Crunch time for GM
US car giant faces a long and winding road to recovery
By : Tracey Boles - Chief Reporter November 27, 2005
GENERAL Motors has been the world’s largest carmaker for more than 70 years but its star is on the wane.
In the past year, it has seen losses deepen, pension obligations balloon, market share collapse and credit ratings downgraded. To add to its woes, the US Securities and Exchange Commission (SEC) recently launched an investigation into the carmaker’s accounting. And Japanese manufacturer Toyota is revving up to overtake it as king of the road.
On Monday, GM unveiled a three-year blueprint to revive its flagging fortunes, including some 30,000 job cuts and the closing of five vehicle factories.
Including earlier cuts in health care benefits, the drastic plan should reduce the company’s annual costs by a total of $7bn (£4bn, E6bn) by the end of 2006, some $1bn more than its previous target; it will reduce GM’s production capacity in the US and Canada by about 800,000 units a year.
But the restructuring was widely seen as just the first step on a long and winding road for a company that once towered over the car industry.
Last week Rick Wagoner, GM’s chairman and chief executive, refused to say when the company expected to make money again. He would only say that he was confident the plan would help reverse more than $2bn in losses this year. Wagoner also would not say how much savings the restructuring would yield.
In recent weeks, investors have feared that the company may even have to file for bankruptcy protection, the prospect of which has overshadowed crucial negotiations with unions to curb employee costs. Wagoner was forced to send an email to the company’s 325,000 employees to dispel Chapter 11 rumours.
His comments fell on deaf ears. Despite the changes announced last week, GM will still have the capacity to build more cars and trucks than it is selling in the highly competitive US market.
Such inefficiency, along with tentative leadership, lacklustre car designs and management mishaps, have conspired to give Toyota and other foreign carmakers the competitive edge, analysts say.
Toyota’s popular designs have eaten into Detroit’s market share. There is no let-up in sight, with the Japanese carmaker planning to build at least two more plants in the United States and Canada. GM will have to go much further if it wants to get its costs in line with falling revenues, according to a Fitch report, the ratings agency. Fitch claims that, even if the ailing carmaker achieves all of the estimated $7bn in cash savings expected from the cost-cutting plan, it will not be enough to return it to profitability.
Mark Oline, Fitch’s managing director, said: “We do expect a continuing cash drain from operations through 2006 and are increasingly concerned with a number of items that could further reduce liquidity.”
An industrial dispute at GM’s parts supplier, Delphi, is the biggest threat to liquidity, Oline believes. Fears of a strike at Delphi have dogged GM’s bond and share prices since the supplier filed for bankruptcy protection in October. A shutdown at Delphi would see the bulk of the GM’s production grind to a halt. Extracting cost reductions from unions, retirees and unions will prove challenging, and also sap the carmaker’s liquidity, Fitch said.
GM is not alone in feeling the heat. Ford, poised only a few years ago to catch up with GM in US sales, said last week that it would cut salaried jobs as it prepared its second restructuring plan in four years.
The Detroit car companies and their suppliers have announced plans to eliminate around 98,000 jobs in total.
But for cities that have for decades looked to the American car industry to provide much of their livelihood, GM’s retrenching is the clearest indication of the end of an era in which generations of families could depend on steady work at a car company – and a generous retirement plan after 30 years of service.
“It used to be our kids would come in here and follow us, but that’s not the trend any more,” said one GM car worker last week. “I just think it’d be nice if General Motors could get everything together, get it fixed and get going again.” |
