GM: Spreading the Pain to Raise Cash, Get Lean
July 15, 2008

By Michelle Krebs

DETROIT -- General Motors' plan to generate $15 billion in cash through year-end 2009  in order to get through this major restructuring of the U.S. auto market spreads the pain across all of the automaker's constituents: salaried and hourly workers; retirees; shareholders and even executives.

"Today's actions, combined with those of the past several years, position us not only to survive this tough period in the U.S., but to come out of it as a lean, strong and successful company," Wagoner said in conference calls with employees, media, Wall Street analysts and investors.

Highlights of GM's plan include:

· cutting another 150,000 units of truck and SUV capacity and speeding up the elimination of another 150,000 units by closing the four plants that was previously announced. GM also will cut capacity of associated V8 engines and other parts;

· slashing salaried costs by 20 percent, which includes elimination of jobs as well as pay raises and bonuses;

· eliminate health care coverage for salaried retirees at age 65 when they are eligible for government health care coverage;

· immediately suspend the dividend;

· borrow $2 billion to $3 billion;

. sell or monetize assets.

 

Bracing for the Worst

Only six weeks ago, GM announced a restructuring plan that included the closure of four plants that make large trucks and SUVs, a strategic review of the Hummer brand, approved funding for the Chevrolet Volt extended-range vehicle and the addition of third shifts at U.S. plants that make popular small and mid-size cars like the Chevrolet Malibu and Pontiac G6.

But on Tuesday, executives said the U.S. vehicle market deteriorated so dramatically in the last six weeks that they were forced to have another go at it.

The question now: does this latest plan go far enough? GM execs seem to think so. In conference calls with employees, shareholders, Wall Street analysts and the media Tuesday, GM CEO Rick Wagoner said the newest scheme to generate $15 billion in cash should provide the automaker with "ample liquidity" to weather the storm for the next 18 months.

However, even Wagoner admitted the structural change in the U.S. automotive landscape has been more dramatic than anticipated. "`Since the first of this year, our progress has been threatened as U.S. economic conditions that have become increasingly more difficult,'' Wagoner said on a conference call. "`We are having a tough time getting clarity in our crystal ball.''

This time, it appears GM has planned for the worst. In developing the plan revealed Tuesday, GM assumed U.S. vehicle sales would be a dismal 14 million light vehicles in 2008 and the same number in 2009, a significantly lower forecast than virtually any out there. Edmunds.com, parent of AutoObserver, downgraded its forecast for 2008 to 14.9 million vehicles in 2008. Other forecasts are somewhat lower at 14.5 million but none are as low as 14 million.

GM's plan further assumes oil at $130 to $150 a barrel through 2009. Oil tumbled $6 a barrel at $138 Tuesday on fears that a slowing U.S. economy would result in lower demand.

GM further assumes, for planning purposes, its U.S. market share at 21 percent, which is roughly where it has been of late but GM's assumption could ultimately be on the high side.

Even Fewer Trucks

The rapid and dramatic shift away from trucks and SUVs to smaller cars and crossovers with fuel-efficient engines is a permanent, structural change in the American automobile industry, GM believes.

In fact, GM's forecast detailed on Tuesday showed the truck, SUV and commercial truck market has dropped from 17.3 percent of all sales in 2006 to an expected 12.7 percent in 2008 and 12.3 percent in 2009.

Broken down, the large and luxury SUV segment was 4 percent of U.S. industry sales in 2006, slipped to 3.9 percent in 2007 and is falling to 2.7 percent in 2008 and 2.3 percent in 2009. The "discretionary" large-pickup market was 3 percent of the market in 2006, slipped to 2.7 percent in 2007 and falls to 1 percent in 2008 and 2009. The commercial truck portion was at 10.3 percent in 2006, 10.6 percent in 2007 and is expected to dip to 9 percent in 2008 and 2009.

To that end, GM will cut even more production of trucks, SUVs and associated parts and V8 engines.

In total, between now and the end of 2009, GM will slash truck and SUV production by 300,000 units a year, dropping GM's total annual truck capacity to 3.4 million units.

Half of that amount already was announced by Wagoner at the GM shareholder meeting in June. They are a truck plant in Oshawa, Ontario, an SUV plant in Moraine, Ohio, a Janesville, Wis., plant that makes medium-duty trucks and SUVs, and a medium-duty truck line in Toluca, Mexico. Those plants were to be closed between year-end 2008 and 2010. However, GM will accelerate their closure.

GM will cut an additional 150,000 units at plants that weren't named in Tuesday's announcement. GM makes trucks in Pontiac and Flint, Mich., at plants that have had extended summer vacations. GM also has a truck plant in Fort Wayne, Ind.

GM believes the reduction in truck assembly and related capacity will save the automaker $2.5 billion.

Cutting Development Spending on Trucks, SUVs

GM will cut capital spending by $1.5 billion from its previous plan. GM now plans to spend $7 billion in 2009 instead of $8.5 billion and about the same amount beyond 2009. The bulk of the spending cut is due to the delay of the next-generation large pickup and full-size SUV program as well as V8 engine development for those vehicles.

What will be increased is powertrain spending - for the development of alternative propulsion systems, small-displacement engines and fuel-economy technologies.

While most of the cost cutting affects North America, GM also will reduce working capital by $2 billion in North America and Europe by getting leaner through reductions in inventory, from raw materials to finished goods.

Cutting Salaried, Retiree Costs

GM will cut the number of salaried jobs in the U.S. and Canada beginning this year, though the automaker did not say how many jobs would go away. Instead, GM said it would cut salaried costs by 20 percent.

The automaker said the job cuts will be achieved through normal attrition as well as early retirement and buyouts, which GM hasn't offered in the recent years.

Remaining U.S. and Canadian salaried employees will not receive pay raises in 2008 and 2009.

Executives will receive no  cash bonuses in 2008. GM predicts its top executives will see a 75 to 84 percent reduction in their cash compensation.

As of Jan. 1, 2009, GM will no longer provide health-care coverage to retired salaried workers beyond age 65, when those retirees are eligible for Medicare coverage. In lieu of health care, GM will bump up pension payments for those workers to help offset, though admittedly not fully, the elimination of health-care coverage. GM will dip into its overfunded pensions to boost retiree payments.

Add up these changes and GM expects to cut 20 percent in salaried costs, or about $1.5 billion in 2009.

At the same time, GM will postpone $1.7 billion of payments that was to have gone into the newly established Voluntary Employee Benefit Association (VEBA), which shifts GM's legacy costs for hourly retiree health care to a union-run fund.

Shareholders Sacrifice Too

Effectively immediately, GM has suspended its dividend, an action taken by Ford long ago and not done by GM since 1922. That will save GM $800 million through 2009.

GM might as well cut the dividend. Its shareholders are already unhappy that the automaker's stock price has dropped to its lowest levels - below $10 a share -- since the early 1950s. Through Monday, GM shares had lost 87 percent since Wagoner became CEO in 2000; it has been the worst-performing stock among the 30-company Dow Jones Industrial Average over the past 12 months, according to Bloomberg News' analysis.

No Sacred Marketing, Engineering Cows

Another part of GM's plan is to reduce and consolidate sales and marketing budgets, while protecting advertising for newly launched models and brand advertising.

Troy Clarke, GM's North America president, said the majority of cuts are in "legacy" spending on events and in motorsports. "When we talk about legacy costs we think of pensions and retiree health-care costs," he said. "But it is fair to say in the 100 years in business, we have spending patterns in other parts of the company that are more legacy based on where we need to go."

Instead, look for GM to spend its marketing dollars the way it did on the successful product launches of the Chevrolet Malibu, Cadillac CTS and Pontiac Vibe. "Those are tutorials in how to target the customer and communicate effectively and economically with them."

Similarly, the often-sacred cow of engineering won't be spared either. Most vulnerable will be engineers and engineering resources tied to truck, SUV and V8 development. GM said it will hold engineering spending for 2008 and 2009 at 2006 and 2007 levels, which is substantially lower than originally planned, company executives said.

The cutbacks in engineering and marketing, combined with the expected benefits of GM's 2007 contract with the UAW, should save GM $6 billion to $7 billion by 2010, reducing its structural costs up to$ 27 billion.

Selling Assets

GM, with outside advisors, is developing a list of assets that it could sell or monetize to raise an additional $4 to $7 billion.

Already, GM has said it is conducting a strategic review of the Hummer brand for possible sale. Wagoner and Lutz confirmed GM has received plenty of interest in the SUV brand.

"If we can sell it, we'd interested in doing that," said Lutz. "We're working with some financial institutions as intermediaries to see if perhaps the brand could be sold. We have had some expressions of interest. It's a great brand and in parts of world, Hummer demand continues unabated like in Russia and the Middle East where gas prices are not a concern. But it's not good business in the U.S."

GM execs wouldn't reveal what other assets might go, but it has been speculated GM's OnStar communications company, its Service Parts Operation, which sells aftermarket parts, and its remaining interest in General Motors Acceptance Corp. (Cerberus Capital Management which owns Chrysler holds the majority of GMAC) could be solf off.

What appears clear is that no other brands - at the moment - are under consideration for sale. Instead, GM execs said the brand focus is on profit improvement.

Borrowing Money vs. "Self Help"

In contrast to Ford, GM has adopted the "self-help" strategy - that is finding the cost savings from within. In late 2006, Ford put up nearly all of its collateral as part of a roughly $24-billion cash-raising effort. A number of analysts had predicted GM would borrow the $15 billion it needed to stay afloat in the next year or so.

In part, GM was forced to look within instead of borrowing money because of the disaster in today's credit markets, a situation that didn't exist when Ford borrowed only two years ago. If it is possible at all, borrowing money now is risky and expensive, noted GM executives. Instead, GM plans to borrow $2 billion to $3 billion when it is opportune to do so, and could borrow more if the credit markets become favorable.

GM claims it has $20 billion worth of assets it could borrow against, including stock in foreign subsidiaries, its brands, its stake in General Motors Acceptance Corp and its real estate holdings.

The Goal

GM's goal is to get to 2010 when the full financial benefits of the 2007 UAW contract kick in and the U.S. auto industry recovers - hopefully.

"It will return, but it will change," GM President Fritz Henderson told media and analysts in the conference call.

Indeed, GM's Lutz predicted the U.S. automotive landscape will more closely resemble that of Europe than it does of America of old -- smaller and more fuel efficient.

That's precisely GM's goal in its latest restructuring -- to become smaller and more efficient to take advantage of the upturn, whenever that occurs.

 "This is not a plan to survive," Wagoner told GM employees, media, analysts and investors Tuesday. "This is a plan to win."

PHOTOS:

1. Next-generation Chevrolet Equinox reflects GM's continuing move away from body-on-frame SUV architectures.

2. Next-generation fullsize Buick appears to retain traditional cues.

Posted by Michelle Krebs at 9:10 AM under Featured , GM | Comments (1) | digg this | Seed Newsvine

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