July 16, 2008

GM Hopes $15B Boost to Bottom Line Adds Stability

By Sharon Silke Carty and James R. Healey

DETROIT -- General Motors on Tuesday announced sweeping cost cuts and fundraising moves in an effort to quell rumors and speculation that bankruptcy is a serious threat for the automaker.

GM's plans will total about $15 billion -- enough, it said, to help it survive the current market downturn through 2010, by which time the market is expected to turn around.

"It is important to understand that what we're trying to do here is to have a plan that reacts to what is obviously an extremely adverse U.S. market," said GM CEO Rick Wagoner on a conference call. "We are focused on liquidity to make sure we have the resources we need to get through what is a tough period."

The moves include cutting salaried workers in the U.S. and Canada by voluntary means (but not ruling out layoffs), eliminating health care coverage for white-collar retirees, suspending the dividend on its common stock and slashing truck capacity. Also included are possible asset sales, including the Hummer brand, and tapping credit.

Publicly addressing the issue of financial health became seen as essential. Mere rumors could not only spook financial markets, but could seriously impair GM's ability to sell cars. A loss of confidence among customers, as well as its dealers, could do more damage to sales than what it has suffered from the rapid retreat of buyer demand from trucks and SUVs, GM's key product segments.

A Chapter 11 filing would be "absolutely devastating" to any of the automakers, said Jack Nerad, executive editorial director and market analyst for Kelley Blue Book's website.

Speculation about GM's future "is moving from a business story to a consumer story," he said. "If it does that, then it becomes another major concern among a laundry list of concerns the automakers have to deal with. They've had enough of a problem with the way the market has been going. This is the last thing they need as they're trying to maintain market share."

"Where they're getting hammered is in the fear of a bankruptcy," said David Cole, chairman of the Center for Automotive Research; this announcement said: "Don't sweat it. Through 2010, we're protected even with the worst-case scenario."

The idea that GM would file for bankruptcy took life in the past few weeks when a few Wall Street analysts began speculating that one of the Big Three domestic automakers would face a serious cash crunch in the near-term.

Auto sales have plummeted in the past few months, down 10.1% through the end of June. Pickups and SUVs, some of the most profitable vehicles the U.S. automakers produce, have been hardest hit, falling 23% and 14.6%, respectively, in the first six months.

Investors seemed to be taking a wait-and-see approach to GM's announcement . Shares closed up 46 cents, or 4.9%, to $9.84, after trading up and down all day. GM shares have been trading at levels not seen since the 1950s for the past few weeks. That's a far cry from its 52-week high of $43.20, reached on Oct. 12, and reflects a decline in GM's share price of 40% in the past month.

Trying to calm the waters

Investor reaction to bankruptcy rumors has been "hysteria in the last couple of weeks," Cole said.

"It's been a very unsettled financial market for a lot of reasons, not just GM," he said. "They had to deal with it. For any kind of product company, you've got to settle down your potential customers and dealers."

GM had no option but to spell out how they planned to deal with the market downturn, Cole said. But once sales start picking up again, he believes GM will be in a very good position because it will have cut the cost of producing each vehicle by $4,000 to $5,000. Plus, slow sales are creating "pent-up demand" for new cars, he said, which could lead to a strong rebound.

Others were not so positive.

"This may be the last gasp of GM before, and its last desperate hope to avoid, bankruptcy," said David Gregory, professor of labor law at St. John's University. "The real question is whether this restructuring cuts mortally into the bone of GM, and not simply to the bone."

If any of the automakers were to file for bankruptcy, their customer base could dry up immediately. Nerad said buyers would be concerned about the viability of warrantees and finding replacement parts in the future.

Plus, there's the psychological impact.

"People don't want to take any chances," he said. "People want to feel good about their purchase. You don't want any question in the mind of the consumer over the future of a brand."

Tuesday's moves to cut truck production further came just a month after the automaker said it would close four truck and SUV plants by the end of 2010. Sales of those large vehicles have plummeted this year, with steadily rising gas prices forcing consumers to rethink the kinds of cars they need.

GM also already announced it was postponing development of a next-generation truck platform to roll out in 2012. The company is plowing the money saved into developing smaller cars and crossovers.

Robert Lutz, vice chairman in charge of global product development, said the automaker has its eye on producing cars and trucks that have the best fuel efficiency of any vehicle in the segment.

Still, postponing replacements for current full-size pickups "is always a risk," Lutz told USA TODAY. "But we are very familiar with the new Dodge Ram and the new Ford F-150 (due out this fall), and in our view, our current truck (Chevrolet Silverado and GMC Sierra) is still better than those new ones, especially in fuel economy."

Some truck sales gone for good

But the market has changed, Lutz said, and he sees some of the changes as permanent: "The fashion element has gone out of pickup trucks. The urban cowboy or the woman who wants to make an emancipatory statement and drives a big pickup to work" no longer is buying.

The pickup has "gone back to work-truck status," Lutz said.

Ford has postponed the launch of its F-150 until November, but Chrysler still plans to launch its new Ram pickup in September. Meanwhile, Toyota has halted production of its recently redesigned Tundra pickup until late this year because of poor sales.

If the economy recovers and fuel prices drop, extra shifts at GM's remaining truck plants could meet rebounding demand, Lutz said. "If it goes back to trucks, by God we've got the capacity, and the V-8 engine capacity" to avoid missing the opportunity.

GM said it used the most conservative estimates it could in developing its cash-raising plan, planning on an overall U.S. market of 14 million vehicle sales this year and next. That's on the low side of what others see for the industry, with 2008 estimates of 14.5 million to 15 million, and about the same in 2009. And GM sees its market share shrinking by about a half-percentage point to 21%.

"Aside from the market share assumption, which seems a touch aggressive, all other assumptions underpinning GM's cash-savings measures seem reasonable," auto analyst Himanshu Patel at JPMorgan wrote in a note to clients.

Among moves announced Tuesday:

*Health care cost cuts. GM said it is eliminating salaried retiree health care, a move that could spark other companies to follow suit.

As of Jan. 1, 2009, health care coverage for retirees over 65 years old will disappear. In its place, the automaker will increase pensions to help offset the cost of Medicare and supplemental coverage.

Dave Osterndorf, a consultant at Towers Perrin who specializes in the auto industry, said that decision allows GM to tap into its pension pool, which is overfunded, to pay for health care.

*Eliminating the dividend on its shares immediately. Cutting out the dividend should add more than $800 million to GM's bottom line through 2009, the company said.

Cole said the company hesitated to cut the 25-cents-per-quarter dividend, after slashing it in half in 2006, because many investors are attracted to dividend-paying stocks.

But now that shares are below $10, it makes sense.

"The river is getting faster and wider, and they've got to do drastic things to get to the other side," he said.

*Strategic review. GM said it's looking at all of its global assets to see if it can sell off or monetize any. It expects to earn $4 billion in extra liquidity that way. Wagoner said Tuesday the company is already seeing interest in the Hummer brand, which it is considering selling.

The automaker will also raise $2 billion to $3 billion by borrowing, using some $20 billion in unencumbered assets as collateral.

In 2006, Ford Motor made a similar move by putting up nearly all of it assets, including the Blue Oval brand logo, to raise $23.5 billion. <>