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GM Cuts Costs to Stop Its Cash Burn
2008-07-17
Reacting to the worst car market in a decade, General Motors (NYSE:GM - News) laid out a series of moves on July 15 to slash costs and raise cash as the company struggles to get through radical changes in the car market. Chairman and CEO G. Richard Wagoner Jr. said GM will save or raise about $15 billion in cash with a slew of moves. GM plans to slash salaried worker costs by 20% by cutting jobs and retiree health-care benefits. The company's U.S. salaried workforce is 32,000. GM also says it will cut marketing and advertising budgets and capital expenditures. Beyond that, GM also will sell more assets, perhaps even an equity stake in its profitable overseas operations. "We're going to have to ride it out until market conditions settle down," Wagoner told reporters. Whether Wagoner's latest moves will be enough is an open question. GM is assuming American consumers will buy 14 million cars a year, down from 16.1 million last year, and that its market share will be around 21%. Last month, industry sales slowed to a 14-million-vehicle annual selling rate and GM's market share was 21%. GM will have to hold its market share to keep its turnaround plan from losing steam. GM will need to stop the slide to have any chance of a turnaround. "They always say the latest restructuring will be enough," says Maryann Keller, an industry analyst who sits on the board of dealer chain Lithia Motors (NYSE:LAD - News). "If things get worse, they will have to adjust again." Uncertainty about auto sales and fuel prices have punished GM's stock, which recently traded for under $10 a share and is down 74% in the past year. Investors have been fearful that sales could keep falling and that GM's profit center -- trucks and SUVs -- has evaporated. Through June, GM's sales are down 16% with truck sales off 20%. GM shares rose 6% in afternoon trading July 15, to just under $10. White-Collar Job Cuts Wagoner and GM have been under intense pressure in recent months as $4-per-gallon gasoline has hammered the company's profitable pickup truck and SUV lines. GM burned through $6 billion in cash from the end of October to the end of March. The free fall in truck sales -- GM's core business -- even prompted Merrill Lynch (NYSE:MER - News) analyst John Murphy to write in a report that GM would need to raise more cash to avoid bankruptcy. The auto giant had $24 billion in cash at the end of March. Analysts figure the company has burned more since then. To stay flush, Wagoner took the ax to his white-collar workforce. He wouldn't give numbers, but said the company will use mostly early retirement and attrition programs to thin the staff. GM also plans to eliminate health-care coverage for white-collar retirees over 65. The cuts won't end there. GM has already said it will close four truck plants. But more closures are on the way. The company already said it will cut 150,000 trucks a year. New cuts at factories will take out the same amount by the end of next year. Shareholders will share the pain, too. GM is cutting its 25%-per-share dividend, which should save some $800 million in cash between now and the end of 2009. Wagoner will also cut executive bonuses. Competing While Cost-Cutting? Some of GM's cost-cutting could put the company on a slippery slope. The company will cut its capital expenditures budget by $1.5 billion to $7 billion. Vice-Chairman Robert Lutz says no significant new-car programs will be cut. The savings will come from eliminating or delaying development of new trucks, since they're out of favor anyway. But it could make a product race with Toyota (NYSE:TM - News) tougher to sustain. The Japanese juggernaut already outspends GM on R&D and capital spending. GM is also cutting advertising and marketing at a time when it needs to reach consumers badly. GM had a great reputation for making SUVs and trucks, but not passenger cars. As consumers shift to smaller, thriftier vehicles, GM needs all the marketing help it can get. Wagoner says GM has some sponsorship programs such as motor sports that will be reviewed to see if they are still effective. Anything that doesn't help GM's brand-building efforts will be cut, he said in an interview. GM North America President Troy Clarke said the company will use alternative methods to target customers more specifically. GM will also look at cutting traditional advertising initiatives like auto racing. "We don't intend to walk away from our share of voice," Clarke said. Still, GM will be marketing eight brands with less money, while most rivals have two brands to push. All of those cuts add up to $10 billion in GM's planned cash savings. Wagoner says GM will raise another $5 billion through selling assets and borrowing money. Company Focus Turns to Cars GM has already put its Hummer brand on the for-sale block. GM could also sell some of its 49% stake in GMAC, the company lending arm that is jointly owned with Cerberus Capital Management. GM is also selling some shuttered factories. President and COO Frederick "Fritz" Henderson wouldn't be specific beyond that. But Henderson said GM could use its profitable overseas businesses as collateral to raise secured debt. If things got even worse, GM could sell an equity stake in some of its overseas business, but Henderson said the company would more likely use its international businesses as collateral. GM hopes its latest cuts and cash-raising plays will see the company through to 2010. By then, a union-led health-care fund will take over medical benefits and GM will save $4.5 billion a year in cash. Plus, many workers making $28 an hour will be replaced by new hires making $14 an hour. Those changes will yield big dividends. But GM will still have to prove it can make margins in passenger cars like it once did in trucks. Lutz points out that consumers in places like Europe pay more than $30,000 for small and midsize cars -- almost double what they pay in the U.S. Add in GM's structural cost cuts and the company can turn a profit in cars, says David Cole, chairman of the Ann Arbor (Mich.)-based Center for Automotive Research. "As cost reductions kick in, the ability to be profitable across the whole line improves," Cole says. True, but GM will still have to ring the register. Its brands don't command the showroom traffic and prices for passenger cars that imports do. "They may make money," Keller says. "But they won't be able to make money like they did on trucks." That will be GM's huge challenge.
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