General Motors' (GM) board was meeting on Dec. 1 to review a plan that management hopes will persuade Congress to lend the company about $12 billion in public funds. Collectively, Detroit wants $25 billion in bridge loans. The plan includes moves that will cut executive pay, narrow the cost gap vs. Japanese carmakers, and review several of its brands for sale or cuts.
Sources say GM will tell Congress (BusinessWeek.com, 11/20/08) that it plans to reopen the labor agreement to negotiate a deal with the United Auto Workers that would narrow that cost gap. GM will also make a case that it is pushing hard to improve the fuel economy of its lineup. And it is looking at different strategic options for as many as four brands—Saab, Saturn, Hummer, and Pontiac. If any of them go away, namely Saturn or Pontiac, it would be done by slowly phasing them out over several years.
GM is trying to work out a sale of Saab, BusinessWeek has learned. For several months, GM has been shopping the brand to Chinese, Indian, and Russian carmakers, as well as to the Swedish government, sources familiar with the talks said. Saab Managing Director Jan Ake Jonsson and GM-Europe President Carl-Peter Forster have been leading the efforts to find a buyer, or at least get someone to take the company off GM's hands.
Taking a Loss
Meanwhile, Ford (F) said it is also willing to sell Swedish carmaker Volvo to raise cash while the company asks the U.S. government for a loan. Ford has been trying to sell Volvo for more than a year. It has even rejected an offer, says one industry source, from a Chinese automaker. Ford has wanted as much as $3 billion to $5 billion for Volvo, which it purchased from an independent holding company in 1999 for $6.4 billion. But both GM and Ford may now have to settle for a deal that pays them little in exchange for a majority stake by the Swedish government.
Part of the problem for both automakers is that members of Congress who are opposed to or reluctant to granting government loans to the automakers said in last month's Capitol Hill hearings that they were against any of the money going to overseas operations or jobs. As long as both Saab and Volvo are wholly owned and losing money (BusinessWeek.com, 5/6/08), the companies cannot make that promise.
Volvo will have about 18,000 employees by yearend, and it lost $458 million in the third quarter alone, as its sales declined 24%, to $2.9 billion.
In a statement issued on Monday, the Swedish government said it was willing to consider its options and was talking to the carmakers. "The Swedish government has to be worried about this," says David E. Cole, chairman of the Center for Automotive Research in Ann Arbor, Mich. "In the case of Saab, they won't want to lose that facility in Trollhattan [Sweden]."
GM has about 5,000 employees in Sweden, most of whom work in the Saab factory in Trollhattan, where the 9-3 and 9-5 models are built. GM has shelved plans to build the 9-5 at its plant in Russelsheim, Germany, since the brand's future is under review.
Tough to Do a Deal
GM started shopping the brand more aggressively during the past several months, after Chairman and CEO G. Richard Wagoner Jr. announced plans in July to save or raise $15 billion in cash through cuts and asset sales. So far, there has been some interest, but the global recession and credit crunch makes it tough to get any kind of deal done.
Saab has long been a money loser for GM. In 1990 the auto giant bought 50% of Saab from Investor, a private investor group that is 47% held by foundations of the Wallenberg family, for about $600 million. Its value subsequently declined, and GM bought the rest in 2000 for $125 million. Saab has sold only 75,000 cars globally this year, down 21% from the same period last year.
While the Saab brand has a cult following of loyal buyers, that group has never been large enough to make real money. GM has rebadged a few niche products in recent years to give Saab dealers something to sell: When GM owned a stake in Subaru parent Fuji Heavy Industries, it gave Saab a Subaru WRX renamed the 9-2X. The Saab 9-7X was simply a restyled Chevrolet Trailblazer SUV.
Saab would be the easiest of GM's brands to ditch. Many of its dealers are already paired with Cadillac franchises.
Volvo is widely considered the more viable of the two brands, with greater worldwide sales and a more distinct brand image centered around safety engineering. Ford has adapted a lot of the company's safety innovations and has developed several vehicles on a Volvo engineering platform, including the new Ford Flex and Mercury MKS.
It is unlikely, though, that the Swedish government, if it ended up acquiring both companies, could operate them successfully without a major alliance partner such as France's Renault or Japan's Honda. "Volvo and Saab, even if you put them together, are not big enough, and don't have the scale to operate independently," says Robert Austin, a longtime Volvo executive and now a principal in independent consultancy Auto Futures Group.
Sources say Pontiac and Saturn will also be under strategic review. (Hummer has been on the block for months.) But neither is likely to be killed. Saturn has too many retailers who would need to be bought out. And they are all stand-alone dealers. "Maybe they'll cut one brand," says Mike Jackson, CEO of AutoNation (AN), the nation's largest dealer chain. "They should consider cutting Saturn, Saab, Buick, Pontiac, and GMC."
Pontiac is a different case, say several sources in the company. GM has been shrinking its role for years, cajoling Pontiac dealers to sell to Buick-GMC dealers to form one channel. That plan has succeeded, in that there now are fewer than 30 stand-alone Pontiac dealers who would need to be bought out or merged in with a Buick-GMC dealer. Right now, about 80% of Pontiac's sales are made by dealers who also sell Buick and GMC.
GM has even been winding down Pontiac's product line. Next year, it will launch the GMC Terrain small SUV; that vehicle was originally supposed to be a Pontiac but was given to GMC instead. More than half of Pontiac's volume comes from the G6 midsize car. But a freshened model has been delayed and may not be built.
GMC and Buick could end up getting most of the higher-volume cars sold in the combined showrooms, while Pontiac would sell just a couple of performance cars. At the Detroit Auto Show in January, GM will show a new Buick LaCrosse, which will be built using the same basic platform as the Chevy Malibu, Saturn Aura, and Pontiac G6. Internally, GM product planners are questioning whether they need two midsize cars selling in the same showroom under the Buick and Pontiac names. That's one reason that GM has delayed developing an all-new G6.
If GM does get rid of any of its brands, it will be a long, drawn-out process. There may not be any specifics on union concessions this week, either. One high-level GM executive said that anything with the union will have to be negotiated after the meeting in Washington. But options include a wage cut and getting rid of the union JOBS bank, which pays workers 75% of their wages while laid off. The UAW already agreed to cut pay from $28 an hour to $24 an hour at a Mitsubishi plant in Normal, Ill., says Sean McAlinden, chief economist at CAR.
GM workers cost about $76 an hour, including the cost of retiree benefits. Toyota workers cost, all in, about $18 an hour less. The UAW could take a pay cut to match wages at both the Mitsubishi plant and what Toyota pays its workers. The union could also accept bigger premiums and co-pays on health-care coverage and cut GM's long-term medical liabilities. GM does not plan to give details of the actions when it releases the plan to Congress on Tuesday afternoon, but it will set targets for cost reduction. If the UAW gives GM cuts, the union would likely give Ford and Chrysler similar concessions. UAW President Ron Gettelfinger has said in recent media interviews that the UAW is at the bargaining table and willing to do its part to help secure a bridge loan.
GM may be able to use Congress' reluctance to back the industry as a way to wring concessions from dealers, the United Auto Workers, bondholders, and others.
Business Exchange related topics:U.S. AutomakersUnited Auto Workers (UAW)Global Auto Industry