Few people know General Motors as well as Chuck Stevens does. A GM lifer, Stevens hails from Flint, Michigan, where he attended General Motors Institute (now Kettering University) around the same time GM CEO Mary Barra did. “She graduated a couple of years after me,” recalls Stevens, 55. “I never knew her when I was going to school; she was an electrical engineer, and I was on the finance side.”
“I couldn’t deal with the corporate bureaucracy the way it was at the time,” Stevens explains. “So either I was going to quit, or I was going to go far away.” To the other side of the Earth, as it turned out. “I was given the opportunity to do the Shanghai General Motors deal”— the groundbreaking joint venture between GM and SAIC Motor, the first of several JVs in China that together have sold more than 21 million GM vehicles since 1999. “I think they were just trying to get rid of me,” Stevens quips. “And I said OK, let’s do it.”
So in 1994 Stevens packed his things and, along with his family, “moved 10,000 miles to a communist country to do something I’d never done before.” He spent the next 12 years in Asia, leading GM finance operations in China, Singapore, Indonesia, and Thailand before returning to North America, first as CFO for GM Canada in 2006 and then as CFO of GM Mexico in 2008.
In 2010, GM tapped Stevens as North America CFO. Had he changed since leaving Detroit’s bureaucracy in the rear-view mirror? “The bureaucracy changed,” he replies. “I didn’t change. I am an operating finance guy who wants to be at the table with my sleeves rolled up.” General Motors, he says, “was looking to change the dynamic” in the wake of its bankruptcy. For a time Stevens was also interim CFO of GM South America, which meant more travel. “I spent a lot of time in Brazil in 2011 and 2012, trying to square away that business,” he says.
Catalysts for Change
Then, on January 15, 2014, Stevens became executive vice president and CFO of General Motors, succeeding Daniel Ammann, who became president of the company. Mary Barra, then head of global product development, took over as CEO on the same day.
The honeymoon was brief. Less than a month later, GM announced it was recalling 800,000 Chevy Cobalts and other models due to a faulty ignition switch, a number that would swell to 2.6 million. The defective switch, which the company had known about for years, was ultimately linked to 124 deaths and 275 injuries. In September 2015 GM settled criminal charges related to the switch, entering a deferred prosecution agreement and paying a $900 million penalty. The company also settled nearly 1,400 civil lawsuits for $575 million, and it expects eventually to spend $625 million to compensate victims of crashes caused by the defective switches. (GM still faces a number of death and injury claims related to the defect.)
Another catalyst for change came in February of this year, in the form of activist investor Harry Wilson. Representing a group of hedge funds, Wilson told GM he would seek a seat on the board of directors and propose that the company buy back $8 billion of its stock. But he backed down in March when the automaker announced a $5 billion buyback and a new, transparent capital allocation framework. (Stevens says those initiatives were already in the planning stage when Wilson began discussions with the company.)
This summer, GM’s business shifted into high gear. The automaker reported record results for the third quarter, posting its highest-ever adjusted earnings before interest and taxes ($3.1 billion) and adjusted EBIT margin (8%) on revenues of $38.8 billion, the latter down 1.3% year-over-year, thanks to a $2.3 billion currency headwind. Earnings per share grew 55% from last year, to $1.50, and the company’s stock rose more than 5% on the news, to $35.26. One reason for the stellar performance is the new analytical tools developed by GM finance to enable better business decisions, according to Stevens.
The good news continued in October, as the U.S. auto industry enjoyed its best October since 2001. General Motors led the way in both sales and market share, posting 15.9% year-over-year growth for the month.
Stevens, meanwhile, hasn’t given up his globe-trotting. “I spend a lot of time in Europe, because I’m very interested in getting that business to profitability,” he says. Recently, he met with CFO to discuss some of the changes under way in General Motors’ strategy and corporate culture, the role of finance in those changes, and the outlook for the business.
Your predecessor, Dan Ammann, set out to develop better financial tools for decision making. What has been achieved so far?
We already had the ability in North America to look at profitability at the product-line level. When Dan became CFO [in 2011], it was his mission to drive that into a global capability. The first building block was country-of-sale reporting, to understand how much money we made on a true company level, country by country. Then we expanded that to the product-line level. Using that new capability, some pretty critical decisions were made.
Can you give some examples?
The decision to exit Chevy Europe in 2012, for example. Or the decisions [to scale back or stop] manufacturing in Thailand, Indonesia, and Australia. The decision this year to reduce our presence in Russia. All were enabled by that foundation.
So we have profitability by product line and by country. Now we’re expanding that to include [return on] invested capital and capital deployed by product line and country.
That’s the next step. We’re deploying a tool called variable profit by VIN. Today, I can tell you how much we make on a Silverado sold in the U.S. in a given month or a given quarter. With variable profit by VIN, I will be able to tell you how much we make on a Silverado retail leased vehicle sold in Texas. We’ll be able to know [profitability] by sale type and by sale channel, whether it’s retail lease, retail finance, retail cash, or fleet. We’re rolling it out in Europe now, and ultimately we’ll roll it out in the U.S.
The product-line profitability and the ability to look at returns on invested capital at a product-line or country level are a natural bridge to robust capital allocation, to ensuring that we’re deploying our shareholders’ capital where it’s going to generate appropriate returns.
GM announced a new capital allocation framework in March. Can you describe it?
It’s very straightforward. First, we’re going to invest at an appropriate level in the business, in technology and innovation, to drive long-term sustained performance. But we want to make sure that we’re driving a 20%-plus return on invested capital, which is top performance in our industry.
The second aspect of the framework is to maintain an investment-grade balance sheet. The [makeup] of that balance sheet will change over time depending on the business, but it’s currently defined and aligned with the rating agencies as a target cash balance of $20 billion and a target debt plus underfunded pension of $25 billion to $30 billion. The $20 billion is what we think is the minimum amount of cash we need to be able to manage through a downturn and continue to invest in the business and protect our dividend.
The third aspect of the framework is, after accomplishing 20% returns and maintaining an investment-grade balance sheet, any free cash flow will go to our shareholders. So in 2016, if we generate $5 billion to $6 billion of free cash flow, shareholders will know that the $5 billion to $6 billion is coming back to them.
Earlier this year GM authorized $5 billion in stock buybacks. Was that negotiated with activist investors?
No, this was what we had planned to do. There was no negotiation. We are focused on optimizing returns for our shareholders, and we don’t want to carry a lot of excess cash. We’ve been buying back shares as expeditiously as possible because the stock is undervalued.
Speaking of returns, GM has ambitious goals for earnings per share and free cash flow.
We expect to see double-digit earnings per share growth over the next number of years. The consensus EPS this year is about $4.50 a share. Our guidance for 2016 is $5 to $5.50.
One, by meeting our commitments: 10% margins in North America, profitability in Europe, continued strong performance in China. Two, by continuing to drive core efficiencies. That will lead to the first double-digit EPS growth, in 2016.
Beyond 2016, it’s the growth initiatives that Dan Ammann talked about in our [October] investor conference — leveraging GM Financial and doubling the earnings there; continuing to grow Cadillac globally; focusing on adjacencies, whether it’s aftersales growth or OnStar, for example; and continued growth in China.
We expect that our free cash flow generation capability in the 2016-to-2018 time frame will be $6 billion to $7 billion a year, compared with an average of $4 billion a year over the last few years. The biggest drivers of that will be our improved earnings as well as absence of some of the headwinds we had, associated with the recall campaigns and such.
EPS growth will be driven by the improvement in our profit margin as well as share buybacks. On the basis of that we think that we are a compelling investment opportunity today. Longer term, our objective is to drive this business to 9% to 10% margins in the 2020-plus time frame. That will translate into $9 billion to $10 billion a year free cash flow.
Of course, these results are predicated on GM continuing to refresh its vehicles and make cars and trucks that people want to buy.
Yes. Our product-launch cadence is a critical component of growing our margins, not only in North America but around the world, not only in 2016 but beyond. We are entering the heart of our product-launch cycle over the next two to three years. Approximately 40% of our volume on an annual basis will be on recently launched products, compared to about 25% over the last number of years. Those launches are coming in core passenger cars like the [Opel] Corsa and Astra in Europe, the [Chevrolet] Cruze and Malibu in the United States, and similar products in China. All of our crossovers in the United States will be new products, starting with the XT5, the new Cadillac that will replace the SRX next year.
Sales of full-size trucks and luxury vehicles generate a big portion of the industry’s profits. How does that affect GM’s thinking in assembling its vehicle portfolio?
In many ways. First, you’re right: 14% of the industry volume globally comes from full-size trucks and luxury vehicles, but 60% of the profit comes from those vehicles. We have a strong franchise in full-size trucks and full-size SUVs, and we will protect that franchise. We are underrepresented in luxury, and that is why filling out and growing the Cadillac portfolio is such a key part of our strategy. We want to participate in that profit stream.
As for passenger cars, our view is that we must continue to improve their profitability. They will never be as profitable as trucks or luxury cars, but there’s a huge profit-improvement opportunity for us. The next-generation Corsa is $900 more profitable than the vehicle it replaced. It’s performing to expectations so far. The Astra is more than $1,000 profitable; we’re just launching that. We expect to see more than a $1,000 profit improvement on the Cruze and the Malibu versus the products they’re replacing, and closer to $1,500 a unit. So that’s going to be a huge catalyst for earnings growth.
Absolutely. A fundamental shift in our approach to product development is that we want to plan for continual refreshes of products through their life cycle, as opposed to “launch them and leave them.” When you systematically plan for refreshes, whether they’re exterior or interior, you keep that product more competitive and mitigate the natural price and volume decay.
The Malibu, we launched it and it wasn’t well received. We quickly redid the front end, but we didn’t address some of the vehicle’s core shortcomings — interior packaging, rear legroom. But the new Malibu will be a home run.
The Silverado and Sierra in the 2016 model year will have a completely new front end, new hood, new tail lamps, and a refined transmission. That’s the benefit of having more-focused product lines and architectures: it gives you the flexibility from a capital perspective to do refreshes more often.
Let’s talk about changing GM’s corporate culture, which Mary Barra has repeatedly stressed since the ignition-switch recalls began. What was that culture like leading up to the recalls, and how is the company working to change it?
There was a lack of personal accountability and responsibility, where if you didn’t talk about an issue and bubble it up, then you wouldn’t be responsible to resolve it. It became clear, first as we went through the restructuring, then reinforced by the ignition-switch recall and the Valukas Report, that the company needed to make a systematic behavior change around personal accountability and a sense of urgency, breaking down silos and working across the organization.
That is a companywide priority for Mary and the top leaders in the organization. We’ve been working very hard over the past year to drive that behavior change and that culture change through the organization.
How do you know if you’re making progress?
The proof points are in our results — we achieve the results that we commit to achieve. The proof points are in the tougher discussions that we’re having. The proof points are the people in my organization who come and talk to me about challenges. Our employee engagement continues to increase.
There’s a saying now among senior leadership that “Your problem is my problem.”
What does that mean in practice?
For example, a few months ago our expectations for South America were that the second half of the year would be improved versus the first half. But the macro environment got worse. We recognized that, and at a monthly operating review we asked, What are we going to do across the business — whether in the other regions or in functions like manufacturing or global product development — to collectively offset the deterioration in South America and achieve our overall company objectives? South America’s problem, in other words, was our problem.
We are all aligned now around achieving the company’s objectives. We only win if we all win.
What do you look for in finance leaders?
I look for three fundamental characteristics. One, a high degree of personal accountability and responsibility — do what you say you’re going to do. Two, a track record of results. Whether you’re running a department or a business unit or a region, if you have a track record of results, you can be counted on. Three, the ability to be a strong business partner. Finance can be Monday morning quarterbacks, or they can be partners in the business. I always wanted to be a partner in the business, and that’s what I want my finance leadership to be.
Edward Teach is editor-in-chief of CFO.
