Blaming the weak US economy, record high fuel prices, shifts in consumer vehicle preferences, and the lowest auto sales volumes in a decade, General Motors on Tuesday unveiled a series of cost cutting measures intended to boost its liquidity by about US$10bn.
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These include white collar job cuts, the axing of salaried retiree health care and executive cash bonuses, a reduction in sales and marketing spend and the postponement of healthcare-related cash transfers and some large vehicle redesign programmes.
The automaker has also suspended shareholder dividends and plans asset sales and “capital market activities” to raise an additional $4-7bn.
Analysts have recently expressed concern that GM, burning an estimated $1bn in cash a month, could run out in 2009 and perhaps even file for US Chapter 11 bankruptcy protection.
But GM said today it had liquidity of $23.9bn and access to another $7bn through US credit facilities.
“While the company has ample liquidity to meet its 2008 funding requirements, it is taking additional measures to bolster liquidity to protect against a prolonged US downturn. The actions include a combination of operating and related actions, as well as asset sales and capital market activities. The cumulative impact on cash through 2009 is projected to be approximately $15bn,” it said in a statement.
GM is assuming US light vehicle industry volumes of 14m units in 2008-2009, a lower market share of around 21% and oil prices of $130 to $150 per barrel by 2009.
It now expects to generate an extra $10bn of cumulative cash improvements by the end of 2009.
Further salaried job cuts will be made in the US and Canada in 2008 through attrition, early retirements, and various “separation” measures.
US salaried retirees over 65 will lose healthcare cover from 1 January but will be compensated partly with a pension increase from GM’s over funded US salaried plan to help offset costs of Medicare and supplemental coverage. White collar workers who survive the latest cull also face a base pay freeze to the end of next year.
Annual cash bonuses for the company’s executive group have been axed for this year – GM said this was a reduction in their “cash compensation opportunity” of 75 to 84%.
These moves are expected to save $1.5bn in 2009.
Structural cost reductions of around $2.5bn are targeted in GM North America through further adjustments in truck capacity and related component, stamping and powertrain capacity in response to lower volume. Truck capacity is expected to be reduced by 300,000 units by the end of 2009, half from previously announced changes (the recent planned closure of four assembly plants), and half from “new capacity actions”.
GM will reduce sales and marketing budgets while protecting launch products and brand advertising and will hold engineering spend for 2008 and 2009 at 2006-2007 levels, substantially lower than planned.
Added to the benefits of the 2007 GM-UAW labour agreement, these moves should reduce North American structural costs by $6-7bn.
GM is also reducing capital spend by about $1.5bn with much of that related to the delay of the next generation large pickup and SUV models, plus V8 engine development and associated capacity.
Spending for non-product programmes will also be “significantly reduced” though powertrain spending will be increased to develop alternative propulsion and fuel economy technologies and small displacement engines.
To improve working capital by approximately $2bn in North America and Europe, GM will reduce raw material, work-in-progress and finished goods inventories and boost lean inventory practices at parts warehouses.
It will also defer approximately $1.7bn of payments that had been scheduled to be made to a temporary asset account in 2008 and 2009 for the establishment of the new UAW VEBA [healthcare fund].
Suspending future dividends on common stock is expected to improve liquidity by approximately $800m by the end of 2009.
GM also expects additional liquidity of $4-7bn from asset sales and financing activities and is eyeing assets worldwide with help from outside advisors.
“A strategic analysis of the Hummer brand is under way, and GM is continuing to focus on profit improvement initiatives across all remaining GM brands,” the automaker said.
It is also planing to raise additional liquidity in global finance market, initially targeting at least $2-3bn.
“The company has gross unencumbered assets of over $20bn, which could support a significant secured debt offering, or multiple offerings, that would far exceed the initial target. Examples of such assets include stock of foreign subsidiaries, brands, stake in GMAC and real estate,” GM said.
GM added it expects to report a “significant” second quarter loss, due partly to recent American Axle and local union strikes in North America, as well as the continued weakness in the US auto market and “adverse vehicle segment mix” – in other words, not having enough fuel-efficient vehicles in its range to meet the sudden change in consumer demand.
GM said it also expects to book “significant charges or expenses” for items such as the last round of job cuts and moves to reduce truck and SUV output.
“GM is highly confident that the initiatives announced today, in conjunction with the current cash position and its $4-5bn of committed US credit lines, will provide the company with ample liquidity to meet its operational needs [to the end of] 2009,” it said.
GM chairman and CEO, Rick Wagoner added: “We will continue to take the steps necessary to align our business structure with the lower vehicle sales volumes and shifts in sales mix.”
“Even under conservative planning scenarios, GM is well-positioned to withstand the US market downturn and emerge a stronger company. We have a solid position in the rapidly growing emerging markets, a global operating framework that allows us to respond to changes in the US market, a commitment to technology leadership, and an ever stronger and competitive product line-up.”
