More cuts across the board: General Motors to slash dealers, plants and employees
General Motors' spate of announcements this morning was bad news for enthusiasts (e.g. the shuttering of Pontiac) and even worse for GM's debt-for-equity swap (without a 90% take-rate the automaker is bound for CH 11). But for dealerships and workers, GM's re-revised restructuring plan is going to hurt... hard.
In addition to focusing on GM's core brands – Chevrolet, Cadillac, Buick and GMC – and thus jettisoning Saab, Saturn and Hummer by the end of 2009, GM announced plans to cut its dealerships by 42% by the end of 2010. By the end of next year, GM's dealer base will be reduced from 6,246 (in 2008) to 3,605, 500 more than originally proposed in the automaker's February 17 plan. According to GM's release, "The goal is to accomplish this reduction in an orderly, cost-effective, and customer-focused way. This reduction in U.S. dealers will allow for a more competitive dealer network and higher sales effectiveness in all markets." However, with the Oldsmobile debacle still fresh in many minds, it's going to be a long and expensive row to hoe for the General.
On the manufacturing front, GM plans to reduce the number of assembly, powertrain and stamping plants in the U.S. by 28% by the end of 2010 and to 31% by 2012, cutting production centers from 47 to 34 by the end of next year, and finally to 31 two years later. Once complete, hourly workers in the U.S. will be reduced from 61,000 to 40,000 in 2010 (34%) and then cut by an additional 2,000 by 2011. GM also plans to cut both salaried employees and executive employment as it moves forward, but hasn't disclosed the amount of reductions yet.
While all these cuts are necessary (and have been for almost three years), there's an overarching sense that GM is flailing in the lead-up to its June 1 government-imposed deadline. We expect even more details to follow in the coming month, but in the meantime, make the jump for the General's full carnage-laden press release.
[Image: Bill Pugliano/Getty]
PRESS RELEASE
GM Accelerates its Reinvention as a Leaner, More Viable Company
DETROIT -- General Motors (NYSE: GM) today presented an updated Viability Plan that will speed the reinvention of GM's U.S. operations into a leaner, more customer-focused, and more cost-competitive automaker.
The Viability Plan is included in an exchange offer whereby GM is offering certain bondholders shares of GM common stock and accrued interest in exchange for certain outstanding notes.
Revised Viability Plan goes further and faster
The Viability Plan announced today builds on the February 17 Viability Plan submitted to the U.S. Treasury.The revised Plan accelerates the timeline for a number of important actions and makes deeper cuts in several key areas of GM's operations, with the objective to make us a leaner, faster, and more customer-focused organization going forward.
Significant changes include:
- A focus on four core brands in the U.S. - Chevrolet, Cadillac, Buick and GMC - with fewer nameplates and a more competitive level of marketing support per brand.
- A more aggressive restructuring of GM's U.S. dealer organization to better focus dealer resources for improved sales and customer service.
- Improved U.S. capacity utilization through accelerated idling and closures of powertrain, stamping, and assembly plants.
- Lower structural costs, which GM North America (GMNA) projects will enable it to breakeven (on an adjusted EBIT basis) at a U.S. total industry volume of approximately 10 million vehicles, based on the pricing and share assumptions in the plan. This rate is substantially below the 15 to 17 million annual vehicle sales rates recorded from 1995 through 2007.
Fewer U.S. brands, nameplates, and dealers
As part of the revised Viability Plan and the need to move faster and further, GM in the U.S. will focus its resources on four core brands, Chevrolet, Cadillac, Buick and GMC. The Pontiac brand will be phased out by the end of 2010. GM will offer a total of 34 nameplates in 2010, a reduction of 29 percent from 48 nameplates in 2008, reflecting both the reduction in brands and continued emphasis on fewer and stronger entries. This four-brand strategy will enable GM to better focus its new product development programs and provide more competitive levels of market support.
The revised plan moves up the resolution of Saab, Saturn, and Hummer to the end of 2009, at the latest. Updates on these brands will be provided as these initiatives progress.
Working with its dealers, GM anticipates reducing its U.S. dealer count from 6,246 in 2008 to 3,605 by the end of 2010, a reduction of 42 percent. This is a further reduction of 500 dealers, and four years sooner, than in the February 17 Plan. The goal is to accomplish this reduction in an orderly, cost-effective, and customer-focused way. This reduction in U.S. dealers will allow for a more competitive dealer network and higher sales effectiveness in all markets. More details on these initiatives will be provided in May.
Sales volume and market share projections
The Viability Plan anticipates improved financial results despite more conservative U.S. sales volume expectations going forward. The lower volume expectations are the result of managing the business with fewer nameplates and dealers, leaner inventories, and reduced market share. To address the inventory issue, GM on April 23 announced U.S. production schedule reductions of approximately 190,000 vehicles during the second and early third quarters of 2009.
The Viability Plan also reduces GM's market share projections to adjust for the impact of the brand and dealer consolidation, as well as for the short-term impact of speculation regarding a GM bankruptcy. The plan assumes a 19.5 percent share in 2009, with share stabilizing in the 18.4 to 18.9 percent range in subsequent years.
"We have strong new product coming for our four core brands: the Chevrolet Camaro, Equinox, Cruze and Volt; Buick LaCrosse; GMC Terrain; and Cadillac SRX and CTS Sport Wagon and Coupe," said Henderson. "A tighter focus by GM and its dealers will help give these products the capital investment, marketing and advertising support they need to be truly successful."
Lower structural costs, lower breakeven point
The Viability Plan also lowers GMNA's breakeven volume to a U.S. annual industry volume of 10 million total vehicles, based on the pricing and share assumptions in the plan. This lower breakeven point (at an adjusted EBIT level) better positions GM to generate positive cash flow and earn an adequate return on capital over the course of a normal business cycle, a requirement set forth by the U.S. Treasury in its March 30 viability plan assessment.
GM will lower its breakeven point by cutting its structural costs faster and deeper than had previously been planned:
- Manufacturing: Consistent with the mandate to accelerate restructuring, we plan to reduce the total number of assembly, powertrain, and stamping plants in the U.S. from 47 in 2008 to 34 by the end of 2010, a reduction of 28 percent, and to 31 by 2012. This would reflect the acceleration of six plant idling/closures from the February 17 plan, and one additional plant idling. Throughout this transition, GM will continue to implement its flexible global manufacturing strategy (GMS), which allows multiple body styles and architectures to be built in one plant. This enables GM to use its capital more efficiently, increase capacity utilization, and respond more quickly to market shifts.
- Employment: U.S. hourly employment levels are projected to be reduced from about 61,000 in 2008 to 40,000 in 2010, a 34 percent reduction, and level off at about 38,000 starting in 2011. This further planned reduction of an additional 7,000 to 8,000 employees from the February 17 Plan is primarily the result of the previously discussed operational efficiencies, nameplate reductions, and plant closings. GM also anticipates a further decline in salaried and executive employment as it continues to assess its structure and execute the Viability Plan. More details will be announced as soon as they are finalized with the various stakeholders.
- Labor costs: The Viability Plan assumes a reduction of U.S. hourly labor costs from $7.6 billion in 2008 to $5 billion in 2010, a 34 percent reduction. GM will continue to work with its UAW partners to accomplish this through a reduction in total U.S. hourly employment as well as through modifications in the collective bargaining agreement.
As a result of these and other actions, GMNA's structural costs are projected to decline 25 percent, from $30.8 billion in 2008 to $23.2 billion in 2010, a further decline of $1.8 billion by 2010 versus the February 17 Plan.
Strengthening GM's balance sheet
Another key element of GM's restructuring will be taking the necessary actions to strengthen its balance sheet. GM today took an important step in improving its balance sheet by launching a bond exchange offer for approximately $27 billion of its unsecured public debt. If successful, the bond exchange would result in the conversion of a large majority of this debt to equity.
"A stronger balance sheet would free the company to invest in the products and technologies of the future," Henderson said. "It will also help provide stability and security to our customers, our dealers, our employees, and our suppliers."
Another important part of improving the balance sheet will be the ongoing discussions with the UAW to modify the terms of the Voluntary Employee Benefit Association (VEBA), and with the U.S. Treasury regarding possible conversion of its debt to equity. The current bond exchange offer is conditioned on the converting to equity of at least 50 percent of GM's outstanding U.S. Treasury debt at June 1, 2009, and at least 50 percent of GM's future financial obligations to the new VEBA. GM expects a debt reduction of at least $20 billion between the two actions.
In total, the U.S. Treasury debt conversion, VEBA modification and bond exchange could result in at least $44 billion in debt reduction.
Throughout the Plan, GM will continue to make significant investment in future products and new technologies, with an investment of $5.4 billion in 2009, and investments ranging from $5.3 to $6.7 billion from 2010 to 2014. Very importantly, development and testing of the Chevy Volt extended-range electric car remains on track for start of production by the end of 2010 and arrival in Chevrolet dealer showrooms soon thereafter.
"The Viability Plan reflects the direction of President Obama and the U.S. Treasury that GM should go further and faster on our restructuring," Henderson said. "We appreciate their support and direction. This stronger, leaner business model will enable GM to keep doing what it does best - provide great new cars, trucks and crossovers to our customers, and continue to develop new advanced propulsion technologies that are vital for our country's economy and environment."
Reader Comments (Page 1 of 2)
zamafir 1:43PM (4/27/2009)
Yes, it hurts, yes it's people's livelihood, but as a business, if GM had done this three or four years ago, trimmed the fat, would they be begging for welfare now? I'm not being snarky, I'm sincerely curious why their various captains of industry thought the previous model was a valid financial one?
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Nixapatfan 1:57PM (4/27/2009)
4 years ago:
They couldn't make Hummers fast enough
Car sales didn't drop off a cliff
Gas didn't spike up to almost $5
The UAW contract wasn't expiring
They were able to get loans from banks
They were making cuts, but just slow enough to preserve liquidity instead of blowing it all at once and still end up begging for money.
They just found the crystal ball last week
There weren't so many internet CEO's to guide them
zamafir 2:10PM (4/27/2009)
3 years ago ford hired Mulally, no crystal ball needed to understand other large players saw this coming. Though I guess blaming hindsight when other companies had foresight will continue to absolve their management. I’ll be patient, I’m sure someone will provide a reasonable reply.
Sea Urchin 2:27PM (4/27/2009)
Zama, the answer is that GMs managment wasn't qualified to run the company. That's it.
Nixapatfan 2:29PM (4/27/2009)
umm Ford hired Mullaly in Sep 06.
If you seriously think others saw this coming then please explain why almost all car companies are scrambling to make cuts and showing losses now? Did you know Ford is still posting loses even with Mullaly and according to you they saw it coming 4 years ago.
Ford just got lucky with their timing with financing and putting everything they have on collateral before the banks came crashing down. If the market stays the way it is, there will be more car companies in the welfare line as they burn through their cash. GM's problem was they had very little cash reserves because they spent it all on restructuring the company for about 15 million industry sales annually instead of the 10 million it is at now.
PJ 2:45PM (4/27/2009)
Nixapatfan,
*Also* four years ago...
- GM's North American operations posted an $8.6 billion loss.
- Profits fell $7.6 billion from 2004.
- U.S. market share fell to 15%.
- Wagoner called it "one of the most difficult years in GM's history."
- All-new or refreshed products included the Colorado/Canyon, ION, LaCrosse, Terraza/Uplander/Montana SV6/Relay, Cobalt, and G6.
- Analysts continued to predict that GM would slide into bankruptcy.
There's no pretending that GM hadn't seen the iceberg by that point, and was equal parts unwilling and unable to turn the rudder.
DesiAuto 3:55PM (4/27/2009)
Nixapatfan,
"...lease explain why almost all car companies are scrambling to make cuts and showing losses now?"
How many are near BK?
Big Rocket 4:19PM (4/27/2009)
@Nixapatfan: Of course none of the Internet armchair CEOs could have seen this market slump except in 20/20 hindsight. But, isn't this rare foresight precisely what the real CEOs were supposed to be capable of? You don't pay someone millions of dollars and expect him to be just as good as the average Joe.
Sea Urchin 5:04PM (4/27/2009)
Big Rocket...how DARE you come here and demand that CEOs who get paid millions to have some sort of foresight?
Tom 1:45PM (4/27/2009)
This is simply the response to Obama's criticism of the original plan. You wanted "deeper and faster" cuts Mr. President. Here you go...
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Luis 1:48PM (4/27/2009)
With sales down 30-40%+ is this really a surprise?
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Frank 1:49PM (4/27/2009)
I know that those 6,246 dealers are not individual locations. My local dealer is a Chevy, GMC, Pontiac store. Does anyone know how many unique physical locations GM has to sell vehicles?
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Kumar 3:33PM (4/27/2009)
That actually sounds about right. In 2007/8 there were something like 14000 franchises. A dealership location will be anything from 1+.
Something tells me the fuzzy GM mathematicians are just subtracting the standalone Saab, Hummer, and Saturn dealerships, as well as inventing some other figure for the number of dealers going out of business due to poor sales. So in other words, they're not really doing anything outside of cutting those brands loose.
Tom 1:52PM (4/27/2009)
"why their various captains of industry thought the previous model was a valid financial one?"
Because before the economy took a dump, it was working. Every single automotive company in the world is cutting production, workers and most are shedding brands. Less than a year ago, GM was paying dividends on their stock and two years ago, they were profitable. Takes a lot to turn a big ship like GM.
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Doc 4:16PM (4/27/2009)
Tom,
You must be from another world! GM’s financial model hasn’t worked in at least a decade. They haven’t turned a profit since 2004 and they were losing money even when the industry was at a 16 million + units per year. I used to work for GM and from my own experience the culture of the company as whole is the main problem. People blame the UAW and I think the problem was management letting UAW get away with murder with contracts that were clearly not sustainable in the long term. Management also allowed inflated white collar personal with outrageous benefits (beyond what you could imagine) I know because I worked there. I didn’t get fire or was laid off; I left a year ago when I saw what was coming…. There is no way a company can survive operating the way GM has been operating for the last 20 years.
why not the LS2LS7? 2:04PM (4/27/2009)
It does feel like they are flailing. But it's probably because they are. They had the plan they wanted (right or wrong) a month ago, but the administration (perhaps rightly) said it was insufficient.
So the plans they are putting out now will of course look like they are a series of recent twists and turns, because they are.
I often imply people give Ford too much credit (and they do), but Ford did at least get ahead of this curve, mortgaging everything (and then converting it into equity) slightly ahead of time instead of playing chicken with chapter 11.
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jamie 2:26PM (4/27/2009)
Ford isn't completely off the hook either. If either GM or Chrysler fail, then Ford would be forced to crawl on their hands and knees to the Federal overlords as well. Meantime, irregardless their funding is only expected to last until January 2010, then they will have to pay the piper also. Hopefully their revenues will not decrease before then.
That's another reason why the government has to prop up GM and Chrysler. They don't want another beggar at the bailout window.
thomas 4:05PM (4/27/2009)
@Jamie
your argument would be much more valid if irregardless were a word.
Also, why is that stop sign so crooked?
why not the LS2LS7? 4:17PM (4/27/2009)
I agree with all of what you just said. Which is part of the reason I think people give Ford too much credit.
Ford did a great job raising cash to push off the day of doom. They might have pushed it off far enough that they will be able to turn around before running out of money. But it's far from certain, and Ford's projections are only as good as their ability to predict the direction of the economy, which isn't any better for them than anyone else.
toysbyus 2:39PM (4/27/2009)
Is anyone surprised? GM's decades-out-of-date business model (entry level, one step up, two steps up and on and on, blah blah, blah) just doesn't reflect a marketplace with worldwide imports. This should have been done in 1985...........amputating one arm then a bit of pain then would have helped them put programs in place for precisely this period and environment.
Obama isn't the cause (BTW, I did NOT vote for the guy) but then, he isn't the cause. GM and its unions made this almost a certainty. Waggoner being "let go" was only fair as our money was supporting GM while they slid towards the Chapter 11 door...........the administration surely is NOT going to fix anything. This is the worst case of shooting oneself in the foot that I have ever seen (and I'm 61).
Sad to see it happen BUT.......
Steve
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