GM: Unrealistic Expectations

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Cutting Labor Costs

GM needs to make further cuts to its labor costs to satisfy the original qualifications set in place by the Bush Administration. Right now, GM's costs are $77 an hour versus $48 an hour including benefits at foreign-owned plants in the U.S. But about $18 an hour goes to retirees.

A source close to GM's planning says the company wanted wage and benefits concessions from the union. The UAW already agreed that new hires will make $14 an hour in wages compared with $28 for veteran workers. The source said that GM was also trying to cut wages and health-care benefits for veteran workers. That complicated talks. GM also wants to get more flexible work rules in the plants and to cut the number of skilled tradesmen, like electricians and plumbers, who make more than $30 an hour. GM's Wagoner wouldn't give details, except to say that "We came into this with very ambitious targets. This will take a big bite out of our labor costs."

GM did say it will close five more factories globally on top of the nine that the company has already announced. A total of 47,000 jobs have been eliminated worldwide this year.

There's another possible pitfall for GM. The company said its pension plan was significantly underfunded at the end of 2008. The company could have to plow more cash into the pension plan in 2012 or 2013 if the stock market doesn't rebound. That could further hit GM's balance sheet.

Chrysler said it reached agreement with the United Auto Workers on work rules and wage concessions that meet the criteria of Treasury, putting its employees at parity with U.S. workers assembling vehicles for foreign automakers like Toyota (TM) and Honda (HMC).

Sales Predictions

Perhaps the biggest wild card for GM, Chrysler, and Ford (F), which has not asked for government assistance, is how low auto sales will remain and for how long. Chrysler, perhaps to shock legislators and Treasury into funding the restructuring plan, projects sales this year of 10.1 million units, and a moribund average selling rate for the industry of 10.8 million units between 2010 and 2012. GM thinks it will be much higher, ranging between 11.5 million vehicles and 14.3 million vehicles in 2010 and from 14.5 million to 17.5 million in 2012.

If sales are on the high end of GM's plan, the company would pay back its government debt by 2014. If sales stay on the low side of GM's projections, the company would still owe Uncle Sam $30 billion in 2014.

GM's plan has a rosier sales outlook that Chrysler's. Jeremy Anwyl, CEO of Edmunds.com, a Web site tracking auto sales pricing and data, says it's safer to use GM's lower sales estimates. He thinks sales will be in the range of 12 million to 13 million vehicles in the U.S. over the next couple of years. But in a few more years, 16 million cars and trucks isn't a crazy idea, he says. "Everyone wants to know if they will be back for more, and that depends on auto sales," Anwyl says. "I have to believe that 15 million or more is the industry's average."

The High Cost of Bankruptcy

If the government doesn't support the two companies they both could end up in bankruptcy. GM executives maintain that bankruptcy is their last option and could result in liquidation. In its report to Treasury, the company says that bankruptcy would cost the government more in loan support since banks are doing very little debtor-in-possession financing for bankrupt companies.

GM says a quick bankruptcy, or a prepackaged bankruptcy in which terms are agreed with the union and creditors before filing with the court, would require $36 billion in government funding. On the long end, a traditional Chapter 11 bankruptcy would require between $71 billion and $86 billion in government loans.