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Can GM Stop Blowing Cash?


Many a company would be happy to have as much cash on hand as General Motors Corp. (). At the end of September, the Detroit giant had more than $19 billion in its coffers. So why are investors getting edgy about the company's nest egg? The cash pile in GM's auto division was in excess of $29 billion back in September, 2003 -- meaning that the company burned more than $10 billion in two years as weak sales fell short of covering rising costs for health care, commodities, and furloughed workers. And GM could consign a further $6 billion to the flames by the end of next year, estimates bond analyst Kip D. Penniman Jr. of KDP Investment Advisors Inc.

GM seems to be getting the message. The talk behind closed doors is now about scaling back budgets for new models, reducing payrolls by tens of thousands, and shutting factories. In meetings the first week of November with executives at the troubled North American auto division, Chairman and CEO G. Richard Wagoner Jr. said they must dramatically cut spending. He is even scrutinizing new models intended to drive sales three years from now. Publicly, Wagoner has already committed to announce in December a series of plant closings and to give more detail on how he will eliminate more than 25,000 of its 110,000 auto jobs.

But making those cuts costs money, too. Downsizing figures are tough to calculate, but analysts say early pension buyouts and employee relocation costs could add up to as much as $2 billion. And if cash gets too tight, cutting product budgets could make it tougher to spark a sales turnaround. Plus, if current talks between the United Auto Workers and bankrupt parts-maker Delphi Corp. () -- GM's biggest supplier -- end up in a strike, GM could be shut down. Goldman Sachs Group () analyst Robert Barry estimates that a strike shutting down GM would cost the auto maker $2 billion a month. Also, GM may have to cut a pricey deal with Delphi or the union to head off a strike.

THE LAST CROWN JEWEL

For its part, GM is clearly in restructuring mode. But Wall Street wants to see GM and the union cut more deeply than they have in the past. Both sides have long resisted an overhaul, hoping future market share gains and GM's 5% annual attrition rate would match plant capacity with car sales.

Temptation to stall again could come when GM sells 51% of its financing division, GMAC, as it promised to do on Oct. 17. The sale could yield as much as $12 billion in cash. But GMAC is GM's last crown jewel and has delivered $1.5 billion in cash dividends to the auto division so far this year. Some analysts worry that the GMAC sell-off will reduce the pressure on executives to undergo a major restructuring that would deliver profits even if sales continue to fall in coming years. "If they don't seize the opportunity and do major restructuring, they're going to look up two or three years from now and be close to being out of cash," says Shelly Lombard, a senior credit analyst at Gimme Credit Publications.

Radical restructuring won't be easy for a company that is genetically engineered to maintain its size and market share at nearly any cost. Union contracts thwart plant closings and all but prohibit firing of factory hands, who get paid at least 75% of their wages when furloughed. To date, GM has cut factory jobs only by retiring workers after 30 years of service. Right now, GM's 5,000 idled U.S. workers are costing Wagoner $500 million a year in cash. Wagoner did make a small first step in October by securing an agreement from the UAW to slash $1 billion a year in staff health-care outlays. "The health-care cuts help," Wagoner said in an October interview with BusinessWeek. "But we don't have a one-point turnaround plan."

More cuts are now in the cards. Wagoner has told Wall Street that he intends to have manufacturing capacity reduced so that it matches demand by 2008 "if not sooner." The cuts could come with Wagoner starting to ax capacity by at least 600,000 vehicles next year. Three assembly facilities that are already idled -- an SUV plant in Linden, N.J.; a van plant in Baltimore; and a midsize-car plant in Lansing, Mich. -- could be first. Other assembly facilities may also go -- possibly a truck plant in either Janesville, Wis., or Pontiac, Mich. Another SUV factory in Oklahoma City and a minivan plant in Doraville, Ga., are at risk, too. GM may also discontinue a couple others that make engines or steel body panels. If Wagoner closes five factories, GM would have the capacity to make only around 4.7 million vehicles a year. Should sales continue to fall, more factories could be shuttered later, says one company source.

With less capacity, GM could start to douse the cash fire. It would no longer have to force-feed the market so much. It could cut back on discounting its models, thus earning better net prices. The company fetches net revenue per vehicle of $21,000 -- about $3,500 less than Toyota Motor Corp. (), according to Harbour Consulting Inc. in Troy, Mich. "If something is relatively scarce, you can get a better price," says Sanford C. Bernstein analyst Brian Johnson.

Some investors fear that GM and the UAW will stick with their bad old habits of keeping furloughed workers on the payroll when they close a plant, on the chance that another plant will be able to use them. "Investors are worried that they will close plants but won't address the labor costs," says Goldman's Barry.

GM is wise to make some deep cuts while it has the cash to get it done. As one shareholder puts it: "The bad news is, GM has a lot of problems. The good news is, they have the cash and liquidity to fix it."

By David Welch and David Henry


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