In the Fast Lane at GM

Dan Ammann is wasting no time in his quest to make the auto giant a leaner, financially savvier machine.
Edward TeachFebruary 7, 2013

Arriving in Boston last November, the day before the election, Daniel Ammann has places to go, people to see. The first stop for the senior vice president and CFO of General Motors is Fidelity Investments, which is both an investor and the administrator of GM’s U.S. pension and benefit plans. “We were going through a pension-transfer deal,” explains Ammann. “They were involved in that, so we were just having a brief postmortem.” Next comes lunch at the offices of this magazine, where the lanky finance chief settles into a chair and manages to eat a sandwich while answering questions about the company and his work. Then he’s off to Cambridge, where he will talk to students at Harvard Business School and the MIT Sloan School of Management. He’s been giving these kinds of presentations recently, and he has a compelling story to tell: in short, America’s largest automaker teeters on the brink of ruin, is rescued by a $50 billion federal bailout, emerges from bankruptcy, executes history’s largest initial public offering, and proceeds to rack up 11 profitable quarters in a row (and counting).

“And after that,” says Ammann, “I talk a little bit about why I’m there, and what I’m doing now.”

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Here’s some of what Ammann has been doing since becoming CFO in April 2011: building what GM calls a “fortress balance sheet,” one with a maximum of liquidity and a minimum of debt; repairing internal controls and financial reporting (they were listed as a risk factor in the IPO prospectus); and giving operational employees financial tools for making better decisions. Indeed, the same day Ammann was making the rounds in Massachusetts, GM announced it had secured a new, $11 billion revolving credit line.

It’s been a heady ride for the 40-year-old CFO, who has come a long way in a short time, both figuratively and literally (he hails from New Zealand). But Ammann, and GM, still have a long way to go, and he doesn’t intend to slow down. “We don’t spend a huge amount of time looking backward,” he told an interviewer at the Wharton School in October. “We’re all about looking forward in the company right now and plotting out a successful future for GM.”

From Banker to CFO
Ammann joined General Motors as treasurer in April 2010, nearly a year after GM filed for the fourth-largest bankruptcy in U.S. history, listing $82.3 billion in assets and $172.8 billion in liabilities. He had worked for Credit Suisse First Boston in New Zealand until 1997, when he took a job at CSFB in New York City. In 1999 he moved to Morgan Stanley, becoming head of industrial investment banking in 2004.

“I had been involved in one way or another with GM during most of my time at Morgan Stanley,” recalls Ammann. “As the company entered into 2008 and things got challenging, we at Morgan Stanley were retained to work with them as an adviser on their overall restructuring alternatives, which evolved into working on the bankruptcy.”

Ammann would eventually have two key contacts at GM: director (and now vice chairman) Stephen Girsky, formerly a renowned auto industry analyst at Morgan Stanley; and Chris Liddell, who left the CFO post at Microsoft to become GM’s finance chief in 2010. “Girsky I had known since the late ’90s,” says Ammann. “Liddell I’d known since the early ’90s, from New Zealand — I knew him from Down Under. Like any enthusiastic banker would, I talked to them about how I could help with all the things they had ahead of them in their new roles at GM, and they said, ‘Why don’t you come and help on the inside instead of from the outside?’

“I thought about it for about five minutes and said, how could I not take on that opportunity?”

Shedding debt and shuttering plants, laying off workers and closing dealerships, the new General Motors emerged from Chapter 11 in July 2010. “GM emerged from the bankruptcy as a significantly changed company,” says Mike Wall, an auto analyst at IHS Automotive. In addition to gaining a new capital structure, “the plant closures they were able to do in North America radically reshaped their manufacturing footprint,” Wall says. “They have a much leaner operation.”

General Motors also sold or discontinued four brands: Hummer, Pontiac, Saab, and Saturn. “That was incredibly challenging for them to do prior to the bankruptcy,” says Wall. “They were able to develop a much more core focus on brands [in the U.S.] — Chevrolet, Cadillac, Buick, GMC.”

In November 2010, GM raised $23 billion from the IPO, selling 478 million shares at $33 per share. The federal government, which had provided $33 billion in debtor-in-possession financing, saw its stake in the company fall from 61% to 26%. Four months later, Liddell surprised everyone by announcing that he was leaving GM, and CEO Daniel Akerson offered Ammann the CFO job. “I thought about that for an even shorter period of time — about one minute — and said yes,” he says.

Building a Fortress
As CFO, Ammann has maintained the company’s focus on the fortress balance sheet. “You hear us talk about that a lot,” he says. “Why? Fundamentally, it’s related to the nature of the business — a very competitive, cyclical, capital-intensive, low-margin industry. One of the great challenges GM has had in its history was that every time the business slowed down or cash became scarce, we had to pull back on investing in the future of the business. And this business requires a significant and steady amount of reinvestment.”

In a normal year, says Ammann, GM wants to spend around $15 billion on the future — $8 billion in capital expenditures and “another $7 billion or $8 billion” on engineering expense. But between 2007 and 2009, the capital number “hit the trough,” he says, falling to $3 billion or $4 billion. “And the cost of that is not just the fact that you don’t have new product in the market, but also that you spent a ton of money engineering things that never came to market. We estimated that we were wasting about a billion dollars a year on investing in projects that would ultimately be canceled.”

With GM flush again, the company is determined to invest in a steady state, regardless of where the business cycle is. “We said, Let’s not get ourselves back into that situation again. This company should not carry a large amount of debt. It should not carry significant legacy debtlike obligations. It should have a large amount of liquidity available at all times,” says Ammann. In November, GM had more than $30 billion in cash, plus the $11 billion revolver, while its debt amounted to about $5 billion, “which for a company of this size is basically nothing,” he says.

Another benefit of the fortress balance sheet stems from the fact that GM “is at the center of a huge ecosystem, with suppliers upstream, dealers and distributors and customers downstream,” says Ammann. “And that whole supply chain is very dependent on external credit: dealers need to floor-plan their inventory, customers need to finance their purchases, and so on. Ultimately, the providers of credit to that supply chain are directly or indirectly looking back to the health of the manufacturer, because if the manufacturer gets into trouble, the collateral, which is the vehicle underlying their loan, is going to have a question mark around it.

“So by bringing an unquestioned strength to the balance sheet of the manufacturer in the middle, we actually take cost out of the entire supply chain, by derisking the financial profile of all of the other participants in the supply chain.”

Further fortifying the balance sheet was the aforementioned pension-transfer deal — a landmark transaction, closed in October, whereby General Motors offloaded its $26 billion pension obligation for its 118,000 salaried retirees in the U.S. by offering lump-sum buyouts to a subgroup of 44,000 retirees (13,000 accepted) and buying a group annuity contract from Prudential Financial for the rest. The $29 billion deal, consisting of the assets in GM’s plan plus cash, is by far the largest such transaction in history.

GM’s total pension obligation — which includes hourly workers and, before the Prudential deal, amounted to $130 billion on a global basis — is the one significant liability that was not restructured during the bankruptcy. Starting in 2010, the company set out to fully fund and derisk its pension plans, says Ammann. First, it stopped the liability from growing, by moving current U.S. salaried workers from defined-benefit to defined-contribution plans, and by negotiating a United Auto Workers (UAW) contract that, for the first time in more than 50 years, did not contain a pension increase for retirees. Second, it began matching assets and liabilities, moving more of its plan assets into fixed-income investments, to reduce volatility in the funded status. Then it reduced the size of its obligations through the annuity transaction.

But reducing the $71 billion pension obligation to GM’s hourly workers in the U.S. will be another matter, analysts say. Annuitizing the plan would be unlikely, as it would require on one hand the cooperation of the UAW, and on the other hand an insurance company able to take on the enormous obligation.

A Vision for Finance
Also at the top of Ammann’s to-do list is disseminating better financial information throughout GM. That’s one of five bullet points under the finance organization’s “Vision for World-Class Finance,” which Ammann says was adopted following “a heated but pretty straightforward discussion” among the CFO’s senior leadership team in 2011.

The first bullet point: timely and reliable reporting and controls. There had been plenty of room for improvement. GM had made a remarkable admission in its IPO prospectus: “We have determined that our disclosure controls and procedures and our internal control over financial reporting are currently not effective.”

“That was a mess, and it’s gotten straightened out,” Ammann says, crediting controller and chief accounting officer Nicholas Cyprus with leading that effort.

The second bullet point: easy-to-understand information and insight to drive better business decisions. “That is at the very core of what wasn’t getting done very effectively, and of the huge opportunity we have,” says Ammann. “We want to give people a much better set of tools so they can understand where we make money and where we don’t, and why — and what they can do about it.”

In the product-development organization, the CFO explains, “each vehicle program is its own little project: you deploy x amount of capital and make y amount of revenue and z amount of profit margin. But the metrics that people were using to evaluate those business cases left out some basic components. So we reconfigured the financial metrics that are used in the product-development process across the company, in a completely uniform way.” Confirmation that finance was on the right track came when an engineer subsequently told Ammann that workers on a product program had made a decision “because they could now see much more clearly the financial consequences of what they were doing.”

He has also made it his mission to improve employee awareness of how GM stacks up against the competition. The challenge, he says, is to make data easy to understand “so that you don’t need to be a financial analyst to get the big picture.” Still, he adds, “we can have all the big-picture town halls we want, but unless we’re putting better tools into the hands of people who are making business decisions every day, we’re not going to get the job done.”

The third component of the vision is driving the right decision and upholding accountability for results. “If we can get the second and third ones right, we’ll really start to have an impact,” Ammann says. Fourth is a rewarding work environment, “which sounds like a throwaway but it’s not. Do you want to be part of taking this finance organization and making it the gold standard?” And the fifth: world-class cost and efficiency, “which is not where we are at the moment. So we’ve rallied the finance organization around this very simple vision.”

Stepping on the Gas
Today, after years of cost cutting and shrinking, General Motors is “back in growth mode,” says Ammann. The company had lowered its break-even point in the U.S. to about 10.5 million units during the recession; with new-vehicle sales currently at a seasonally adjusted 14.4 million units, GM North America is comfortably in the black. Analysts believe the market has more room to rebound, perhaps up to the 16 million units per year that prevailed before the recession. “If you look at the history of U.S. new-vehicle sales going back to 1951, 2009 was the worst year in per-capita terms,” says David Whiston, a senior equity analyst at Morningstar. “That says to me we’re not in a new norm for auto sales. Things are going to get better, and they have.”

Wall of IHS Automotive says there is typically “a pretty solid snapback in sales” following a recession. “We haven’t hit that full snapback yet,” he says. “I think it’s coming soon.” For one thing, the average age of vehicles on the road is 11 years. “That’s extremely high,” says Wall. Also, “The housing market is starting to turn. Consumer confidence is starting to come back. Credit is very cheap. It’s all setting up for a pretty attractive situation for autos. The last thing we’re waiting on is the job market.” IHS sees new-vehicle sales of 15.0 million units for 2013, and is forecasting 15.7 million units on a run-rate basis in late 2014, and 16.2 million for 2015.

GM should grab more of that growing pie, given that 70% of its U.S. model lineup will be updated and refreshed during this year and next. That will not only lure more customers to showrooms, but also enable GM to raise prices and lower incentives. The redesigns include long-overdue next generations of key vehicles such as the Chevrolet Silverado and GMC Sierra full-size pickups and the Chevrolet Impala, a full-size sedan. The latter hasn’t been updated since 2006, and GM has had “to dump it in rental fleets for years,” says Whiston. Adding to the lineup’s luster, in January a jury of automotive journalists named Cadillac’s new ATS compact sedan the 2013 North American Car of the Year.

The new vehicles, and prices, should help GM improve its operating margins in North America. At 6.1% in Q3 2012, “we’re in the middle of the pack,” relative to GM’s competitors, says Ammann. The company has set 10% EBIT-adjusted margins as a global goal.

In absolute dollar terms, 2011 was the most profitable year in GM’s history — $7.6 billion in net income, on sales of $150.3 billion. But 2012 is shaping up to be less successful, at least in the United States. GM’s U.S. sales grew 3.7%, lagging overall auto market growth of 13.4%, while its market share sank to 17.9%, as Japanese rivals Toyota and Honda recovered from the 2011 earthquake and tsunami.

A global car company, General Motors operates in four geographically based segments: North America, Europe, South America, and international (including Asia-Pacific, Eastern Europe, the Middle East, and Africa). Most of its revenues (72%) come from abroad, although most of its profits come from North America. China is a major success story; GM was an early entrant there, and its Buick and Chevrolet brands are market leaders. “Buick is a very strong brand for GM in China; it’s almost night and day from the U.S.,” says Wall of IHS Automotive. “They’re looking to push Cadillac there as well.” (Since GM conducts its operations in China through less-than-majority joint ventures with Chinese companies, it doesn’t consolidate sales from China into the financial statements but records the equity income from these partnerships in its earnings.)

GM Europe, on the other hand, is a major pain point, as Europe currently is for most automakers. In October, the company estimated it would lose between $1.5 billion and $1.8 billion in Europe in 2012. CEO Akerson has said the company hopes it will break even there by mid-2015. But it won’t be easy to reduce excess capacity or renegotiate pension benefits in Europe, say analysts, given the strength of European unions and the attitude of European governments. “Until the European macroeconomic picture is clarified and the European automobile industry gets through more of the restructuring that it needs, it’s going to remain a very painful place to do business,” says Ammann.

The Road Ahead
In December, the Treasury Department announced that it would sell its remaining 500 million shares in GM over the following 12 to 15 months, thus erasing much of the “Government Motors” stigma from the company. At the same time, the automaker said it would buy 200 million of those shares for $5.5 billion, or $27.50 per share, a 7.9% premium over the previous day’s price. That came as good news for bulls like David Whiston, “because the uncertainty of Treasury dumping 500 million shares on the open market was one of the major overhangs on the stock. Realistically, this is the best-case scenario.”

(Whether it was the best-case scenario for the government is debatable. It has been estimated that Treasury would have had to sell its entire stake at $53 a share to break even on its $50 billion investment in GM. “Given the lack of borrowing costs for Treasury, I don’t see why it had to rush to get out of its position and take the loss,” says Efraim Levy, senior automotive analyst at S&P Capital IQ Equity Research. “But it does benefit the shareholders: we raised our EPS target and our target price for 2013 as a result.”)

Meanwhile, the CFO continues to shape finance’s agenda for the future. “There’s so much to do,” says Ammann. “One challenge, not just for me but for our senior leadership group in finance, has been to figure out what we do not spend time on. What are the things that are going to have an immediate or near-immediate impact, and what things can wait?”

He says he has the right team to help him figure it all out. “We have this unique combination of people who have been inside GM for most or all of their careers, but who have worked all around the world and know the business from lots of different perspectives, combined with an interesting mix of people who have come from the outside — whether it’s someone like me, or a handful of seasoned operating-finance executives who were hired out of places like GE. We just hired a new CFO for Europe [Michael Lohscheller] who was the CFO of Volkswagen here in the Americas.

“What we’re finding is, top talent in finance from big companies around the world want to come here and be part of this. Like me, they didn’t come here to be partially successful or muddle along for a period. They came here because they saw an opportunity to be part of something pretty significant.”

“I think I have the most fascinating job in finance in the world,” concludes Ammann. It’s certainly one of the most challenging.

Edward Teach is executive editor of CFO.

Car Guy
CFO Dan Ammann has respect for engineers and a penchant for fast driving.

In Detroit, there has always been a certain tension and mutual suspicion between “car guys” (engineering and design people) and “bean counters” (finance people). But Dan Ammann comes as close to being a car guy as a CFO can get. As an investment banker at Morgan Stanley, he used his first bonus to buy a vintage 1961 Cadillac convertible, which he still has. “Luckily it was a Cadillac, given where things have ended up,” he says. Indeed, working at General Motors “is a dream come true,” says Ammann, who describes himself as a “closet gearhead.”

“I’ve spent a fair amount of time in the business with people who engineer cars,” he says. “It’s genuinely interesting, and if you have a genuine interest in what they’re doing, you have a much better chance of their having a genuine interest in what you’re trying to do.” The car guys are “the true believers,” he declares. “They’re the ones who are really making it happen every day in the organization.”

Hanging out with car guys is how the finance chief learned about GM’s driver-development program, which is conducted at the company’s Milford, Michigan, testing facility. It’s intended primarily to teach development engineers how to operate a car at the outer limits of its speed and handling, an attraction Ammann couldn’t resist. Today he’s one of only about 25 people in the entire company who are certified at the program’s highest level.

The final step of the program is to go for a high-speed spin at Germany’s famed Nürburgring Nordschleife racetrack. Last July, Ammann earned his test driver certification there, pushing his Cadillac CTS-V sedan to 175 miles per hour. “But it’s not so much the top speed as it is the fact that you’re going through the turns at 130 or 140,” he says. “The first time you do it, you think there is no way the car is going to stay on the road. But it’s amazing what the car will actually do.” — E.T.