By David Welch
Maybe it was shadow of Delphi's (DPH ) bankruptcy that pushed the United Auto Workers to finally give General Motors (GM ) some help in its restructuring efforts. Or maybe it was billionaire investor Kirk Kerkorian lurking in the background. It could also have been the somber conclusion of GM's investment-banking firm Lazard Ltd., which told UAW leaders two months ago that GM was in real trouble (see BW Online, 8/31/05, "GM's Aches Are the UAW's Pains").
For all of those reasons and more, the UAW gave GM some relief on the huge health-care costs that have been choking the giant carmaker. GM announced on Oct. 17 that it has reached a deal with the union to cut its health-care cash outlays -- expected to be $5.6 billion this year -- by $1 billion a year. The deal is big because it'll drop $3 billion in pretax income a year to GM's bottom line. That's about $2.5 billion aftertax.
GM has agreed to terms with the union, but it will let UAW leaders propose the deal to its members for ratification in the coming days. "This is a huge move," says GM Chairman and CEO G. Richard Wagoner Jr. "It's $3 billion on an accounting basis, and the cash that comes with it is a big help as well."
Wagoner also announced that GM may sell a controlling stake in its General Motors Acceptance Corp. finance arm. The cash-cow lending business has long propped up GM's earnings -- even in years when the car business made money. But GM's credit rating has fallen to junk status, making borrowing costs -- and hence profits from loaning out the borrowed capital -- much thinner. A controlling interest in GMAC could fetch GM $12 billion, according to Sanford C. Bernstein analyst Brian Johnson. But that means the finance profits would be shared with the partner, putting the onus on GM management to get auto earnings climbing again.
The health-costs deal doesn't solve all of GM's problems, though. Also on Oct. 17, GM said it lost $2.1 billion in North America in the third quarter and $4.9 billion in North America year-to-date. In total, GM lost $1.6 billion in the quarter and $3.8 billion year-to-date (see BW, 3/17/05, "Running Out of Gas at GM"). While the agreement doesn't sop up all of the red ink, "it goes a long way," says Bernstein's Johnson. "This does show the union's willingness to deal with the industry's new realities."
While the tentative deal is with GM, it's almost certain that Ford (F ) and Chrysler (DCX ) will seek similar deals, though it remains to be seen if they can get it done like GM -- before their union contracts are renegotiated in 2006. Still, it's a stretch to think that Ford and Chrysler wouldn't reap the same benefit of UAW workers finally paying for health-care premiums.
"THE WAY OF DELPHI."
Ford overall is profitable, but it lost $907 million in North America in the second quarter, ended June 30. Through September, its market share fell to 17.7%, from 18.4% in the year-ago period. And since January, Ford's stock price has dropped from $14.71 to below $9. Chrysler's North American auto operations are profitable. Ford shares were up 5 cents, to $8.66, on Oct. 17, while DaimlerChrysler was up 76 cents, to $51.70.
Although the UAW hasn't yet delivered details of how its medical plans will change, local union leaders expect the cuts to be significant. "It must be big, says Oscar Bunch, president of UAW Local 14 in Toledo [Ohio]. "It's gotta be about job security. We don't want to go the way of Delphi."
Both GM execs and the union have been under pressure to deliver a deal. Delphi filed for bankruptcy on Oct. 9 for many of the same reasons GM needs concessions [see BW, 10/8/05, "Time and Patience Run Out at Delphi"). And all year, Kerkorian has been boosting his stake. He's an active investor who has seized control of companies in the past if he didn't think management was moving fast enough to solve the problems.
"WE HAVE THINGS GOING."
What's left to fix? GM still hasn't revealed the big, sweeping restructuring of its plants that Wall Street has been waiting for. It has 25% of the U.S. market, but it has production capacity to build for much more. GM also must contend with falling revenue and the fact that its vehicles don't fetch strong prices. "We're not relying just on cost reductions," Wagoner says. "We have things going on the revenue side."
That's one major problem for GM. Last year, it brought in $3,500 per vehicle less than Toyota (TM ) in North America, thanks to incentives and lower pricing, says Troy (Mich.) research firm Harbour & Associates. Thus far this year, GM's North American revenue is down 9%, to $77.3 billion.
So, GM is trying to rebuild its brands. Earlier this year, Wagoner boosted capital spending by $1 billion, to $8 billion, in an effort to get more new vehicles to market. Vice-Chairman and Chief Financial Officer John M. Devine said on Oct. 17 that GM is also boosting its marketing budget to lure buyers to its brands, many of which are languishing.
FOCUS ON FACTORIES.
This is a key challenge, and one that's costing GM real money. It took $805 million in impairment charges in the third quarter. In many cases, the charges came from vehicles that couldn't fetch the prices or sales volume that company planners expected. So losses on those vehicle programs grew, and GM took write-downs.
As Wagoner tries to fix GM's weakness in the North American market, he has turned his attention to his factories. Since GM has too many plants and workers -- it has 111,000 employees and contracts that forbid permanent layoffs -- it has been following a long-term strategy of using rebates and sales incentives of up to $5,000 a vehicle to keep plants running at productive levels.
As GM cuts jobs and closes factories, its production will get closer to its real demand. That should result in lower rebates and better profitability from the vehicles built by the remaining plants.
That's an issue the UAW can help Wagoner fix. The average GM factory worker is over 50. The company plans to cut more than 25,000 jobs and close more factories in the next three years as those older hands retire. Says Wagoner: "We expect to achieve 100% capacity utilization by 2008."
The UAW suddenly seems game for helping GM achieve that. But GM has for decades shown the ability to downsize.
That will buy time. The long-term task will be stopping the market-share slide and getting buyers to pay more for GM's cars. Some fresh new models are coming. And it's clear from many of them that GM has put a greater emphasis on styling (see BW Online, 7/7/05, "GM's Design Push Picks Up Speed"). Can GM get buyers who are so conditioned to discounts to buy its cars at a price that will allow it to make money? That might be the hardest part yet.
Welch is BusinessWeek's Detroit bureau chief
Edited by Phil Mintz