More Big Cuts: Can GM Hang On?

July 15, 2008

Barely a month after announcing massive cuts, notably on the truck side of the business, General Motors today revealed a new plan aimed at coping with the "dramatic" rise in fuel prices and the steady downturn in the American auto market.

The numerous steps outlined by GM CEO Rick Wagoner at the ailing automaker's Detroit headquarters include further cuts in light truck production, a 20 percent reduction in white-collar costs - which will lead to the elimination of thousands of salaried jobs - the elimination of health care coverage for retirees over the age of 65, and other steps meant to save $10 billion by the end of 2009.

GM will meanwhile attempt to line up additional capital worth about $5 billion, though that may require borrowing against real estate and other assets, including stock in its generally more profitable overseas subsidiaries.

On the positive side, Wagoner and other senior GM managers insisted that they have "protected" the company's product program. That doesn't mean it will be business as usual in GM's design and engineering studios, however. After years of building up its portfolio of pickups, SUVs, and other light trucks, GM will put the focus on small cars, crossovers, and "green" technology so that the company's lineup, said "car czar" Bob Lutz, will soon look "more European...than ever before in our history."

But for now, GM has to make sure it has a history, and Wagoner told GM employees that, "Our goal is not just to change GM's bottom line from red to black, but to change GM for the long-haul."

The hastily announced news conference reflects the speed at which things in the auto industry have been changing. Barely a month ago, GM felt that the previous cuts it had announced would hold things over. But last month, the automaker suffered a sharp downturn in overall sales - as did virtually all manufacturers, including Asian giant Toyota. From an annual peak of more than 17 million vehicles earlier this decade, the annualized rate of sales in June tumbled to just 13.6 million. While most observers expect some rebound, GM's latest planning is based on the likelihood that oil will remain in the $150-a-barrel range and that U.S. car sales will linger around 14 million through the end of 2009.

Most of that decline has come in the light truck column. If anything, noted Wagoner's second-in-command, Fritz Henderson, there's actually a shortage of the smaller, fuel-efficient passenger cars that are suddenly in vogue.

A significant element in the latest turnaround plan is the elimination of another 150,000 units of light truck capacity. On top of that, GM will speed up the elimination of 150,000 units of truck capacity originally announced in June.

Such cuts will likely lead to further job losses on the hourly side of the GM workforce, though company officials declined to go into specifics. They've already completed nearly 20,000 union buyouts since the beginning of the year.

What's also unclear is precisely how many salaried jobs will be lost, though the ultimate figure is likely to reflect the planned, 20 percent reduction in white-collar costs. That's even more severe than the 15 percent cut announced earlier this year by Ford Motor Co. Wagoner said he believes that "most" or all the latest cuts can be achieved through voluntary buyouts.

Many of these announcements had been anticipated, but one of the big surprises came with news GM would phase out health care for retirees over 65, who would be eligible for government medical coverage. The septuagenarian Lutz noted that GM will increase salaried worker pension payments to help offset some of the added medical costs, though it is clear retirees will have to reach into their own pockets for some new costs.

Several other questions remained unanswered during the Tuesday news conference. GM officials declined to update what will happen with the moribund Hummer brand, an icon of the automaker's long focus on big, fuel-guzzling trucks. Last month, the company said it would consist options including the sale or closure of Hummer, but while Wagoner noted there has been "a lot of interest," he declined to offer any other news.

Hoping to put a more positive spin on the Tuesday morning news, GM officials gave reporters a taste of some future product programs, starting with the Chevrolet Cruze, which will replace the division's current compact sedan, the Cobalt, starting in 2010. According to Lutz, Cruze will be offered with a new, turbocharged I-4 engine that will boost its mileage by as much as 9 mpg. That, the company hopes, will make it, by far, the most fuel-efficient nonhybrid model in its class.

The automaker also showed the CTS Sportwagon, a Euro-styled version of the popular Cadillac CTS sedan. And it announced formal approval of the sporty CTS Coupe, which will reach market by the summer of 2009.

There has been some speculation that the U.S. market should revert back to a more truck-based model, should gasoline prices drop much below $4 a gallon. But Henderson said that the shift to small cars and downsized crossover vehicles should be seen as "being permanent."

Lutz stressed that a critical goal of the latest turnaround plan is to "safeguard" GM's product development program. Without new models, he emphasized, there's no way to recover. But the products of the future will be markedly different from what customers have come to expect. Significantly, 11 of 13 new products launching this year will be either passenger cars or crossovers, with those higher-mileage designs accounting for 18 of 19 products coming next year.

Skeptics have raised concerns about this paradigm shift. Over the years, General Motors has struggled to make money on passenger cars, especially going up against the likes of Toyota and Honda, who dominate the sedan market these days.

But there have been positive signs, including the strong demand for the Cadillac CTS and the sold-out Chevrolet Malibu. Notably, the average transaction price - what customers actually pay, as opposed to sticker price - has gone up $4,000 on the Chevy, this year, and $8,000 for the Caddy sedan.

Consumers are willing to pay significantly more for desirable small cars, in Europe, noted Lutz, as there's less of a link between size and price. As the American market evolves to a more European model here, GM is betting the same shift in pricing will take place.

Looking at the harsh cuts he'd approved, CEO Wagoner insisted, "Our plan is not a plan to survive. It is a plan to win." The question is whether consumers and investors will prove anywhere near as optimistic.

GM stock, which had fallen to another low on Monday, began the day with a modest rebound, but then started to slip once more. But Lutz downplayed the ongoing rumors of a GM bankruptcy. Noting he has survived numerous such rumors during a more than 50-year industry career, he suggested that analysts forget that "car companies don't die that fast."

As for consumers, their views will become visible as industry observers tally sales numbers for July and the months to come.

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