Wednesday, June 8, 2005

Struggles at GM

Can cuts lift GM?

Jobs: 25,000 U.S. positions cut by 2008; Savings: $2.5B a year; Michigan: State will fight to retain jobs

By Ed Garsten / The Detroit News

Inside the revival plan GM CEO Rick Wagoner announced plans to cut 25,000 U.S. manufacturing jobs by 2008 as part of a four-point plan to resuscitate its North American operations. Here are the four aspects of the plan: Improve cars and trucks GM has overhauled its product development process and is spending more money to produce hit cars and trucks. The company also is pulling ahead the introduction of some key vehicles, including its new line of large SUVs. Under Vice Chairman Bob Lutz, GM also plans to focus on crossover vehicles, which combine car and SUV attributes. Overhaul sales and marketing GM says it wants to fundamentally change the way it sells cars and trucks through a series of moves. The new plan calls for mass-market Chevrolet and premium Cadillac to be GM's foundation brands. Saturn, Saab and Hummer will focus on targeted market niches. Pontiac and Buick will have fewer offerings. GM wants to pull back on incentives after years of offering the deepest discounts in the industry. The strategy is to price vehicles closer to the actual transaction price rather than offer huge cash rebates. GM also plans to load vehicles with more exclusive standard equipment. Improve sales in major metro markets. GM does well in small and medium markets, mostly in the Midwest, but struggles in major cities such as New York, Miami and San Francisco. Streamline retail operations. GM wants its dealers to sell several GM brands under one roof when possible. The company hopes to group GMC, Pontiac and Buick under the same ownership. Cost reduction After achieving significant cost savings in recent years, GM is intensifying efforts to become the world's most efficient automaker. GM is moving to a global purchasing system that takes advantage of production in low-cost countries such as China. In addition, GM is working to make plants leaner and more flexible in order to adjust to changing market demands. GM's goal is to use 100 percent of its factory capacity, up from 86 percent last year. Health care costs GM's health care costs amount to $1,500 per vehicle in the United States, a huge disadvantage versus foreign automakers. The automaker pays health costs for 1.1 million people in the United States and is the nation's largest private insurer. GM is engaged in intense talks with the United Auto Workers about lowering health care costs. GM wants the UAW to renegotiate health care expenses before the current labor agreement expires, something that union leaders have said they don't intend to do. Why it's happening GM posted a $1.1 billion loss in the first quarter, and its U.S. market share has fallen to 25.4 percent from 27 percent a year ago. The company has $20 billion in cash and short-term investments, but Wagoner said the company's top priority is making its North American division profitable as quickly as possible. GM says the cutbacks should generate annual savings of roughly $2.5 billion. Impact On Michigan GM's continued cutbacks are bad news for Michigan's ailing economy. The state already boasts the highest unemployment in the nation. In the past, huge GM restructuring actions have devastated areas such as Flint. The automaker has not said how many of the 25,000 job cuts will come from Michigan, where it employs 50,000 factory workers. On workers While GM has a huge number of factory employees nearing retirement age, the cutbacks will still have a major impact on workers. Several plants will be shuttered, which means workers will be laid off or transferred. What's next GM won't yet say which plants are targeted for closure. The job cuts likely will be part of negotiations between the company and the United Auto Workers union. GM's contract with the union expires in 2007. Road to recovery? Will reducing its workforce by 25,000, closing some factories and paring product lines put GM on the right track? Yes No, the cuts aren't enough No, it's not the right approach Get results and comments Error processing SSI file Comment on this story Send this story to a friend Get Home Delivery

WILMINGTON, Del. -- Under intense pressure to deliver a turnaround plan, General Motors Corp. said Tuesday that it will dramatically downsize its North American operations by closing factories and slashing at least 25,000 manufacturing jobs in the United States by 2008.

The cuts outlined by GM Chairman and CEO Rick Wagoner at the automaker's annual shareholder meeting will save $2.5 billion a year but mark another sign of GM's waning industrial might.

Wagoner also put the United Auto Workers on notice that GM is committed to reducing soaring health care costs, calling on union leaders to cooperate in "addressing a huge risk to our collective futures."

The stakes are huge -- for Wagoner, for GM, for the UAW and for Michigan, which is reeling from a steady loss of manufacturing jobs, high unemployment and one of the slowest rates of job creation in the nation. GM's promised plant closings are likely to hit Michigan and its tax revenue hard.

The cuts mirror recent restructurings at Ford Motor Co. and DaimlerChrysler AG's Chrysler Group, but some investors question whether they are deep enough to restore GM, which has become a symbol of the U.S. auto industry's decline.

"Is GM going the way of some airlines or will it reinvent itself?" said Maryann Keller, a consultant and longtime GM watcher.

"The latest moves don't solve the problems. It takes great product to get momentum back. It can be done -- look at Hyundai and Nissan," Keller said.

Some analysts also noted that the cuts represent only a slight increase in the company's job-reduction pace in recent years.

Wagoner detailed a four-point plan to overhaul GM to applause from many of the nearly 200 shareholders who jammed a ballroom and a overflow room at the Hotel DuPont in Wilmington. His plan calls for improving car and truck development, reducing employee health care costs, intensifying cost cuts and revamping the marketing strategy for its eight U.S. brands.

Wagoner emphasized the urgent need to fix GM's bludgeoned North American operations. GM North America lost $1.3 billion in the first quarter of this year, contributing to the company's overall $1.1 billion loss -- its worst quarterly performance since 1992.

The losses sparked a widespread recognition that the once-mighty automaker was in crisis. GM is losing U.S. market share, its credit rating has been lowered to junk-bond status by key agencies and the management refuses to estimate its full-year financial results.

Investment firm Morgan Stanley now estimates GM's pre-tax losses could total $4 billion in North America this year. What's worse, GM has begun burning cash -- an estimated $2 billion this year.

GM shares and bonds have taken a beating on Wall Street and its market value is now just one-seventh that of Japanese rival Toyota Motor Corp., the world's second-largest automaker after overtaking Ford.

Amid the turmoil, GM has intensified talks with the UAW aimed at cutting the automaker's $5.6 billion annual health care bill before the national contract expires in September 2007. UAW President Ron Gettelfinger, though, has said the union has no plans to open the contract.

"We have not reached an agreement at this time, and, to be honest, I'm not 100-percent certain that we will," Wagoner said. "If we can't do that we'll have to consider our other options."

What those options may be is unclear. UAW Vice President Dick Shoemaker, head of the union's GM department, said the union "is not convinced that GM can simply shrink its way out of its current problems."

"What's needed is an intense focus on rebuilding GM's U.S. market share, and the way to get there is by offering the right product mix of vehicles with world-class design and quality," he said in a statement.

The job cuts would come from GM's 111,000 U.S. hourly workers, which include 50,000 in Michigan, Wagoner told reporters at a news conference after the meeting. The 25,000 positions comprise 23 percent of GM's U.S. factory workers.

That's discouraging news for Michigan Gov. Jennifer Granholm, who said Tuesday that she would fight to retain jobs in the state.

GM said most of the job cuts would come through attrition, but early retirement packages and other actions might be necessary.

The company did not specify which plants it would close or when.

In recent months, GM has mothballed assembly plants in Baltimore and Lansing, and ended production at a Linden, N.J., assembly plant. Laid-off workers from those plants who eventually retire will make up part of the 25,000 jobs to be eliminated, Wagoner said.

"This is a necessary first step signaling there is more to come," said Jim McTevia, chairman of Detroit turnaround firm McTevia and Associates. "They may not get enough people to leave through attrition, though, and layoffs will end up costing the company money."

GM's goal is to have all its plants producing cars and trucks at optimal levels. The automaker used 85 percent of its manufacturing capacity in 2004. It is on track to reduce its annual manufacturing capacity to 5 million units by the end of this year from 6 million in 2002.

GM is saddled with excess capacity because its market share has shrunk, to 25.4 percent in the first five months of the year, with May sales down 6.7 percent.

Employee and retiree health care cost GM $1,500 for every vehicle it produces and Wagoner estimated a more acceptable figure might be about $1,000.

The company is placing more emphasis on large metropolitan markets where its products do poorly, namely Miami, New York, Washington, D.C., and Los Angeles. It is also raising its capital spending by about $1 billion this year and will continue that spending level into 2006 to better finance new product development.

"Their market share is not in line with its size," said Brett Smith, senior industry analyst with Ann Arbor-based Center for Automotive Research. "It suggests GM isn't done shrinking yet."

The company is hoping to clear many of the 1.2 million unsold cars and trucks sitting on dealer lots by extending to all customers the discount generally reserved for GM employees and their families. The offer is good through July 5.

But GM hopes to wean the public off costly big cash rebates in favor of moving vehicle pricing closer to the amount customers pay, including discounts.

The automaker also realizes it is no longer wise to continue its long-held practice of producing every type of vehicle for each of its eight brands.

Under a plan promoted by Mark LaNeve, vice president North America vehicle sales, service and marketing, Chevrolet and Cadillac will become "foundational" brands with a full line of cars and trucks. Buick and Pontiac will see their product lines trimmed, while GMC, Hummer, Saturn and Saab will be more focused specialty brands.

Pontiac, Buick and GMC are also being converted into a single sales "channel" where all three brands will be sold together in dealerships.

GM's advertising agencies are also on notice that their piece of the automaker's multibillion-dollar ad budget is contingent on their ability to coax consumers into showrooms and drive off with a car or truck.

Wagoner said GM has not been asked by Delphi Corp. and has no plans to engage in the type of bailout arrangement between Ford Motor Co. and its financially strapped former subsidiary Visteon Corp. GM spun off auto parts maker Delphi in 1999.

"The circumstances are completely different," said Wagoner. "We have a good spirit of cooperation. We want Delphi to be successful."

He pointed out GM and Delphi have an arrangement whereby UAW-represented Delphi workers may be eligible for any positions that open at GM facilities.

Wagoner said GM is assessing "strategic options" for its profitable GMAC finance arm. He said the GMAC is under pressure because the recent credit ratings downgrades.

Unlike the staid and predictable annual meetings of the past, this year's came as GM faces its deepest problems in more than a decade. Some shareholders sharply criticized Wagoner; others expressed confidence in the company's leadership.

Flint car salesman Jim Dollinger called for Wagoner's resignation, saying "this company is sick," as he promoted his plan for improving GM's performance.

Activist shareholder Evelyn Y. Davis of Washington, D.C., took the board to task for taking a neutral stand on billionaire Kirk Kerkorian's move to buy enough GM shares to make him the company's third biggest shareholder. "Kerkorian is a common enemy," shouted Davis.

Kerkorian's tender offer was scheduled to expire at the close of business Tuesday. Kerkorian's investment arm, Tracinda, is expected to update investors on its tender offer today.

GM shares closed up 31 cents at $30.73, just under Tracinda's $31 offer.

The biggest show of support for the automaker came from Detroit social worker Jane Garcia who said: "We as shareholders need to hold our own families accountable and make sure they buy GM cars."

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