Tuesday, April 26, 2005

Struggles at General Motors

GM may close more factories

Despite a decade of cutbacks, analysts say sluggish sales point to more job losses.

By Ed Garsten / The Detroit News

Reducing capacity Industry analysts predict GM will be forced to close several assembly and parts plants over the next few years because of sluggish vehicle sales. Do you think the plant you work at will be closed or will operate with fewer employees? Yes No Get results and comments GM's underused assembly plants • An Orion factory that builds the new Pontiac G6 • Spring Hill, Tenn., factories that assemble the Saturn Ion, Vue • A large van plant in Wentzville, Mo. • A Doraville, Ga. mivinan factory Error processing SSI file Comment on this story Send this story to a friend Get Home Delivery

General Motors Corp., faced with shrinking North American market share and evaporating profits, may have no choice but to close more plants and lay off thousands more workers.

The automaker is trying to wring cost out of its money-losing North American business, which is saddled excess manufacturing capacity.

In the past 16 months, GM has been forced to shut down various North American assembly plants for 121 weeks because of slow sales and bloated inventories, according to an analysis by The Detroit News.

This week alone, GM temporarily laid off 7,000 workers, joining an estimated 8,500 workers already idled due previous plant closings or permanent production cuts. By contract, GM must pay the workers 95 percent of their pay.

"We know there is more progress possible on getting our manufacturing cost-competitiveness to a world-class level, and getting our capacity footprint and utilization optimized and we are determined to deliver on that objective," GM spokesman Stefan Weinmann said.

GM ended production at its Linden, N.J., assembly plant last week. GM also is preparing to shutter the Lansing M plant, and a van plant in Baltimore, Md.

In total, GM has closed eight plants in North America and shed more than 127,000 factory jobs since 1992. But short of a major sales turnaround, analysts predict GM will be forced to close more assembly and parts plants over the next few years.

"It's a matter of when, not if," Merrill Lynch analyst John Casesa said in a report released this month.

GM's current North American plants have enough capacity to support 30 percent of the market, analysts say, but GM's U.S. market share has dropped to 25.6 percent.

Despite cutting car production by 50 percent since 1993, the automaker is still saddled with too many plants that build sedans and coupes.

During the first quarter, GM's assembly plants produced 87.6 percent of the vehicles they're capable of building, compared with 90.2 percent during the first three months of 2004, the company disclosed this month.

Grand Rapids consultants IRN Inc. estimates GM uses just 80 percent of its production capacity.

"In a market that's so price competitive where the (profit) margins are starting to erode, we could argue they should be up around 90 percent," IRN senior analyst Erich Merkle said.

GM is under severe pressure to cut costs and reverse North American automotive losses that reached $1.3 billion in the first quarter. United Auto Workers President Ron Gettelfinger has indicated the union won't open the automaker's national labor contract before its 2007 expiration to renegotiate spiraling health care benefits, which will hit $5.6 billion this year.

But some analysts say GM current problems have as much to do with its non-stop incentives since September 11 as they do spiraling health costs.

"GM led a price war. It put them in a situation where yes, it kept the plants open, but the losses they're acknowledging now are really the result of not addressing the capacity issue. They really do have too much capacity," said Walter McManus, director of Michigan's Office for the Study of Automotive Transportation.

Merrill Lynch's Casesa said GM is likely to cut its manufacturing production capacity by 800,000 by decade's end -- or roughly the annual output of three high-volume assembly plants.

Deutsche Bank analysts Rod Lache and Michael Heifler expect the automaker to eliminate as many as four assembly plants and 20,000 to 30,000 jobs as part of a major restructuring.

"The end result is that GM could emerge as a smaller but healthier automaker," they said in a report released April 15.

GM officials are reviewing restructuring options, but any additional plant closings would likely come after 2007, when the automaker renegotiates a new wage, benefit and job security contract with the UAW.

"We'll lay out the actions as we see them," GM Vice Chairman and Chief Financial Officer John Devine said when the automaker released first-quarter results.

With the exception of 2002, GM has reduced the number of cars and trucks it builds every year since 1993, from 7.1 million to 5.8 million in 2004. Its U.S. market share has dwindled from about 35 percent in 1993 to 25.4 percent through March, but production still outpaces sales by more than one million vehicles and several assembly plants are under utilized.

GM's Weinmann says the automaker's capacity utilization rate will improve with the end of production at plants in Linden, N.J., Baltimore, Md., and Lansing.

So far this year, GM's Detroit-Hamtramck full-size car plant has been down five weeks and workers at the low-volume Lansing Craft Center, which builds the Chevrolet SSR, have been off a total of 10 weeks.

The two production lines at GM's Spring Hill, Tenn., Saturn plant have collectively been idled nine weeks this year. But Mike Herron, president of United Auto Workers Local 1853, which represents the workers there, isn't worried about the factory's future.

"While we had some downtime earlier this year, the downtime we've had has been the result of market conditions and ...all manufacturers were suffering from that in the first quarter," said Herron. "We believe we're in good shape."

Using Toyota Motor Co.'s manufacturing tenets as a benchmark, GM developed its Global Manufacturing System to improve quality and productivity.

In last year's Harbour Report on plant productivity, GM improved 5.2 percent, capping off six consecutive years of gains. GM assembly plants took four of the top five spots.

The company has also moved to more flexible manufacturing, which makes it possible to produce several different vehicles in the same plant, such as Lansing Grand River, which builds the Cadillac CTS, SRX and STS on the same assembly line.

IRN's Merkle said several older or under-used plants could be in jeopardy as GM takes advantage of its increased efficiency and flexibility.

"If there aren't any new products going in to those plants, they're going down to one shift and they're not making any investments in those plants, usually that puts up a red flag for us," said Merkle.

The outlook for plant closings could also hinge on how well GM's new line of full-size SUVs and pickups do once they begin arriving next year.

Such strides in productivity and flexibility are a mixed blessing however. The company can save money by producing several products in one factory, but it also means the automaker needs fewer plants, and therefore fewer employees

The result has been a glut of laid off workers receiving paychecks but not producing anything in return.

GM doesn't disclose the number of laid off workers, but Deutsche Bank estimates 12,000 workers are currently classified as temporarily laid off with another 3,500 in what's known as the jobs bank.

Hourly union workers placed on temporary laid-off status receive 95 percent of their take home pay. But after 48 weeks they are placed in the so-called jobs bank where they receive $52,000 per year in wages and benefits, until the current national contract expires in September 2007.

"Had GM been able to maintain market share that would not have been a mortal issue, but in a situation where it continues to lose market share, you don't have the flexibility," said Lance Ealey, automotive analyst for Cleveland, Ohio-based Freedonia Group, an industry research company.

GM's glut of factories is a concern for David Hollister, director of the Michigan Department of Labor and Economic Growth. The state has lost 23,000 manufacturing jobs this year.

"We shouldn't be stampeded into (GM's) gloom and doom, but I wouldn't be surprised if there are closings," said Hollister. "You don't have to be paralyzed -- you've got to be aggressive and proactive."

You can reach Ed Garsten at (313) 223-3217 or egarsten@detnews.com.