GM's Slimmed-Down Economy Model


By David Welch Finally, a restructuring plan from General Motors (GM). After keeping Wall Street on edge for most of the year -- during which GM has lost $3.8 billion -- company Chairman and CEO G. Richard Wagoner Jr. said Nov. 21, that he will be closing 10 plants, cutting production at 2 others, and eliminating 30,000 factory jobs by the end of 2008.

The cuts could finally get GM's plant capacity in line with its sales and market share. But dragging GM's North American business back in the black will depend on how quickly Wagoner can get the union to agree to cut workers. He said in a press conference that he will be negotiating early buyouts with the United Auto Workers.

GM will be paying any idled workers who don't take retirement 75% of their pay. That alone stands to cost the ailing auto giant $500 million this year.

SHRUNKEN SHARE. It may still take some time to stanch the red ink, but the cuts appear to be a reversal of GM's strategy. Since 2001, Wagoner has relied on ever-growing incentives, low-profit sales to employees and rental fleets to keep plants running near full tilt. Now Wagoner says he will cut production deep enough to eventually max out his factories without some of those moves. Says Wagoner: "We're not relying on a plan to push low-quality sales in pursuit of 100% capacity use."

By the time Wagoner has closed or cut production at the dozen plants he has identified and eliminated all of the jobs, GM will be able to build 4.2 million cars and trucks. Add in about 400,000 cars GM gets from factories overseas and two plants jointly owned with Toyota (TM) and Suzuki, and the cuts would bring the company's North America-bound production to as low as 4.6 million vehicles, or about 23% market share. Today's share is running around 26%.

Wagoner says his plants could build more than that by adding a third shift if the market demands more. Company insiders say GM could even cut more deeply if market share continues to fall. Says Wagoner: "We are being conservative in our volume scenarios."

CORE MARKET. Getting production in line with sales is vital. One nasty consequence of deep discounts has been the destruction of the image of many of GM's brands.

Car buyers are conditioned to wait for a big sale. When GM offered employee prices on cars to everyone in June, its market share shot up to 32%. But without such a sweet deal, it again tumbled to 22% in October. (See BW Online, 11/3/05, "GM, Bracing for a Crash?").

This year, GM's sales finally dropped to a point at which the company cannot make money with its level of discounting. But analysts reckon that GM will get better pricing if it isn't trying to force feed cars on the market. "They will be selling to the people who actually like their cars and trucks," says Sean McAlinden, chief economist of the Center for Automotive Research in Ann Arbor, Mich.

IDLE HANDS. As far as profits go, there is still work to be done. Half of GM's 106,000 union workers can retire within two years. So, many of them are eligible to go. But they still may want buyouts to leave. McAlinden says the buyouts alone could cost GM $700 million in cash. Add in other restructuring charges and the costs to downsize could easily top $1 billion. Wagoner didn't put any numbers on restructuring.

But Wagoner has to get workers to retire, and fast. If not, he would be paying thousands more to do nothing. When GM lays off workers, they get sent to a jobs bank where they sit while the company finds something for them to do. GM has 5,000 workers there now.

Wagoner told Wall Street analysts he would like to get rid of the jobs bank, but he added that it's not realistic to think such a move will happen.

BIG STEP. He may have to spend his bargaining time getting deeper health care concessions. As Wagoner shrinks the company, he has to spread the company's massive retiree pension and health care costs over a smaller fleet of cars sold. That means he will have to go back to the union for deeper health care cuts than he got last month.

In November, the union agreed to pay larger premiums on retiree health care, saving GM $1 billion in cash annually. (See BW Online 10/17/05, "The UAW's Jump-Start for GM").

Wagoner could demand more health care cuts in 2007, when the current labor pact expires. But he may have to go back the UAW even sooner, McAlinden says: Wagoner has taken a huge step toward fixing his troubled company, but his work is far from over.

Welch is BusinessWeek's Detroit bureau chief


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