Maybe Wagoner will decide to bite the bullet and spend the billions needed to launch such a dramatic overhaul now, rather than waiting. And maybe the UAW leadership will get religion and offer more than token help. Where they decide to take GM will matter a great deal to the army of auto workers toiling away in its factories, the vast web of businesses that feed off of them, and legions of investors. As we learned a long time ago from outfits like AT&T, no company is too big to fail, or at least shrink dramatically. Not even mighty GM.

General Motors : Coming Confrontation?

Wagoner appears even less likely to start a fight to completely rewrite the union's health-care plan. The union's opposition could soften if GM's fortunes slip dramatically in the next year. But the UAW has almost never agreed to a huge giveback in the middle of a contract. (It did so in 1980, when the federal government demanded concessions as part of its Chrysler bailout, and again for Ford and GM in 1981, when spiking gas prices and a recession slammed sales.) Says Sean P. McAlinden, economist at CAR: "Why would union workers on the verge of retirement agree to cut retirement benefits?" GM's Kowaleski responds that there may be ways to get what GM wants while giving the union something in return: "Do not underestimate the breadth of scheming that can go on to come up with a win-win for everybody."There might be loopholes Wagoner could exploit. Read one way, the labor contract does not guarantee benefits to retirees -- who account for two-thirds of GM's health-care costs -- and only covers active workers, says Sanford C. Bernstein's Johnson. But one GM insider says that interpreting the contract that way would spark a "nuclear war." The UAW could find any number of ways to strike key supply factories and gum up the company. Wagoner knows that firsthand. While president of GM North America in 1998, he played hardball with the UAW over a dispute involving two union locals in Flint, Mich. Those workers, who made parts needed by every GM assembly plant, struck for 54 days over what they said were local issues. That shut down the entire company, costing it $2 billion and nine percentage points of market share, though GM recovered all but a point of that by yearend.Labor experts believe Wagoner is raising a hue and cry now to position the company for bigger concessions when contract talks open. "If you want to get the union to cut medical benefits in September, 2007, you don't start in August. You start now," says Harley Shaiken, a labor professor at the University of California at Berkeley. But if the sales picture deteriorates over the next year, GM probably will have little choice but to force a confrontation sooner and radically reshape its cost structure.

General Motors : LABOR DAY OF RECKONING

It was no coincidence that when GM executives pulled their financial guidance for the rest of this year, they pointed to the uncertainty of getting relief from the company's unions. Wagoner has to decide whether he's willing to settle for halfway measures that will only delay an inevitable confrontation when the UAW contract expires in two years, or if he's willing to risk a labor war to get big savings sooner.GM doesn't need to open the UAW contract to send workers off into retirement and close some plants. Its factory workers have an average age of 51, so many are close to the 30-year service point that qualifies for retirement. And union leaders might go along with a buyout program. The master UAW agreement says GM has to replace some of the retirees with new workers. But the union has long looked the other way as GM slashed jobs through retirement while hiring almost no new assemblers.Industry observers believe Wagoner is laying the groundwork to close a couple of factories and send thousands of workers off to early retirement. That might help, but it still only gets Wagoner about halfway to where GM needs to be. If he targets four of his 20 assembly plants, the company would be running fairly lean. David E. Cole, executive director of CAR, says GM could easily trim production by 1 million cars, or 20% of its capacity, and still have enough to serve the market. GM could save $2 billion per year in the long run by buying out 20,000 workers, estimates Sanford C. Bernstein & Co. analyst Brian A. Johnson. But it would pay $1.5 billion in severance costs to do so.That would allow GM to build fewer vehicles more efficiently, cut incentives, and pull back on low-priced sales to rental fleets. Plus, the company's remaining factories would be more productive and probably more profitable. "That would hit really bad this year," Cole says. "But it would yield returns." There are several candidates for plant closings: GM has two factories making its Chevrolet TrailBlazer, GMC Envoy, and Buick Rainier midsize SUVs; it could probably get away with one. Its next-generation minivans will likely be built at a plant in Lansing, Mich., which puts the current van plant in Doraville, Ga., on the hot seat. GM is already rumored to be considering the closure of one of its full-size pickup or SUV plants, such as one in Janesville, Wis., or Pontiac, Mich.

General Motors : Exuding Confidence

Wagoner's plan to reverse the sales slide with cool new car models makes complete sense from one perspective: The lineup needs a boost. Even with the generous rebates GM has offered from late 2001 through this winter, its U.S. market share slid 2.5 percentage points. Now that Wagoner is pulling back on incentives, the situation is deteriorating even faster. Merrill Lynch & Co. (MER ) estimates that GM's overall sales slid 8% in April as compared to a year earlier. And things will only get tougher if competitors like DaimlerChrysler (DCX ) follow through on talk of importing cheap, small cars from China. GM execs exude confidence about the new models they have queued up starting this year: the Pontiac Solstice sports car, the retro-styled HHR compact-utility vehicle, and, later, the all-new Chevrolet Tahoe and GMC Yukon large SUVs. Says GM Vice-Chairman and CFO John M. Devine: "We think we're coming on strong."But this is a company that sees the cavalry coming to its rescue with each new model year. True, GM managed to pull itself back from the brink of bankruptcy in the early '90s with a strong lineup of pickups and SUVs (and a huge lift from the economy). Recently, its revival of the Cadillac franchise, through cutting-edge design and masterful marketing, has been astounding. Even critics acknowledge that GM's new models are light years ahead of those they replace. But more often, GM's bold forecasts never pan out. Executives wrongly predicted a comeback in family sedans in the '80s, '90s, and as recently as last year. Meanwhile, they took a pass on hybrid gas-electric cars and blew a chance to get a jump on the hot crossover SUV segment with the failed Pontiac Aztek