Thursday, July 21, 2005

Bizuayehu Tesfaye / Bloomberg News The employee discount sale helped reduce dealer inventories, but revenue from those cars and trucks had been accounted for earlier when the dealers ordered them.

GM vows to hasten cost cuts

Production cutbacks, material and health care costs result in $1.2 billion loss in North America.

By Ed Garsten / The Detroit News

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General Motors Corp. vowed to accelerate cost-cutting efforts and take advantage of low-cost parts production outside the United States after reporting a $1.2 billion second-quarter loss in North America.

The huge setback in GM's biggest market is another dose of bad news for the struggling automaker, intensifying the pressure on Chairman and CEO Rick Wagoner to implement an aggressive turnaround plan.

Wagoner and Chief Financial Officer John Devine promised to attack health care costs, excess manufacturing capacity and purchasing costs with new urgency, but analysts were downbeat.

"While we are not surprised by the fact that GM's North American results came in short of expectations, the magnitude of the miss was staggering," Deutsche Bank analyst Rod Lache wrote in a note to investors.

GM North America -- which has lost $2.5 billion this year -- gained little from blockbuster June sales fueled by employee discount pricing for all customers.

The automaker was able to reduce bloated vehicle inventories but is still feeling the effects of production cutbacks, slumping demand for large SUVs, rising material prices and runaway health care costs.

Overall, GM posted a $286 million second-quarter loss, including special items and a tax-rate adjustment -- the company's third consecutive quarterly loss.

Without the items, GM lost $318 million in the quarter, compared to a $1.4 billion profit during the March-June period a year ago. In addition, revenues sank to $48.5 billion from $49.3 billion last year.

GM declined to offer a forecast Wednesday for its third-quarter and full-year results.

The disappointing GM results came a day after Ford Motor Co. reported that its second-quarter earnings fell 19 percent, mainly because of a $907 million pretax loss in North American.

Investors, encouraged by strong June sales, had boosted the price of GM shares in recent weeks.

But the automaker's shares dipped as much as 4 percent Wednesday before rebounding to close down 45 cents, or 1.22 percent, at $36.38, on the disappointing earnings news.

GM has laid out a four-point plan to revive its flagging North American operations, but with little progress to date, some analysts and investors are losing patience.

The turnaround includes improving products and pricing, marketing, material cost reductions and cuts in health care spending. GM will cut about 25,000 hourly jobs and look to close an unspecified number of factories by 2008.

That timetable hasn't changed, but in a statement Wednesday, Wagoner signaled the company will step up the pace of cost-cutting.

"With the intense competitive conditions and pricing pressures continuing in the North American market," Wagoner said, "it's clear that we need to move faster in implementing the key cost reduction strategies that I outlined at our recent annual meeting."

The automaker has already moved up the start of production of a new line of large SUVs to December, and is optimistic new products such as the Hummer H3, Pontiac Solstice, Chevrolet HHR and Buick Lucerne will prove to be winners.

Where GM is losing ground is on health care.

GM estimates its health care costs will balloon to $5.6 billion this year, up from $5.2 billion in 2004, and is in talks with the United Auto Workers union to lower expenses.

Devine declined to characterize the progress or tone of the talks except to say the union was given data to illustrate the scope of GM's health care problem.

"The biggest impact we can have on our profitability is ... to get to a more competitive health care lineup than we have today," Devine said in a conference call. "It's a big number."

UAW President Ron Gettelfinger has indicated the union is not convinced the automaker is in dire straits.

GM revealed Tuesday it withdrew $1 billion from its Voluntary Employees' Beneficiary Association account during the second quarter, and $1 billion this month, to pay for retiree health care. The fund, created in 1997, had not been tapped since 2001.

Global Insight analyst George Magliano believes GM can't count on quick relief from the UAW.

"The problem is they can't do big cost-cutting measures until they renegotiate the union contract and get concessions," Magliano said.

"Internally, they have to accelerate cost-cutting measures -- staff, people and budgets, and things like that."

Cutting the cost of components has become an urgent priority and Devine was blunt in saying the automaker will buy parts from suppliers who provide the best value, regardless of location.

"Our traditional footprint, Western Europe and the U.S.-North America, is no longer as competitive as it needs to be," Devine said. "It's a tough, competitive world we live in these days. It's forcing us to do some things we don't like and change some things we've done in the past."

Devine said GM wants to continue working with current suppliers, especially those who have expanded operations globally.

Mark Oline, an analyst with credit ratings agency Fitch Ratings, says GM's tough stand on purchasing parts at competitive prices is a reflection of the difficult operating environment for automakers. "Our expectations have been that the automakers consistently sought the cheapest suppliers wherever possible," Oline said. A key problem for GM, in addition to escalating health care costs, is an inability to earn money selling vehicles in North America, despite strong industry demand.

"GM makes cars and trucks that cannot sell for a profit, and that is not likely to change anytime soon," said University of Maryland business professor Peter Morici. "Without a radical change in strategy and leadership, losses will mount up, the company will run out of cash, and bondholders and banks will be left holding the bag."

While the employee discount helped reduce dealer inventories by 349,000 vehicles, revenue from the sales was accounted for earlier. Revenues are booked when GM ships vehicles to dealers rather than when consumers buy a new car or truck.

GM's North American market share rose to 27.9 percent in the second quarter, up from 26.7 percent last year, but its 2005 U.S. market share remains flat at 26.8 percent. Sales are up just 2.1 percent.

The employee discount program expires Aug. 1, and the automaker is planning to price many 2006 models closer to the actual amount consumers pay for vehicles.

Devine said prices will be lowered on about half of GM's 2006 product line, while some models will include more features.

While GM North America flounders, GM Europe is seeing the positive effects of a restructuring plan that consolidated factories, streamlined management and cut 12,000 jobs. The region generated earnings of $37 million in the quarter, its first quarterly profit in five years.

Last year, GM Europe lost $45 million in the second quarter.

GMAC, the automaker's financial unit, earned $816 million in the quarter, down from $846 million a year ago, hurt by lower earnings from its auto financing operations but buoyed by increased results in mortgage and insurance operations.

GM is hoping to separate GMAC's credit rating from its automotive operations. Despite GMAC's consistently strong performance, it is being dragged down by GM's overall credit ratings, which were lowered to noninvestment grade by several credit ratings agencies over the last few months.

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