DETROIT - July 15, 2008
Tuesday's actions, which the company said will save $15 billion
through 2009, carry a more urgent tone than past roadmaps to
recovery. This time, GM is facing one of the most serious threats
in its nearly 100-year history, with one analyst speculating that
the world's largest automaker by sales could wind up seeking
bankruptcy protection.
GM said if it's latest, unoptimistic predictions hold true, it
will have enough cash to sustain itself to 2010. But with no
guarantee that the economic slump and U.S. sales downturn have hit
bottom, the latest addition to a long string of restructuring
efforts may not be enough to keep GM from going the way of
Studebaker.
"We are in an unprecedented challenging environment here in the
U.S.," President and Chief Operating Officer Fritz Henderson
conceded in an interview. But words like "crisis" and "panic,"
Henderson said, aren't useful.
"What's useful is decisive action," he said.
While the emphasis is on cuts, GM is preserving funding to
develop new small cars and car-based crossover vehicles that people
are craving as they abandon pickups and sport utility vehicles.
There's also money for vehicles of the future like the Chevrolet
Volt rechargeable electric car.
"In short, our plan is not a plan to survive. It is a plan to
win," GM Chairman and CEO Rick Wagoner said in a broadcast to
employees.
The company said it would cut white-collar costs in the U.S. and
Canada by more than 20 percent, shed thousands more factory jobs by
cutting truck production, borrow $2 billion to $3 billion and take
other measures such as selling assets to generate cash.
The cuts ran deeper than usual, with GM suspending its $1 per
share annual dividend for the first time since 1922, and even
cutting once-sacred health care for more than 90,000 salaried
retirees when they reach 65 years of age. Even GM's long-standing
auto racing sponsorship is in question, although executives would
say only that modifications would be made.
"I can't really tell you where the bottom is," Henderson said.
"The objective was to try to develop a plan that was robust even
if the market was to get worse."
Of the $15 billion in savings, $10 billion will come from
internal cost-cutting. The other $5 billion will come from the sale
of assets, possibly including the Hummer brand, and from borrowing
against others, most likely GM's overseas operations.
The company plans to close four truck and sport utility vehicle
factories more quickly than previously announced, although it
wouldn't say which of the plants in Janesville, Wis.; Moraine,
Ohio; Oshawa, Ontario; or Toluca, Mexico, would be shuttered early.
Factories that make engines, transmissions and other parts for
trucks also will take hits, but GM wouldn't identify the plants or
say if further closures are planned. Henderson said thousands more
blue-collar jobs would be lost, but he wouldn't give an exact
number.
Investors put some faith in GM's plan. The company's shares
initially fell to a new 54-year low of $8.81 but rebounded to close
at $9.84, up 46 cents, or 4.9 percent, from Monday's close.
Still, some industry analysts were skeptical.
Standard and Poor's Ratings Services on Tuesday kept GM's debt
on credit watch negative. Analyst Robert Schulz wrote in a note to
investors that Tuesday's steps are necessary to maintain liquidity
"given the magnitude of the company's expected cash use caused by
currently dismal market conditions in the U.S. automotive market."
GM sales were down 16 percent for the first half of the year as
$4 per gallon gasoline and economic worries either kept buyers out
of showrooms or sent them running to small cars that get great gas
mileage. The shift in buying habits hit truck-heavy GM, Ford Motor
Co. and Chrysler LLC particularly hard, and even Toyota Motor Corp.
saw a sales drop in June.
GM executives said that given tight credit markets, the company
needed to generate most of the savings on its own rather than
through massive borrowing.
"The market is inhospitable, which is why we tried to structure
our approach so we have $10 billion we can do ourselves,"
Henderson said.
Craig Fitzgerald, a partner with the Plante & Moran PLLP, said
most of the savings are within GM's control.
"They don't depend on outside factors," he said. "That's a
healthy mental model and a healthy business model to have."
GM said it is prepared for total U.S. sales as low as 14 million
light vehicles for the next two years, far below its projection of
14.7 million for this year. The plan also assumes GM keeps a 21
percent market share, and that oil prices stay in the $130 to $150
per barrel range.
But Fitzgerald said GM's worst-case scenario may not be bad
enough. At worst, he predicted the U.S. market could drop to an
annual sales rate of 13 million this year with no recovery next
year.
"I see that as a reasonable planning scenario, but I don't know
that I see it as a worst-case scenario," Fitzgerald said.
Tuesday's cuts come atop earlier downsizings. GM had 113,000
U.S. hourly employees in 2006; it now has about 57,000. Its U.S.
salaried work force has dropped from 44,000 in 2000 to about 32,000
last year.
GM won't say how many white-collar cuts will be made, but
Henderson said much of the cost reduction would come from cutting
retiree health care benefits. Those over 65 would get a $300
monthly pension increase to make up for the cut.
Many white-collar jobs will be cut through normal attrition and
retirements, and through early retirement and buyout offers,
Henderson said. The company could resort to involuntary layoffs but
does not want to, he said.
GM has $24 billion in cash and access to $7 billion in credit,
but has been burning through about $1 billion per month. JPMorgan
analyst Himanshu Patel recently predicted that GM would go through
$18 billion in cash this year and next.
Analysts had speculated GM would need to raise more cash to get
it to 2010, when it will start seeing the savings from its landmark
2007 contract with the UAW that cut hourly workers' wages and
transferred billions in hourly retiree health care obligations to a
union-led trust.
As part of its financing plan, GM will defer $1.7 billion in
payments to that trust that had been scheduled for this year and
next.
Although some have speculated that GM would declare bankruptcy,
Wagoner said last week that isn't a consideration.
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On the Net:
General Motors Corp.: http://www.gm.com
GM makes historic cuts in struggle to survive
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