General Motor Corp’s chairman and CEO, Rick Wagoner, probably has the worst to-do list in corporate America. Keep the world’s largest automobile manufacturer out of bankruptcy, make unions agree to axe workers’ benefits, sell off the family jewels (in the shape of GMAC) and keep billionaire Kirk Kerkorian happy. And last but not definitely not least, make GM cars competitive against Japanese rivals in the US.
In the wake of worse-than-expected, third-quarter results, GM announced that it would axe 30,000 of its 173,000 manufacturing jobs and shut 12 facilities by 2008. This enraged unions with the United Auto Workers vowing that future negotiations with the GM management would be jeopardized if the company went ahead with its plan.
However GM is running out of options. The company lost nearly $4bn in the first nine months of 2005. GM hopes to cut its annual $42-bn operational costs by $7bn by shutting down plants and cutting worker health care benefits. This will help GM which may have to shoulder up to $12-bn of liabilities from bankrupt components giant Delphi.
Investors have getting increasingly restive. In 2005, a lawsuit was brought against GM naming Wagoner and chief financial officer John Devine among other defendants, accusing them of misleading investors on GM’s finances before its dismal first quarter results this fiscal year. The case covers the period February 25, 2002 to March 16, 2005, during which period GM issued more than $18-bn in shares, bonds and other debt instruments. The suit alleges the company’s debt ratings were materially inflated by defendants’ materially false and misleading statements and omissions.”
Healthy again?
GM has sought to put to rest rumors that it may file for bankruptcy protection. In November, Wagoner shot off an email to GM employees that said: “I’d like to set the record straight here and now. There is absolutely no plan, strategy or intention for GM to file bankruptcy.”
The company also cites an agreement hammered out with unions to cut worker benefits. Its deal with the UAW seeks to cut healthcare benefits to its 111,000 blue-collar workers in the US. Union bosses have in principle, agreed to increase workers’ healthcare contributions from the current 7%. GM’s salaried employees pay 32% of their healthcare.
GM’s annual healthcare bill will be cut by $6bn – GM pays healthcare benefits for an estimated 750,000 workers, retirees and dependents. Over all, the company expects to cut its benefits liabilities by $80bn over a decade. This is what Wagoner had hoped to achieve. GM has repeatedly said that each car it sells in the US carries $1,500 legacy costs.
Cost-cutting the GM way
Apart from cutting worker benefits, GM is working on schemes to cut component costs. Under a three-year scheme, GM hopes to slash raw material costs by $2bn annually. Suppliers have been asked to relocate manufacturing to cheaper locations.
This is not GM’s first such scheme. Three years ago, it launched its 20/3 program, which sought to cut component prices by 20% in three years. Suppliers were asked to give GM products for a 20% discount. However this scheme did not meet targets. GM spokesman Thomas Hill, admitted to the Detroit News that, while the program had brought a ‘great deal of savings’ to GM, it fell short of a 20% savings .
GM also hopes to cut structural costs by $5bn by end-2006. This includes 25,000 lay-offs. “We will do our best to minimize the impact on each of you and your families. We hope you will understand that, with these difficult actions, we will help to ensure a viable and growing GM for the future,” said Wagoner, speaking to AP, earlier this year.
The company has also sought to sooth the jangled nerves of suppliers by promising that suppliers that stick to the company, will be rewarded. In his keynote address to the Original Equipment Suppliers Association, Bo Andersson, GM’s vice-president, purchasing, said that GM’s line-up for 2006 would definitely boost the company’s outlook.
GM’s future?
While GM concentrates on getting costs under control, a more immediate concern is, how will it recover market share in North America? GM’s market-share has slipped from 28.1% five years ago to 26.6% today. It sold 7.2% fewer vehicles in the third quarter. GM mainly lost out to Japanese rivals, Toyota, Honda and Nissan.
Auto analysts have repeatedly pointed out that GM needs to spiff up its product line. GM is launching its hybrid vehicles later next year, which will finally give it a toe-hold in a market currently dominated by Toyota and Honda. The company’s other future offerings, including the redesigned large SUVs Chevy Tahoe and Cadillac Escalade, face uncertain customer feedback in the wake of rising gas prices and a sales slump among large SUVs.
However, GM is likely to succeed with its new versions of the Chevrolet and Saturn. These are expected to hit the market in two or three years time. “For GM the scary ride is just beginning, and much has to still go right,” said Glenn Reynolds, a capital structure analyst in a CreditSights report.
The predator
GM’s ride has just been made scarier with billionaire investor Kirk Kerkorian upping his stake in GM from 9.5% in April, to nearly 10% last week. Known for his Las Vegas casino, the MGM Mirage, Kerkorian is also famous for trying (unsuccessfully) to take over Chrysler in the 90’s. Today, his investment vehicle, Tracinda Corp, is seeking a seat on GM’s board.
This is likely to mean harsher restructuring and a sale of GM’s assets in order to improve dividend pay-outs to stockholders. GM has already put its finance arm, General Motors Acceptance Corp (GMAC), as well as its ambulance and fire engine manufacturing arms on the block. The sale of more than 50% of GMAC’s equity was expected to net $10-bn
.
Ranted an auto enthusiast in a blog: “Perhaps this is what Kirk Kerkorian has been waiting for” At 10 times 2004 earnings, GMAC might be worth some $30-bn (€25-bn). If that were paid out in dividends, Mr. Kerkorian could make a tidy profit on the $1 billion he has spent buying GM shares. All that would be left to sort out would be how to build and sell cars at a profit. But even if GM failed at that, Mr. Kerkorian might still be in the money.”
Not just the money
However that may be an unfair assessment of Kerkorian’s interest in GM. Because GM’s overseas operations are faring much better than its North American outfit. In China, GM’s vehicles have grabbed 10% of the market – this makes GM number two after Volkswagen in the country. Here, its Japanese rivals, Toyota, Honda and Nissan are trailing GM.
GM’s Asian operations posted a profit of $60m in the first quarter, which while lower than the $275m profits it made in last year’s first quarter, are a decline GM attributed mainly to lower earnings in China and Japan.
Similarly in India, where GM has had a presence since the mid-90’s, the company hopes to get a 10% market-share by 2010. To do this, GM will need to increase its sales figure five-fold from the current 50,000 vehicles. GM plans to introduce a mini-car in the price-conscious Indian market and use its manufacturing facilities in the country as a hub for exports. And, in South Africa, GM is making inroads into the market, mainly with European Opels and Japanese Suzuki and Isuzu models.
While both China and India are miniscule markets compared to the US, they are also tougher in that customers do not like paying too much for their cars. Which make these markets that much more difficult to break into – so far, GM does not seem to have done too badly in these countries.
GM will have to move faster both at home and overseas to tap into markets if it wants to keep out of bankruptcy courts. As the world’s largest automobile manufacturer, GM carries the weight of the US auto industry on its shoulders. If GM manages to turn around its business and make money, it will give the industry a reprieve. If not, the struggling industry will face more bleak times.
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