Gm Slices And Gm Slashes, But The Flab Survives

In the wake of a sobering directors' meeting on Dec. 9, General Motors Corp. is preparing a major cost-cutting initiative that Chairman Robert C. Stempel bills as "a comprehensive program to improve profitability." Write-offs and plant closings seem likely. But many stock analysts already fear that the plan, scheduled to be announced on Dec. 18, won't do enough. In the days before the announcement, GM's stock skidded below $27 a share, a four-year low.

What's spooking the market is the weakness of GM's North American auto operation, which is rolling toward a record $6 billion operating loss this year, analysts estimate. To conserve cash, Stempel has already delayed some new-model development programs -- including updated versions of such profit makers as the S-10 pickup truck and Blazer sport utility vehicle. And with little sign of an upturn in the U. S. auto market, credit raters such as Standard & Poor's Corp. are considering a downgrade of GM's debt. That could add about $200 million to $300 million a year to GM's borrowing costs.

Ironically, all this bad news is hitting just as GM launches nine redesigned models -- more than any competitor. The cars, including the 1992 Buick Le Sabre, Pontiac Grand Am, and Cadillac Seville, are selling well so far. But that is thanks in part to heavily advertised cut-rate financing. For instance, GM has low-cost deals on the Le Sabre, Pontiac Bonneville, and Oldsmobile's new downscale Achieva and its Olds 88. The deals helped boost sales of the Olds 88, for one, by 73% in November. But they are also contributing to GM's losses.

STILL BLOATED? The biggest drag on GM, however, is its payroll of 95,000 white-collar workers. Although GM has trimmed staff 28% since 1983, it could easily slice 20,000 to 30,000 more people from its many layers of management, analysts say. GM "has more capacity and people relative to sales volume than we do," notes Philip E. Benton Jr., Ford Motor Co.'s president. "GM's costs are out of whack with the competition," agrees Maryann N. Keller, an analyst with Furman Selz Inc. in New York.

GM could close up to four assembly plants, plus three times as many parts operations, analysts contend. An oft-cited example: Its Doraville (Ga.) factory will build only about 90,000 Cutlass Supremes this year, way below its 240,000 annual capacity. Cutlass Supreme production could be shifted to another underutilized plant. William E. Hoglund, executive vice-president in charge of GM's components operations, recently told analysts GM also has roughly 11 million square feet of unused space in its parts-making factories.

SWEATLESS PAY. The question is how much would plant closings save. GM's current contract, in effect until 1993, guarantees United Auto Workers members full pay -- even if the factories are quiet and they're at home watching TV. GM has pledged $4 billion to make sure workers get paid no matter what happens to their plants.

The financial pressure on GM, meanwhile, is building. In November, S&P lowered from A to A the rating on GM's preference and preferred stock and began reviewing its ratings for GM's long- and short-term debt. Moody's Investors Service Inc. quickly followed suit. A downgrading of GM's debt would clobber its General Motors Acceptance Corp. finance unit, one of its few profit generators. GMAC regularly rolls over the $20 billion in short-term debt it uses to help fund car loans to consumers and dealers.

Moreover, GM has borrowed heavily to keep most of its product-development programs on track. GM recently sold $1 billion worth of preference stock to bolster its balance sheet. But its debt-to-capital ratio at the end of 1991 will be 70%, up from 40% in 1989, says Scott Sprinzen, an S&P vice-president for corporate finance. That cuts down on maneuvering room. GM is "aggressively leveraged at this point," Sprinzen says.

GM has managed to hold its share of the domestic car market at 35.6% through November, about the same as last year. Stempel has said he wants to avoid the wrenching upheaval that characterized GM's attempts at reorganization in the 1980s, so he may try to get by with less drastic cuts than investors would like. But if the auto slump lingers and the new models still won't move without price-cutting, more draconian measures may become his only option.

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