The Long, Hard Road Facing GM

Cutting 25,000 jobs is a start, but unless it tackles the crippling cost of buyer incentives and retiree benefits, those layoffs won't mean much

By David Welch

When General Motors (GM ) Chairman and CEO G. Richard Wagoner Jr. took the podium at GM's annual meeting in Wilmington, Del., on June 7, it sounded like he was finally offering a glimpse of his long-awaited restructuring plan for the troubled auto giant. In truth, he may have only been clearing his throat. Much work remains to be done.

Wagoner said GM will slash 25,000 jobs by 2008 -- a 25% reduction of the hourly workforce that should reduce costs by $2.5 billion per year. Says Wagoner: "Getting back to profitability in our biggest business unit is our top priority."

Wagoner's proclamation certainly grabbed headlines. But take a closer look: The move wasn't as dramatic as it might have appeared. True, the cutbacks will save GM a lot of money. But even if it could deliver the savings this year, they wouldn't cover a projected $4 billion pretax loss in GM's North American operations, says Morgan Stanley analyst Stephen Girsky.


  Other problems remain: Most analysts expect GM's 25.3% domestic market share will keep shrinking, even with aggressive incentive-spending programs. Plus, Wagoner hinted that an agreement with the United Autoworkers Union (UAW) about reducing GM's health-care costs may not materialize. GM's announcement was "better than nothing," says Deutche Bank analyst Rod Lache. "But I'm not sure it goes deep enough."

Production challenges aren't going away either. Harbour Consulting says GM has capacity to build at least 5.8 million vehicles in North America, but it may sell only around 5.1 million cars and trucks this year. Some analysts think that by the time GM finishes the job-trimming, its North American sales could fall as low as 4.8 million vehicles.

So Wagoner will have to eliminate 700,000 vehicles worth of production to meet today's sales levels. And if GM can't hold share as expected, it'll need to cut even more production if Wagoner wants to hit his target of selling 100% of its capacity.


  This is a thorny challenge. Downsizing to 5 million vehicles of production would rid most excess factory capacity. But GM still will be spending more than $4,000 per vehicle in sales incentives. Analysts note that it's always blowing money on incentives because it never downsizes to a realistic future market-share target. Says Rochdale Securities analyst Nick Colas: "GM's restructuring programs never seem to be proactive to its market-share losses."

What's more, accelerating the downsizing will take even more cash. Half of GM's 111,000 active workers will be eligible to retire by 2008. But if some don't want to go, GM could have to pay each reluctant assembler a buyout in the neighborhood of $70,000 to leave. Cutting 12,000 workers in Europe has already cost $422 million in the first quarter -- and the bill will continue to hit earnings for the rest of the year.


  So be it, Wagoner signaled after the meeting: If GM needs to buy out some workers, it has the cash to do so, he said.

Health care is another wild card. GM pays about $1,600 from the sale of every vehicle in retiree health-care and pension costs. He hinted at the UAW's annual meeting that the union may not give GM what it needs in a friendly, cooperative manner. Wagoner emphasized that he would prefer to slice costs with a handshake rather than a fight, but added, "regardless, we need to address the health-care issue."

A labor showdown could get expensive. If the union went on strike over health care, it would cost billions. GM shelled out $2 billion during a 54-day strike in 1998.


  For now, the announcement at least signaled to investors that GM is serious about a plan to get back into the black. "What they have outlined is a start," says one source close to Kirk Kerkorian, the billionaire investor who has increased his stake in GM to 7.2%, from 3.9%, as a result of a tender offer he launched on May 9.

Kerkorian's investment firm Tracinda fell short of its target 8.9% stake, but it still has enough of a position to draw attention as GM's third-largest shareholder. Sources close to Tracinda say Kerkorian hasn't weighed in with GM's top brass yet, but he'll move if management's fix-it plan doesn't yield results. Kerkorian may also try to get Jerome York, the former CFO of Chrysler and IBM (IBM ), on GM's board to influence decision-making, sources tell BusinessWeek.

Wagoner says he and his team will watch GM's sales closely, and he can get more aggressive if warranted. Eventually, perhaps inevitably, GM's U.S. market share appears destined to go lower, says the Center for Automotive Research. "GM is a 20% market-share company," says CAR economist Sean McAlinden. "Anything else must go." If that's the case, Wagoner better keep his ax handy.

Welch is BusinessWeek's Detroit bureau chief

    Before it's here, it's on the Bloomberg Terminal.