GM to Gain a Further US$5 bil. in Cost and Job Cuts by 2011

Wagoner: "This has been a turnaround without any tailwind"

General Motors (GM) CEO Rick Wagoner delivered a cautious but upbeat outlook at the annual Wall Street Analysts conference yesterday. Wagoner said that despite signs of a challenging year in 2008, there are indications of U.S. sales improving in 2009 and beyond. "We're delivering on the turnaround plan we established in 2005 and have exceeded expectations on virtually all counts," Wagoner said in a statement, adding that GM expects to gain US$4-5 billion in savings in 2011 once the impact of the 2007 labour agreement occurs.

Wagoner outlined a range of key measures aimed at improved automotive pre-tax earnings by 2010. "This has been a turnaround without any tailwind for the industry so far," Wagoner said. "Frankly the outlook for '08 is uncertain and a lot of people view it negatively." GM expects that U.S. sales will top 16 million units this year. GM also plans to increase 2008 capital spending to about US$8 billion, up slightly from 2007 levels.

• GM will cut another US$5 billion from its U.S. labour costs by 2011, beginning with phase two of an attrition programme in February to cut hourly jobs. In total, 46,000 hourly employees will be eligible for retirement.
• GM has declared a new automotive structural cost goal of 23% of revenue by 2012.
• Further plant closures will be studied in order to achieve 100% or greater capacity utilisation.
• It expects to cut the premium it pays for Delphi parts by US$1 billion by 2010, but will only net US$500 million in annual savings because of labour and transitional subsidies to Delphi, its former parts-making unit.
• It expects to continue its growth in emerging markets.
• GMAC Financial Services expects to be profitable this year.

More Jobs To Go

GM is currently negotiating with the United Auto Workers (UAW) union phase two of its buyout programme. The first phase, launched in January, applies to workers at select Job Banks, Service Parts Operations and other key sites. Those opting for the buyout packages would leave in March. Phase two begins in February; for both phases of the attrition programme, 46,000 employees are eligible for retirement. Participating employees in the second phase will begin to leave in April. With this programme and the new labour contracts GM plans to reduce annual U.S. labour costs by an additional estimated US$5 billion by 2011. Add to this the healthcare VEBA and other measures and GM says it can reduce its costs on U.S. hourly workers, salaried pension and health care from an average of US$7 billion a year (over the last 15 years), to about US$1 billion a year starting in 2010.

Tough U.S. Conditions, but Growth in Emerging Markets

Wagoner said that the U.S. market will likely be in the low 16 million range in 2008 because of waning consumer confidence and the high cost of fuel. GM intends to try and stem its falling market share with a raft of new launches including the key Pontiac G8 sedan in March and the Chevrolet Traverse crossover mid-year. The company will also speed up its alignment of its eight brands into four dealer channels: Chevrolet, Saturn, Buick-Pontiac-GMC and Cadillac-Hummer-Saab. GM hopes this will enhance dealer profitability and lead to more differentiated products and brands. GM projects global industry volume to reach about 73 million units compared with 71 million in 2007, Wagoner said. GM expects its own sales to grow in the Asia Pacific, Latin America and Eastern European nations including Russia.

Outlook and Implications

The new labour agreement between GM and the UAW is truly important for the company's sustained profitability, but it will not have any real effect on the bottom line until GM can get the older, more expensive workers out and bring in the newer, second-tier pay workers. Fortunately for GM, their workforce is considerably older than that seen at Ford or Chrysler, allowing for a lot of opportunity to get workers retired early and out of the door. New workers have no pension or retiree healthcare, and workers already retired will have their healthcare taken care of by a VEBA trust funded by GM for a much lesser percentage of the liability than was previously outstanding. Those kinds of savings will put GM nearly on a par with Toyota's manufacturing costs in the United States, but the trick will be to survive the coming 2008 negativity until the market can turn around.

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