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Chevrolet and GMC pickups sit idle at a GM plant in Pontiac. GM officials, after announcing the grim financial outlook for the company, say they want to sell more cars without huge rebates.Struggles at General Motors
GM's dire outlook jolts auto industry
Impact: Raises, retirement funds cut; jobs, health care may be next Cause: Sales dip as rebates, foreign competition increase
GM attorney Steve Cernak says despite the mood in the automaker's Renaissance Center headquarters after bad news about its profit outlook, workers tried to stay optimistic.
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DETROIT -- General Motors Corp. had already warned that 2005 would be a tough year -- now it's shaping up to be a disaster.
On Wednesday, the world's largest automaker said it expects its worst quarterly loss since 1992 and sharply lower-than-expected profits for the year.
The news of GM's financial downturn drove the company's shares to a 10-year low and sent shockwaves through the financial markets. The company's credit rating could be downgraded to junk bond status at any time.
GM immediately launched a round of cutbacks. In an e-mail Wednesday, the company told 38,000 North American salaried employees -- including 31,000 in Michigan -- they will not receive merit pay raises this year. GM also is reducing the matching funds it pays into employee retirement funds by 60 percent starting April 1, and allowing salaried workers to purchase three additional vacation days for $175 per day in order to reduce payroll costs.
GM spokesman Robert Herta said cutting the benefits was "a difficult decision," but necessary in the current environment. GM plans more cost cuts this year and didn't rule out layoffs or increases to health insurance costs.
The surprise warning Wednesday exposed deep problems for GM in North America, including falling sales, increasing competition and skyrocketing health care and pension costs.
"GM North America is our 800-pound gorilla, and it's important that we get this business right," said Chairman and Chief Executive Rick Wagoner.
With its U.S. market share under 25 percent this year, analysts say GM must consider serious restructuring.
"It's one thing to say things are tougher than they expected, but what people want to know is, 'What are they going to do about it?' " said Stephen Girsky, chief auto analyst for Morgan Stanley in New York. "The company's market share doesn't support its size. They have too many plants, too many workers, too many models, too many dealers and their employee benefits are too high."
GM expects to report a first-quarter loss of $1.50 per share, or about $847 million, instead of breaking even or turning a small profit as it predicted earlier this year.
And for all of 2005, GM estimates it will earn $1 to $2 a share for the year, down from a previous target of $4 to $5 a share.
In another ominous sign, GM disclosed it will burn though $2 billion in cash this year instead of increasing its cash flow by $2 billion.
Steve Cernak, a GM attorney from Farmington Hills, said the mood inside GM's Renaissance Center headquarters wasn't good Wednesday but that employees were trying to be optimistic.
"I don't think it's too surprising, given the production cuts and previous month's sales numbers," Cernak said. "It appears we're going to have some tough times in the short run, but in the long run I think we'll be OK."
The news almost single-handedly sank the stock market.
The Dow Jones industrial average fell 112.03 points to 10,633.07 on Wednesday, and GM shares fell 14 percent or $4.71 to $29.01 -- wiping out about $2.7 billion in shareholder equity.
It was the sharpest decline in GM shares since they dropped 21 percent on Oct. 19, 1987, a day known as "Black Monday," according to Bloomberg data.
GM's market value of $16.6 billion is now one-eighth the size of Toyota, the world's No. 2 automaker.
Ford Motor Co. and DaimlerChrysler AG shares also slid.
The automaker's dismal earnings outlook sent tremors through the Metro Detroit economy, especially among parts suppliers who are already struggling. Shares of Delphi Corp., Visteon Corp., Lear Corp. and American Axle & Manufacturing Corp. and other GM suppliers all slumped.
While U.S. car and truck demand is off 3.6 percent this year, GM's sales have dropped 10 percent. Weaker consumer demand and cutthroat competition from rivals are limiting GM's ability to raise prices.
In many cases, GM has been forced to cut prices or offer fatter discounts on older models. "This is a matter of some urgency," said David Cole, chairman of the Ann Arbor-based Center for Automotive Research. Cole said many of GM's challenges -- high labor costs, rising raw material expenses and health care outlays -- are largely out of its control, but must be reined in or it's going to be a "train wreck."
Standard & Poor's promptly revised its ratings outlook for GM from stable to negative and signaled it could downgrade its rating on GM's debt, now one notch above junk-bond status, if the company's performance doesn't turn around soon.
Fitch Ratings downgraded the company from BBB to BBB-, maintaining its negative outlook. Moody's Investors Service said it's considering a downgrade.
John Devine, GM's chief financial officer, said the automaker needs to do far more to reduce costs to counter falling sales and flat revenues.
"We're committed to getting North America back in the black as soon as we can," he said.
But it may take a while. Devine predicted North America would post "a significant loss" for 2005.
GM expects to continue facing steep health care costs, a competitive pricing environment that limits the ability to raise prices and sluggish sales in the first two months of the year, especially for newly launched vehicles.
"If we don't get the revenue, our bottom line suffers," Wagoner said.
GM expects its health care spending will increase to $5.6 billion this year from $5.2 billion last year.
"We're not expecting miracles out of (Washington) but we're also having discussions with our providers, employees and unions," Wagoner said.
Earlier this year, GM North America President Gary Cowger visited the governors of 13 states to lobby, in part, for some sort of assistance in lowering the automaker's health care bill.
Aside from higher health care costs and declining sales, GM's ability to generate cash is being hit hard by the costs of closing two plants and permanently idling another. By the summer, assembly plants in Baltimore, Md., Linden, N.J., and Lansing will halt production.
In a filing Wednesday with the U.S. Securities and Exchange Commission, GM said it expects it will spend $6 million to $10 million per month to cover pay and benefits for laid-off workers in Baltimore and Linden. Most of the workers displaced by the Lansing closing will be relocated.
Devine maintained GM is seeing "solid" success with new vehicles such as the Pontiac G6, Buick LaCrosse and Chevrolet Cobalt, though they all generate lower profits.
But GM has also been forced to slash vehicle production 12 percent in the first quarter and about 10 percent in the second quarter.
The production cuts have hit parts suppliers hard, especially Troy-based Delphi Corp., a former GM unit, which is in the midst of an accounting scandal that cost it its vice chairman and chief financial officer. Devine and Wagoner said the company is considering more reductions in North America that could include jobs, although they offered no specifics.
GM's new full-size pickups and SUV's aren't due until next year, and Wagoner said the plan now is to try to accelerate the launch of at least the pickup truck to early 2006.
That strategy is fraught with danger, said Fitch Ratings analyst Mark Oline, noting "you run the risk of incremental quality and cost issues."
Indeed GM's push to move up the launch of the high-profit vehicles may be too late says Oline, given the fact that consumers are beginning to migrate to smaller or more fuel-efficient choices such as passenger cars or crossover vehicles.
Identity's Hanson says GM's new products simply don't stack up to the competition.
"They are doing the correct things, but Toyota is doing them better," said Hanson. "When they come out with a product, they might be dynamite, but Toyota is ahead of them."
Long a leader in the incentive war, GM plans to change its strategy. Wagoner wants to move away from huge cash rebates and price vehicles closer to their real market value. The company's advertising also needs to emphasize the value and attributes of GM brands rather than peddle price alone.
The company is also putting its entire advertising business up for bids, looking for a new direction in building goodwill in the marketplace.
Looking to get more bang for its product development and manufacturing buck, GM will produce fewer low-volume, or niche vehicles, such as the slow-selling Chevrolet SSR.
"The good news is GM is in the middle of a perfect storm which can galvanize them to serious action on costs," said Cole of the Center for Automotive Research.
But Merrill Lynch analyst John Casesa believes investors should get out of the rain and advised them to sell their GM shares right now.
Ever the optimist, Wagoner feels he has the support of GM's board of directors in spite of the red ink to come, saying "there's been a lot of areas where the business has progressed. The board is behind our strategy."
But Wagoner is also a realist, admitting, "we've got to address the long-standing chronic issues of the company."
Detroit News wire services contributed to this report. You can reach Ed Garsten at (313) 223-3217 or egarsten@detnews.com.
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