Reacting to stagnant sales and record low share prices, General Motors CEO Rick Wagoner said it will improve its balance sheets by cutting production of its slow selling models, laying off salaried employees, suspending its shareholder dividends and borrowing at least US$2 billion to cushion the operation against a prolonged slowdown in domestic sales.
"We are responding aggressively to the challenges of today's U.S. auto market," Wagoner said in a statement. "We will continue to take the steps necessary to align our business structure with the lower vehicle sales volumes and shifts in sales mix. We remain committed to bringing to market great products that target changing consumer preferences for more fuel-efficient vehicles."
"Today's actions, combined with those of the past several years, position us not only to survive this tough period in the U.S., but to come out of it as a lean, strong and successful company," Wagoner said.
Today's announcement ended rumors that the world's largest automaker would file for bankruptcy later this year. Any enthusiasm was muted however, by the news of drastic changes to the company's work force and employee benefits.
Wages frozen, retiree benefits slashed
In addition to an unspecified number of layoffs, GM said it will eliminate health care coverage for US salaried retirees over 65, effective January 1, 2009. Raises for salaried employees in the US and Canada will be deferred through 2009.
Executives will also be doing their share of belt tightening and instead "will have a significant reduction in their cash compensation" this year and will receive no cash bonuses in 2008. The move will result in a 75 to 84 percent reduction in executives' cash compensation opportunity, GM said.
GM will also defer $1.7 billion in payments to its union-led health care benefit trust for hourly retirees. Originally scheduled for this year and next, the fund was a key part of the 2007 contract between GM and the UAW.
More cuts in truck production
On the production side of the operation, GM said it will accelerate their previously announced cuts.
Last month, the automaker said it would cease production at three North American truck plants in 2009 or 2010. Those plants were the Oshawa, Ontario, truck assembly plant to close in 2009; the Moraine, Ohio, truck plant in 2010; and the truck line in its Janesville, Wis., plant by 2010.
The Oshawa plant builds the GMC Sierra and Chevrolet Silverado pickups. The Moraine plant builds the Chevrolet Trailblazer, GMC Envoy and Saab 9-7X. The Janesville truck line makes the Chevrolet Tahoe, Chevrolet Suburban and GMC Yukon SUVs.
In total, GM expects to reduce output by 300,000 units by year's end, saving US$2.5 billion in the process.
"The actions announced today are difficult decisions, but necessary to respond to the current auto market conditions," Wagoner said in the statement.
Increased borrowing, focus shifts to fuel efficiency
In addition to cutting costs across the board, GM said it will raise US$4 billion to US$7 billion in additional funds through financing or asset sales. The HUMMER brand has been rumored to be on the auction block as GM seeks to improve both it's environmentally-friendly image and evict a loss-making brand from its portfolio.
Despite poor domestic sales, GM said it believes it can sell the ailing brand for US$2 billion.
A large portion of the borrowed funds will go toward acclerated development of more fuel-efficient powertrains. In a separate announcement, GM said that it would halt all further development of its V-8 engines and redouble their efforts in smaller displacement fours and sixes.
(Editor's note: More news will come as details of GM's product strategy emerge. Stay tuned.)
The bottom line: GM will survive. It will be fundamentally changed, but it will endure.
Taken in total, this is the start of a painful, yet absolutely necessary step in the evolution of General Motors as a company. For too long, Wagoner and his forebears doubled down on the SUV market and failed to anticipate the day when gasoline demand would outstrip production capacity.
Since the start of 2008, General Motors has seen a steady decline in US sales. Trucks and SUV sales have been hardest hit by the combination of higher gas prices and a weakening dollar, with sales down 22 percent year to date. Car sales slid 8.6 percent from a year ago.
Share prices have mirrored the dismal sales reports: from a year-to-date high of US$28.98 on January 30, shares closed today at US$9.84, up 46 cents on today's news.
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