General Motors

General Motors is the world's largest automaker. The company sold 9.2 million vehicles last year under brands that include Buick, Cadillac, Chevrolet, GMC, Hummer, Opel, Pontiac, Saab and Saturn. Based in Detroit, GM employs some 327,000 people around the world and manufactures vehicles in 33 countries. In 2005 it hauled in revenues of $192 billion.

Sound like a good business? Actually, it's lousy. GM lost $10.6 billion in 2005 and is scrambling to stop the bleeding: closing factories, cutting thousands of jobs, slashing the stock dividend and selling off an estimated $14 billion stake in its finance arm, GMAC. If GM can't engineer a big sales turnaround by the end of 2007 it will probably lose its crown as the king of carmakers to Toyota.

To understand how GM veered off course so badly, it helps to know a little history. In the 1920s, under legendary chairman Alfred P. Sloan, GM promised "a car for every purse and purpose." Sloan thought GM should build Chevys for young folks, Oldsmobiles for mid-career professionals and Cadillacs for those who finally had money for a luxury model. The idea was to keep car buyers in the GM family throughout the economic stages of their lives—-and it worked brilliantly for decades. In the early 1970s, when GM's market share peaked, an astounding 1 of every 2 cars sold in the U.S. was made by GM.

That same moment, however, marked the start of GM's decline. When the international oil crisis of the early 1970s drove up gasoline prices, GM was turning out nothing but gas-guzzlers and didn't respond fast enough to consumer demands for fuel-efficient models. That created an opening for Japanese manufacturers like Honda and Toyota, which had long sold small cars overseas, to ramp up production to meet surging U.S. demand. GM didn't introduce front-wheel-drive compact cars until 1979. Even then, its models weren't as well built or economical as the foreign brands. Sales continued to slide. The company started downsizing, laying off workers and closing factories.

The big problem for GM now, in fact, is that its widespread shutdowns have left it with more than 1 million retirees. Paying for their benefits adds $1,500 to the cost of every vehicle, siphoning profits from all but the priciest models. Foreign carmakers like Toyota, relatively free of that burden, can afford to add more features to their cars and trucks, like anti-lock brakes and leather upholstery, putting GM at a further disadvantage. GM's health-care bill for workers, dependents, retirees and surviving spouses is also crushing: it hit $5.3 billion in 2005. While workers have agreed to pay more for their benefits, the costs still hamper GM's attempts to be competitive.

GM might steer out of this mess if it simply produced more stylish, high-quality cars. As it is, the company makes very few models that are critically acclaimed and considered best-in-class. Not a single GM model takes top honors in J.D. Power's surveys of cars that consumers find most appealing (though a handful of Chevys and Pontiacs do rank in the top 3). Buick and Cadillac score near the top in J.D. Power's rankings of long-term reliability, better than Toyota and Honda, but by other measures GM falls short. Saturn, Pontiac, Buick and Hummer all rank below average in "initial quality," according to J.D. Power.

Management blunders in recent years have devastated GM too. Instead of investing in new car models, the company plowed money into designing bigger and better SUVs and pickups. As gas prices soared and sales of full-size SUVs slumped, GM found itself with too much production capacity for those vehicles. GM is also playing catch-up with fuel-saving technologies. Its first hybrid car, the Saturn Aura, is finally coming to market in 2007, a decade after Toyota launched its hybrid Prius.

Can GM survive? In early 2006, Wall Street had its doubts: investors dumped GM stocks and bonds on fears that the company might declare bankruptcy as a way to get out of its retiree obligations. Those fears subsided, and the stock price went back up. The big test, however, will come this year, when GM negotiates a new master labor contract with the United Auto Workers. Investors want major concessions on everything from health benefits to wages to work rules, figuring GM needs a radically lower cost structure to be globally competitive. But if the company is posting quarterly profits by then, the UAW probably will balk at "givebacks."

However it turns out, the battle for the future of GM is bound to be ugly.

—Daren Fonda