Fritz Henderson speaks informally to Reporters

[Bruce Nunnally]

Fritz Henderson: Welcome. Thank you for coming. I don't have any introductory marks really to turn it over to questions. I really appreciate everybody's time here this morning.

Q: Can you tell us a little more about the options you have for financing the Opel deal? If the money does not come from Germany or the other countries, what options do you have?

Fritz Henderson: Well, a couple things, first, let's start with what is most important which is restructuring the business and having the operating plan that is viable longer term. I think that we are quite confident we know how to do that. We need to make the presentation. … We will shortly be making presentation to the respective governments. First and foremost, what is the operating plan? Second issue is, obviously, we will pay back the bridge loan which is due in the end of November. (Current liquidity in Europe) is sufficient to allow us to do that. The company is upgraded while certainly a challenging environment for us. (We’ve) operated at or better than planned. So we have the resources there to basically pay off the bridge loan and… resubmit for consideration not only in Germany but in various other countries (that) indicated an interest in providing resources and support. … In terms of our expectation… we are (at) about $3 billion Euro of financing. (That’s) number one. Number two, (we’re ) presenting the plan first to our people, including all of our people, labor as well as involving the entire workforce, then sitting down with the respective governments. We feel confident that the plan will be financeable without any doubt.

Q: Financeable by the government? Or other sources?

Fritz Henderson: Part of it is from us.

Q: When you say us?

Fritz Henderson: GM.

Q:GM where? Where would GM get the money from?

Fritz Henderson: Couple things. First of all, things have improved there. Our liquidity position is better there. It is important to understand that. That would be our principal source of doing it. On the other hand, in the future, if we need to participate, we can participate via royalty holidays. There’s a number of ways to participate to provide financing and we would certainly look at that. There are ways, perfectly fine, for us to be able to support.

Q: Royalty holidays?

Fritz Henderson: With lower royalty in terms of what’s required in order to finance the business. We can do that.

Q: Can you send money from here? That you cannot do, right?

Fritz Henderson: We can. The terms of the financing document in December are different from the terms of the exit financing document in August. We are able to run a global business. We certainly need to be prudent about it, be very careful about it, but we do have the ability to run a global business. It is different. The exit documents are different from the loan that was negotiated in December.

Our view would be resources in Europe are better than we expected them to be. We have the wherewithal, for example, via royalty holidays or other forms, to provide support over a period of time. We do have the ability, if necessary, to provide support directly if necessary. Again, only if necessary.

Q: First of all, when -- can you give a sense of the timing? Some of us have picked up; this is going south for a while. And then, GM would probably have liked to have gotten out more than just the last few days or the weeks. More importantly, can you talk a little bit about the whole process of how this reflects a change in business? Germany seemed to be the last place of business as usual. Politics govern how things are done. Politics with labor union, the regions, so on and this seems to be a serious clash of old style versus the new way. Either a good business decision or it is not. And politics and friends don't matter.

Fritz Henderson: First of all, let me make one point: You’re not going to hear any criticism from me of the German government. … Let's face it, if the bridge loan hadn't been put into place at the end of May, (Opel) would have failed. I'm immensely appreciative of the support that was provided so that we could get to this point. And, I think it’s really important to understand that. We have the ability now to repay that loan. In fact, what is interesting is we never fully drew the amount of the bridge loan. We already paid back a portion of it. I think there is 900 million Euro that is outstanding today. So, first and foremost, the support that was provided in May was crucial to bring us to this point.

Second, our situation has changed. GM’s situation has changed obviously. If you flashed forward from whether it is March or May or even September, the situation has changed. (There is a) better understanding from our board of our business, our global business. Remember, more than half of our board was new July 10. (That’s) number one. Number two, (this is) a highly complicated situation. Number three, our own financial situation that we'll detail more specifically here in the middle of the month is better than it was in September. … So a lot of things changed. And the conclusion, after a very vigorous discussion by the board, was we should go back to retaining Opel, restructuring the business and running the business successfully.

The last point I’d make about Europe (is) what’s required to be successful in Europe. We obviously had a situation in Europe where the market has fallen significantly. It’s important to not walk away from it. The business does need to be addressed and restructured. It has to be. Anybody’s plan, whether it’s ours, Magna, whoever’s, was going to do that. And so, I think it is certainly important that that stays foremost on our list of things to do because I don't think anybody wants to be involved in this, whether it’s GM, whether it’s the German government, in any sort of initiative that would leave the business unaddressed. We have to address the business requirements.

And, yes, things have changed. But I would say that, I think the interest of the German government is also to have a viable Opel and, Opel/Vauxhall in Europe. I think in that vein, our interests are fully aligned.

Q: Fritz, how many jobs do you need to cut at Opel and how much do you need to down size it? Who is going to run it for you going forward?

Fritz Henderson: The… transition team is being pulled together forthwith, and I’m not going to get into who is on that team, but you should anticipate that it will be put together shortly. We'll be able to talk about it then. I don't really want to press into that. We’re basically pulling together a team of people. Think of this as measured in days and weeks, not months.

…In terms of the number of people, basically we’re going to go through this with our people first before we go into it with you. All of the plans, again, whether it was ours or whether it was Magna's, called for a substantial reduction in capacity in the business and the need to right size the workforce. I just don't think it’s fair, and not something that I should do this morning, to go into what is the number and where. It’s really something we should do with our people first.

Q: I’m going to move to North America. Update us on the workforce here. I would imagine you’re through the salaried reductions right now, but you didn’t get your manufacturing number where you wanted. If you could talk about where that stands and what you might do to get the manufacturing number down...

Fritz Henderson: Okay. So this is something we talked about at the 90-day update. If I look at the amount of attrition that we had in the business, in the hourly workforce, in 2009, it’s about 13,000 people. And, we still have today in the U.S., about 6,000 to 7,000 people on layoff, some of it temporary, some of it permanent. Obviously, we still have excess (workers) relative to requirements given how we are running the plants. Those people are on SUB and second year protection as TSB, there’s no Jobs Bank. We did add a shift, but that was in Canada with CAMI. We are looking at our shift pattern in Kansas at our plant in Fairfax, which would require some people. Obviously, we have people on layoff in SUB. They have first year protection via SUB, second year protection via TSB. If it turns out after a period of time, the people aren't required, then they basically leave the company.

In terms of what to do, we don't have any plans to have a broad attrition plan. We don't think it’s necessary. We might do something targeted to facilities, but I'm reticent to do it because that would basically be using a sledge hammer. That’s not what we need. We need to get our production up and running and use people, and to the extent we’re not using those people, they roll off. That’s the way it works. That’s what was negotiated as part of the new labor contract this year.

Q: When will we be able to hire from the outside?

Fritz Henderson: We can now. If it was into the top 25, any individual hire would have to be approved specifically by Ken (Feinberg) and his team, but we can now. By the way, below the top 25 we could before, but they were also interested in how they could be paid.

Q: After seeing the October sales, are you going to boost production, add any shifts anywhere besides perhaps CAMI or Kansas?

Fritz Henderson: No, we think we made the appropriate adjustments. We ended up taking down our schedules when we took Saturn production out. And, that was the only really substantive adjustment we made at the last point of scheduling. We’re comfortable with where our schedules are now. We are pleased that sales were better than we had forecasted in October. We don't have any plans to add production today. We are just encouraged by what we saw in the month of October.

Q: Back to Opel. You have four plants in Germany. Can you tell us how many you plan to keep open?

Fritz Henderson: No.

Q: Can you tell us more about the board. How it’s different? Who, what, how the board decided it was worthwhile keeping Opel? What’s different now versus the previous board?

Fritz Henderson: I’m not going to get into individual board deliberations. It wouldn’t be appropriate. Most public companies, when they change the boards, they change one or two board members per year. We changed the majority of the board on July 10. Ours was not a normal situation. The new GM emerged from bankruptcy July 10. It was a very different situation. The board members that came from the prior GM board were also relatively new to GM. And then we brought in the new members. They’re all actively involved. They are bright, incisive, coming with different backgrounds. With the exception of two of them – one of them understands the automotive business well and one of them has a reasonable working knowledge of the automotive business. Everybody else is learning. The other five came from either telecom or private equity backgrounds, so we can have a really great OnStar discussion actually.

But, the simple point is, they needed to get up to speed, but at the same time, we had them run the business. We had them make decisions. If you think about a process of you learning, these are people who also have other full-time jobs. They themselves are learning about the business. Not only learning about the situation in Europe, but also learning about GM and our financial condition and results, what’s happening in the business and outlook, getting more confidence in terms of the footing of the business. And all of this is a process of normal learning from very smart people who are getting engaged. So we come into the November review with (the) situation from the corporation standpoint, improved. And certainly, the view, their view is, while the situation is still very challenging, it is at least stable. And, overall understanding of options in Europe, the conclusion was, we should change direction. That was (it) in a nutshell. We won't get into who did what at the meeting.

Q: Can you tell us what, if any, influence… whether you have been pressured by the German government to add a decision in to keep Opel? Whether the European Union had any influence on that or whether (it was) completely internal?

Fritz Henderson: Well, I would say the decision process was really looking at it in broad terms, rather than narrowly, the question that came from the EU to Germany, from Germany to us, I'll call it a catalyst, prompted the reconsideration. Wasn't a principal focus during the discussion. It really wasn't.

Q. How do you get (volume) out of Opel? I know that Regal is coming.

Fritz Henderson: Let's start with China. I mean, one (has to) look no further than the Regal and Lacrosse in China to say, duh! That is where, if you look at it, very powerful. I mean, the vehicles launched in China were launched concurrently with the Insignia in Europe and doing exceptionally well. Exceptionally well. And, the economy is (of) a scale here, where (we were) really more about engineering and capital and we tooled them in Shanghai. But the economy of scale of engineering, doing it once (is) powerful. In truth, the leveraging of the vehicle program, if you just think about it in dimension terms… the China volume(built in Shanghai) would have been the (Opel-built) Saturn volume. Not even close. … It is my observation that if I look at how the Aura did, which was a fine car, and look at the prospects of the Regal, I don't think that we are going to miss a beat in terms of volumes. So I don't think that it will diminish the scale of economy we saw.

Q. What is this decision to keep Opel due to your Chevrolet strategy globally? Are you rethinking what Chevy can be in Western Europe given the amount of interest in Opel and keeping that brand vibrant? Second, as it relates to the U.S., your incentives continue to lead the industry. What is your plan to get those down and how quickly can you get those down? What is a more reasonable and acceptable level of incentive for you?

Fritz Henderson: (Let’s) go back to the first question… We hadn't expected to change when we were doing the deal actually. And, therefore, we really don't expect a change from what we are doing. We had been pursuing a multi-brand approach in Europe anyway. And, our view… is (that as) Chevrolet products get better and better, it gives us a better chance to position Opel where it really should be. Which is, you know, historically the ability to stretch the Opel brand down and up was really difficult to do. Opel needs to be solidly in the middle. And, Chevrolet can take up more space as an entry level product. But the Chevrolet strategy, if you look at the volumes and where it plays, it really is in Eastern Europe and Central Europe. The amount of participation in Chevrolet and Western European countries which can grow is modest. The engine for our business in Western Europe has been and will continue to be Opel and Vauxhall. (So) I would say no change in the Chevrolet strategy.

On U.S. incentives, pickups are a big driver of the discussion. We built '09 pickups longer for technical reasons. … I think that certainly we will see some moderation in incentives on the '10s as we clear out the '09s. …The other thing is that we are, as we reduced the inventory, we lowered the water level in so much of our inventory that (what) was remaining over aged. And, we are aggressively clearing out the over-aged stock which is a good thing to do. But it does take some money. And, it is funny when you think of it this way, if you ran 900,000 units of inventory and 30 percent of it over aged, then, you have 270,000 units of over aged inventory. When you run 400,000 units of inventory, that over age(d) (inventory) unfortunately, didn't diminish per rate. We are aggressively progressing. These (are) vehicles greater than 90 days and 120 days in the lot. Those two thing(s), over-aged (inventory) as well as pickup trucks, are what is driving the incentive levels reasonably higher. Higher than what we with like them to be today. … I think… one factor that will tend to go the other way a little bit, leasing is growing. But I don't think that is going to be, you know, we think… leasing winds up at 6-7 percent of our business here, with the majority of it in Cadillac. It won't be a big driver of real incentives spend(ing). When leasing was 22 percent of the business, it was a big driver of the incentives.

Q. Back to Chevy, if the strategy isn’t changing, then would you have basically been giving away your Western European operations with (the) Magna (deal)?

Fritz Henderson: We would not have been in management control. That is the way that the deal was structured. We with not have been management control. No change there. That was one of the principal tenants of the deal. Next question.

Q. What are you going to do in Russia now that you have taken back the Opel business? Do you have to rethink your plans there? How will that operate?

Fritz Henderson: First of all, the Russian market this year will end at 1.4 million (sales). Last year (it was) 3.2 million. Pull out a calculator (and you can see) the Russian market this year has been pretty challenging actually… down about 60 percent. It reminds me of the volatility we see in other emerging markets we know well. But Russia will recover… You know one of the things I was surprised with when I was in Europe was Chevrolet. We knew that Chevrolet would be the driver of the volume in Russia. What we didn't necessarily see (was that) it would pull Opel with it. Opel actually improved the same time Chevrolet did. Chevrolet is the engine of the strategy in Russia. (And it) would continue to be the strategy in Russia. I do think that the multi-brand approach with Chevrolet and Russia (in the) same showroom… dealers like it. I think the biggest issue in Russia is not ‘What is the right brand strategy?’ (The) biggest issue (is) how does the market recover? Because the market has been really hit hard. I mean, really hit hard. Probably, if I had to pick between the Russia and Ukraine, probably the two markets down the most this year versus 2008, much more than the U.S.

Q. Would you provide an update on the search for a new CFO and new head of GMC Buick?

Fritz Henderson: On (Buick-)GMC… we basically got the search going. (We’ve) interviewed several candidates (and) that will continue… I would imagine we bring it together relatively quickly. Not going to comment on the CFO. We'll have a chance to talk about it in the future. Today we're not going to get into that.

Q. Is the process made easier with the (federal) pay restrictions (in place)… for the top 25 (executives)? Does it make your search easier… know(ing) what you can pay the folks?

Fritz Henderson: Yes. I think that having certainty as how to pay people and, having the ground rules… -- doesn't make it easy but makes it feasible. Because, if you don't know, it is really hard to have a discussion. If you know, at least you can say, ‘Here is how it works’ and people can consider it.

Q. Do you have any idea what plants will be closed in Europe? What Opel plants will be closed and what countries you may go to, to seek loans. Now Klaus is saying that you have lost the trust of the labor movement over there and that… Opel should no longer be appendage of GM. How would you react to that?

Fritz Henderson: All right. One step at a time. (As to)… which country, it would be the countries that we had talked to before. I don't think that there would be a change. We'll present our plan more broadly (to) any country (where) we are operating. (The) big operations are in Germany and Spain and the UK and Poland. Those are the big ones. … On question of repairing with trade (unions), sure we have work to do. This has been a tough, long, difficult process. 2009 in general, for General Motors, has been a year that I'll be very glad to have behind us. … (I)t has been straining on relationships… and we have fence mending and repair that needs to be done. So, you know, that is my responsibility and the responsibility of the leadership team. Certainly I'm enthusiastic about getting started doing that. … (I’m) not getting into the plants (that will be closed).

Q. About the (retention) of Opel, you mentioned today that GM is in a stronger position, can you just tell us what that means? Is the business outperforming what you expected when you came out of bankruptcy? Are you generating cash?

Fritz Henderson: We are outperforming our plan from bankruptcy. I tried to provide at least some insights into that (during the) 90-day update. We'll provide more details of it… in mid- November. You'll see it directly. I'm not going to get into whether (we are) generating cash or not generating cash. I would certainly say the situation is more stable than what the outlook was even two months ago. We'll get into this in a couple weeks. So hold the question. We'll have an opportunity to do that.

Q. (What about) the market itself?

Fritz Henderson: Well, first of all, we didn't know what was going to happen when we went into bankruptcy. Some might argue, you set the bar (intentionally) low. Truth is, we had no idea what was going to happen. None. As far as how the market would treat us. And so, our outperformance versus the plan that we had (going) into bankruptcy… is gratifying but not particularly relevant today. But it … is relevant relative to (the) outlook of a business. In other words, ‘What will happen to the company? What might change? Traction in the market? Will our launch products do okay? You know, the questions you are ask(ing)… ‘Will the four core brands make up the space from the other brands?’ All of the questions that have been swirling around… I wouldn't say answers have been provided but (we have) increasing confidence, for example, just on the question of, ‘Can… the four core brands actually pick up the case? Answer so far has been yes. They have. So, the second is, ‘(The) September market was 9.3 million units. (In) our view, September was depressed because of the impact for the payback from Cash for Clunkers (federally incentivized trade-in program). We felt (the impact) would be sharp and short and (be) felt in the month of September. And, our view was, October would come back to something more rational, and we thought it might come in above 10.5 million units. That happened. I think the final number I saw was 10.7 (million) or 10.8 (million). So… these are things that we are getting data points (on) which suggest (things are) not great but (there is) stability and we are starting to prove out some things that were a theory.

Q. (Unintelligible) questions on Consumer Reports reliability index and the (General Accounting Office) GAO report this week which very strongly contended that the taxpayers will not get back their money from the bailout.

Fritz Henderson: (On) Consumer Reports, (we’re) disappointed with the results. Not (with) their report. But (with) our results. We should and must do better. We did actually, year over year, improve. (But) nowhere near where it needed to be. (On) our launch products… the one encouraging sign I took away from the report was they talked about the launch products having promise. They didn't have (an) adequate sample size (so) they didn't have the ability to make a judgment about long-term reliability and short-term reliability. (So) they weren't included (as) Recommended Buys. So we'll have adequate sample size next year. If they did the job they need to do, then they can be included next year.

On GAO, I am reminded every day that the ability for the U.S. taxpayer to get a return, not just the US taxpayer, but the Canadian taxpayer, bondholders and other unsecured creditors of GM (to) get a return (is) based principally upon the ability to generate value in the stock. We are quite confident in our ability to repay the loan. But the GAO report was more broad, as it should have been. (T)here is a question of how much value do we create (in) the stock? … The one comparison that they made in the report which … was true (but) was missing an important point… talked about what our stock price might have been. … (I)n the past that stock price that was registered when there was a huge amount of claims… that (took) priority (over) the shareholder, claiming money in the cash flows of the firm. Healthcare. The level of (debt.) If I think about equity valuation (and) I don't want to get too technical here, valuation (is based on) how the business performed? … GM is fundamentally changed (from) the bankruptcy. The ability (to) generate value in the stock today is much higher than it ever was before if we execute. (And) there are a lot fewer claimants (that come before) the common shareholder. And, that is the one piece of the report that I think, when they talked about it, I don't necessarily think that they picked up. But the thrust of the point was, you know, the taxpayer or the shareholder is going to get paid back depending how we run the business. Are we able to create value in the shares? That is crystal clear to me. And, it is my fervent desire to show that the report was wrong.