GM's Drag on the Car Scene

The giant's woes upstaged the shiny new models at the New York Auto Show. But GM says cutting a division isn't in the plan

By David Welch

The lights are bright in the Jacob Javits Convention Center in New York. Amid blaring music, the new cars are rolling out. At this year's New York International Auto Show, BMW's new 3-series made its North American debut. Lexus (TM ) has unveiled its rival to the 3 -- the stylish IS sports sedan. General Motors (GM ) brought real estate tycoon Donald Trump to midtown Manhattan to show off its new 440-horsepower Cadilalc XLR-v convertible.

But it's hard for anyone's new models to shine in the long shadow of GM's current financial woes. At the 2005 show, open to the public from Mar. 27-Apr. 3, all anyone wants to talk about is GM's worsening outlook and how the company will fix it.

Everyone except GM, that is. After disclosing on Mar. 16 that its 2005 earnings will fall short of its guidance by $2 billion, to as low as $600 million, and that it will burn $2 billion in cash instead of generating that much, GM execs have yet to disclose a major restructuring plan.


  The reason: It's clinging to the hope that its new models will catch on strongly enough to let it avoid any further production cuts. GM-North America President Gary L. Cowger declined to provide much in specifics at the show, other than indicating that the car giant will ask its unions for some help in covering the $5.6 billion tab for GM's health-care costs. GM has announced idling or closure of three plants in recent months -- plenty in his view, Cowger said.

And shuttering one of its eight divisions? Said GM Vice-President for Sales & Marketing Mark LaNeve: "Cutting a division isn't in the plan."

At a separate New York conference sponsored by Morgan Stanley (MWD ), GM Vice-Chairman Robert A. Lutz echoed that sentiment -- at least for now. The company's market share shrank to 24.9% in the first two months of the year, compared with 27.2% during the same period last year, Lutz said. If ailing brands like Pontiac and Buick don't turn around, "we would take a closer look at phasing [one of them] out," he told investors.


  Until then, GM appears determined to slog it out. Lutz pointed to peppy sales of its newest cars -- the Pontiac G6, Buick LaCrosse, and Chevrolet Cobalt compact, which is on pace to sell 15,000 cars in March just to retailers. If the Cobalt sells that well this month, it would double February sales.

GM also plans on a new pricing strategy to boost revenues. And if sales pick up, Lutz said a major downsizing could be avoided. "We're confident," he said. "This is the third or fourth time I've seen this movie, and it's not as scary this time."

Though GM is hesitant to chop a division, paring some of its 89 different models may be in the offing. GM had just 37 models back in 1960, when it had almost half the market. But these days, Lutz says GM probably needs 70 to 80 models to cover the market.

Still, GM will have a tough time making money this year. The global auto group's losses may come close to wiping out the forecasted $2.5 billion in profits that the GMAC finance arm will make. So if Lutz's optimism isn't shared by car buyers, GM would be forced to downsize later anyway. The road ahead still could be a bumpy one.

Welch is BusinessWeek's Detroit bureau chief

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