GM and Ford: Roadmaps for Recovery
Both General Motors (GM) and Ford Motor (F) have announced extensive North American restructuring plans to address the cost side of their problems (see BW Online, 3/14/06, "GM and Ford: Timelines for Turnaround"). The two plans have many similarities because both companies face similar challenges.
GM announced most of its plan to improve North American operations in November, 2005, and recently added further job cuts, mostly related to the salaried work force, and also cut its common dividend by 50%. Ford, in late January, 2006, announced its comprehensive restructuring plan for North America.
The best that can be hoped for is that these plans gain traction during 2006. We continue to believe that turning around both companies' North American operations will be a multiyear process at best. S&P's downgrade of GM in December, 2005, and of Ford in January, 2006, took into account our view of these restructuring plans (see ):
• Capacity: GM has announced a 19% capacity reduction, and Ford has said it will lower capacity by 26%, both by 2008. The ability of each company to complete these moves isn't a big concern, since both have cut capacity in the past. Still, this round may be somewhat more complex than past versions due to a greater need to consider manufacturing flexibility of new, lower-volume models. But even this shouldn't be a serious barrier to completion. What remains to be proven is whether the lower capacity level, once attained, is appropriate for the existing levels of market share and mix.
• Labor: Both GM and Ford expect to reduce their hourly work forces by about 30,000 over the next several years, although normal attrition is a significant part of this reduction. To accelerate this attrition, GM and Ford need UAW agreement -- we expect that there will be negotiations to accelerate the retirement of eligible UAW employees -- and this would require future cash payments and result in additional charges.
Even before any accelerated attrition, GM has taken an $800 million charge to pay laid-off employees who will move to the JOBS bank -- a contractual mechanism that pays laid-off workers nearly full pay and benefits -- through the end of the contract in 2007.
• Health Care: GM's agreement with the UAW and Ford's related deal on post-retirement health care, both of which are pending court approval, will result in fairly substantial reductions in accounting liability, but modest near-term cash savings. We expect the UAW to grant Chrysler some fairly equivalent concessions eventually, though this is far from certain given the company's better financial performance.
An important question is whether the UAW will be willing to revisit health-care issues in 2007 contract negotiations. Revisions to GM's salaried retirees' health-care benefit plans in the U.S. are expected to reduce GM's accounting liability by about $4.8 billion, and its annual retiree health-care expense by almost $900 million before taxes. But cash savings from these changes will begin only in 2007, and will likely be fairly small initially.
• Pensions: U.S. pension obligations are a relative bright spot for GM, because the company was overfunded by $6.5 billion at the end of 2005. GM is modifying its pension benefits for U.S. salaried employees, freezing accrued pension benefits and beginning a shift to a broader reliance on defined contribution plans. The company's current U.S. salaried retirees aren't affected. Ford is underfunded, as noted above, but retiree health care remains a larger legacy challenge.
• Wildcards: For the GM rating, resolution of the Delphi reorganization is a wildcard from several angles. Substantial costs to the company for resolving the Delphi reorganization aren't incorporated into the GM rating. GM has estimated its exposure for postretirement obligations for former employees at Delphi to be $3.6 billion to $12 billion, although any eventual cash payments will be paid over time.
In addition, any cash payments by GM to Delphi to help establish a lower wage structure at the division will likely be part of the negotiations over the ultimate level of GM's postretirement liability exposure. A labor dispute involving Delphi employees is also not incorporated into the GM rating. For Ford, the costs of restructuring the operations assumed from Visteon, its former supplier, are less significant and already incorporated into our rating, although execution risk remains. Both GM and Ford intend to have net material cost reductions, which almost always involve concessions from suppliers. The ability to garner these from the weak supply base is a wild card.
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