The confirmation of a huge shake-up at General Motors' European arm costing $US1 billion has outlined starkly the seriousness of the company's position. With up to 12,000 jobs on the line, GM will face a tough fight from workers' unions, however the company's priority must now be to drive down costs, and quickly.

General Motors has not made a profit in Europe since 1999. Having tried various, more palatable rescue strategies, the company now finds itself at the last resort.

Since GM announced plans for a dramatic shake-up in its European arm during October, the situation has scarcely improved. Month to month sales have continued to fall, and there are still 12,000 jobs on the line. It seems things may get worse before they improve.

One thing is for certain: GM Europe must cut costs, as it cannot afford to continue making losses in the way it has in recent years. The current climate in the automotive industry is fiercely competitive, with high fixed costs squeezing margins further. Adding to the company's overheads, GM has much of its manufacturing focused on the relatively high cost countries of Germany and Sweden. Job losses are, therefore, inevitable, but the highly unionised German workforce is unlikely to go quietly.

The company is looking to trim the workforce of its Adam Opel subsidiary by around 9,500 by way of early retirements and retraining. The company has put together a severance pay package for this, which it describes as "unprecedented". However, despite what GM says on the matter, attempting to implement such a large number of voluntary redundancies seems ambitious.

Forced redundancies will not enthuse any party involved and would likely rile a German government already coming to terms with job cuts at other major German employers including KarstadtQuelle, BASF and Schering AG.

GM is now in the midst of a very public damage limitation exercise. The company certainly has the means by which to steady its European operation and a successful reorganisation would go a long way to helping.