WSJ - GM Plans to Cut Salaried Staff; Overhaul Looms

[Klaus]

GM Plans to Cut
Salaried Staff;
Overhaul Looms

CEO's Measured Approach
Falls Short as Costs Soar;
Health-Care Issue Heats Up
By LEE HAWKINS JR.
Staff Reporter of THE WALL STREET JOURNAL
March 21, 2005; Page A1

After years of trying to avoid a wrenching overhaul, General Motors Corp. plans to slash its North American white-collar work force, signaling the start of a more aggressive attack on deep structural problems in its core auto business.

The salaried-staff cuts, which could be as deep as 28% in certain departments, are a prelude to a GM effort to seek health-care concessions from its largest U.S. union, the United Auto Workers, and map out further cuts in its North American operations, people familiar with the situation said last week.

Separately, a spokesman for DaimlerChrysler AG yesterday confirmed a Detroit News report that the auto maker's Chrysler unit has negotiated an amendment of its contract that allows the company for the first time to charge UAW workers annual health-care deductibles of from $100 to $1,000 a year.

The agreement, which covers about 35,000 union employees, retirees and their families enrolled in certain health plans, relies on a clause Chrysler has negotiated in its UAW contracts since 1982. That clause allows the company to renegotiate terms if health costs rise beyond certain limits.

It isn't clear whether GM or Ford Motor Co. could negotiate similar amendments, but the Big Three Detroit auto makers usually seek to maintain parity in their contracts with the UAW. If the other two Detroit auto giants follow suit, it would mark a significant break with the longstanding tradition of giving UAW Big Three workers health-care coverage with no deductibles or premiums.

GM's deepening trouble comes as all three of the unionized Detroit auto makers are battling to sustain sales and jobs in the face of strong challenges from lower-cost Asian auto makers. In 1999, Detroit's traditional Big Three held nearly 71% of the U.S. vehicle market. At the end of February, the share for the Detroit Three had slid to 58%, despite a volley of new models. Toyota Motor Corp., Honda Motor Co. and Nissan Motor Co. of Japan and South Korea's Hyundai Motor Co. are moving to increase sales in the U.S. even further, expanding nonunion North American manufacturing operations.

GM also faces stiffer competition from its two crosstown rivals, which were struggling themselves a few years ago. Ford has stabilized financially under Chairman Bill Ford Jr., and last year clawed back market share from GM in the profitable large pickup segment. Ford also has a hit with its new Mustang sporty coupe. Chrysler has done well with its boldly styled Chrysler 300 C sedan and has regained 1.3 percentage points of market share so far this year. GM has lost nearly three percentage points.


GM's chairman and chief executive officer, Rick Wagoner, facing the worst crisis at GM since the company skidded to the brink of collapse in 1991-92, is under pressure from Wall Street to demonstrate that he has a robust plan to put the No. 1 auto maker back on track. Its credit rating is teetering on the edge of a downgrade to junk status following GM's disclosure last week that 2005 profits will fall short of previous expectations. The main reason is deep losses in the North American auto business.

Since taking over as CEO in 2000, Mr. Wagoner has sought to shrink GM's North American auto operations without mass layoffs or confrontation with the UAW. He has bet that GM had enough time to let attrition reduce its aging, high-cost work force over several years. By contrast, Chrysler axed 26,000 jobs and moved to close six plants after going into the red in 2001. Ford in 2002 responded to a sudden profit collapse by announcing plans to close five plants and cut 35,000 jobs world-wide. Now, Mr. Wagoner's measured approach is getting a severe test.

The CEO jolted investors last week when he warned that full-year profits would be just $1 to $2 a share -- including a projected $1.50-a-share loss for the first quarter -- instead of the $4 to $5 a share he promised in mid-January. GM North America, which earned $1.58 billion last year, is now projected to sustain "a significant full-year loss" this year instead of earning $500 million, as previously forecast, GM said. GM operations, instead of generating $2 billion in cash flow, will burn $2 billion, the company said.

GM's stock tumbled last week by about 17%, from $34.33 Monday to $28.35 Thursday -- its lowest level in more than a decade -- before a modest rebound Friday to $28.62. Among investor concerns: that GM might have to cut its $2-a-share annual dividend.

Some analysts are skeptical that Mr. Wagoner can produce a quick fix. "I think they're swatting at an elephant with a fly swatter," said Banc of America Securities analyst Ron Tadross. "Anything they do at this point is going to be too little too late."

Mr. Wagoner and his top executives have offered few specifics of their plans to pull GM North America out of the ditch, but they are sending signals that the pace of cost-cutting efforts will pick up. Within the past several months, GM has announced plans to end production at three U.S. factories, though these plants had long been targeted for closure and were building aging vehicle lines. GM has ordered steep production cuts for the first and second quarter to reduce swollen inventories, and has begun to revamp its U.S. marketing strategy.

GM's top purchasing executive, Bo Andersson, is expected to meet with key suppliers in suburban Detroit on April 6, probably to discuss how a recent large reorganization of product development is going to affect suppliers. April 14 brings a regularly scheduled meeting between Mr. Wagoner and top UAW and GM officials in Dearborn, Mich., where the CEO is expected to outline GM's problems, particularly the mounting burden of financing health care for 1.1 million active and retired GM workers and their families.

In 2003, Mr. Wagoner avoided a confrontation with the UAW over health-care costs, agreeing to a new contract that kept the union's rich benefits largely intact. But those costs have since risen faster than GM expected.

Company executives earlier this year discounted speculation that they might ask the UAW to reopen its master agreement. People familiar with the situation said last week that GM could seek cooperation from UAW leaders to take stronger action within the bounds of the contract to reduce GM's health-care bill, as Chrysler has now done.

In 2007, when the contract expires, industry analysts expect GM to press for concessions, possibly modeled on the UAW's recent six-year agreement with heavy-equipment maker Caterpillar Inc. That pact provided for active UAW members for the first time to pay premiums for health coverage.

UAW Vice President Richard Shoemaker, the union's top negotiator at GM, met with a UAW subcouncil of local and union officials in early March and said health-care costs would be the biggest issue in the next labor negotiation, people who attended the meeting said. But they said Mr. Shoemaker didn't discuss any possibility of reopening the current contract.

Even if the UAW agrees to concessions now, that may not be enough to overcome GM's competitive disadvantage against rivals such as Toyota. Health care isn't GM's only problem. GM has forecast its cash outlays for health care will rise to $5.6 billion in 2005, up $800 million from 2003 levels. But that change is less than the projected reversal in GM North America's results this year. The company has had a string of disappointing new-model launches. It spent nearly $4.4 billion on a failed alliance with Italy's Fiat SpA. Overly optimistic sales assumptions led GM to stack up 101 days of unsold cars and trucks in the U.S. at the end of February. Sales of GM's high-profit large SUVs are declining with about nine months to go before new models arrive.

Now, GM is slashing production in the first and second quarters and laying off thousands of workers -- who will continue to receive the bulk of their pay and benefits under a costly UAW contract provision GM management has renewed in each round of contract talks since 1990.

"This company needs restructuring," said Morgan Stanley analyst Stephen Girsky. "This company is sized for 35% share and it's got 28%" for 2004. GM's share has now slipped even further, to just above 25%, during the first two months of this year.

In announcing the profit warning last week, Mr. Wagoner and GM's vice chairman and chief financial officer, John Devine, declined to offer specifics of their program for repairing GM North America, except to say that management will be "more aggressive."

"Don't underestimate our focus on improving our revenue and reducing the cost structure," Mr. Devine said in an interview last week.

When Detroit auto makers get into trouble, their pattern is usually to hit nonunion, salaried workers before turning to the UAW. GM started planning the latest round of white-collar buyouts in December, and made its offers to employees earlier this month. Thousands of employees are expected to accept the packages by sometime this week.

GM spokeswoman Toni Simonetti declined to offer specific numbers detailing the program, but said the company is implementing an "accelerated attrition program" offering early-retirement packages to those who qualify and buyouts to other salaried employees with less seniority.

"There was no specific target set. It was basically a tool to use to certainly address the resource needs of the company versus the resources that we have on the books right now," Ms. Simonetti said.

Analysts say GM needs a more radical restructuring. "They definitely need to downsize their scale in North America. The consumer does not want to pay as much for GM vehicles as GM is demanding right now," said Himanshu Patel, an auto analyst with J.P. Morgan.

[Klaus]

GM Plans to Cut
Salaried Staff;
Overhaul Looms

CEO's Measured Approach
Falls Short as Costs Soar;
Health-Care Issue Heats Up
By LEE HAWKINS JR.
Staff Reporter of THE WALL STREET JOURNAL
March 21, 2005; Page A1

After years of trying to avoid a wrenching overhaul, General Motors Corp. plans to slash its North American white-collar work force, signaling the start of a more aggressive attack on deep structural problems in its core auto business.

The salaried-staff cuts, which could be as deep as 28% in certain departments, are a prelude to a GM effort to seek health-care concessions from its largest U.S. union, the United Auto Workers, and map out further cuts in its North American operations, people familiar with the situation said last week.

Separately, a spokesman for DaimlerChrysler AG yesterday confirmed a Detroit News report that the auto maker's Chrysler unit has negotiated an amendment of its contract that allows the company for the first time to charge UAW workers annual health-care deductibles of from $100 to $1,000 a year.

The agreement, which covers about 35,000 union employees, retirees and their families enrolled in certain health plans, relies on a clause Chrysler has negotiated in its UAW contracts since 1982. That clause allows the company to renegotiate terms if health costs rise beyond certain limits.

It isn't clear whether GM or Ford Motor Co. could negotiate similar amendments, but the Big Three Detroit auto makers usually seek to maintain parity in their contracts with the UAW. If the other two Detroit auto giants follow suit, it would mark a significant break with the longstanding tradition of giving UAW Big Three workers health-care coverage with no deductibles or premiums.

GM's deepening trouble comes as all three of the unionized Detroit auto makers are battling to sustain sales and jobs in the face of strong challenges from lower-cost Asian auto makers. In 1999, Detroit's traditional Big Three held nearly 71% of the U.S. vehicle market. At the end of February, the share for the Detroit Three had slid to 58%, despite a volley of new models. Toyota Motor Corp., Honda Motor Co. and Nissan Motor Co. of Japan and South Korea's Hyundai Motor Co. are moving to increase sales in the U.S. even further, expanding nonunion North American manufacturing operations.

GM also faces stiffer competition from its two crosstown rivals, which were struggling themselves a few years ago. Ford has stabilized financially under Chairman Bill Ford Jr., and last year clawed back market share from GM in the profitable large pickup segment. Ford also has a hit with its new Mustang sporty coupe. Chrysler has done well with its boldly styled Chrysler 300 C sedan and has regained 1.3 percentage points of market share so far this year. GM has lost nearly three percentage points.


GM's chairman and chief executive officer, Rick Wagoner, facing the worst crisis at GM since the company skidded to the brink of collapse in 1991-92, is under pressure from Wall Street to demonstrate that he has a robust plan to put the No. 1 auto maker back on track. Its credit rating is teetering on the edge of a downgrade to junk status following GM's disclosure last week that 2005 profits will fall short of previous expectations. The main reason is deep losses in the North American auto business.

Since taking over as CEO in 2000, Mr. Wagoner has sought to shrink GM's North American auto operations without mass layoffs or confrontation with the UAW. He has bet that GM had enough time to let attrition reduce its aging, high-cost work force over several years. By contrast, Chrysler axed 26,000 jobs and moved to close six plants after going into the red in 2001. Ford in 2002 responded to a sudden profit collapse by announcing plans to close five plants and cut 35,000 jobs world-wide. Now, Mr. Wagoner's measured approach is getting a severe test.

The CEO jolted investors last week when he warned that full-year profits would be just $1 to $2 a share -- including a projected $1.50-a-share loss for the first quarter -- instead of the $4 to $5 a share he promised in mid-January. GM North America, which earned $1.58 billion last year, is now projected to sustain "a significant full-year loss" this year instead of earning $500 million, as previously forecast, GM said. GM operations, instead of generating $2 billion in cash flow, will burn $2 billion, the company said.

GM's stock tumbled last week by about 17%, from $34.33 Monday to $28.35 Thursday -- its lowest level in more than a decade -- before a modest rebound Friday to $28.62. Among investor concerns: that GM might have to cut its $2-a-share annual dividend.

Some analysts are skeptical that Mr. Wagoner can produce a quick fix. "I think they're swatting at an elephant with a fly swatter," said Banc of America Securities analyst Ron Tadross. "Anything they do at this point is going to be too little too late."

Mr. Wagoner and his top executives have offered few specifics of their plans to pull GM North America out of the ditch, but they are sending signals that the pace of cost-cutting efforts will pick up. Within the past several months, GM has announced plans to end production at three U.S. factories, though these plants had long been targeted for closure and were building aging vehicle lines. GM has ordered steep production cuts for the first and second quarter to reduce swollen inventories, and has begun to revamp its U.S. marketing strategy.

GM's top purchasing executive, Bo Andersson, is expected to meet with key suppliers in suburban Detroit on April 6, probably to discuss how a recent large reorganization of product development is going to affect suppliers. April 14 brings a regularly scheduled meeting between Mr. Wagoner and top UAW and GM officials in Dearborn, Mich., where the CEO is expected to outline GM's problems, particularly the mounting burden of financing health care for 1.1 million active and retired GM workers and their families.

In 2003, Mr. Wagoner avoided a confrontation with the UAW over health-care costs, agreeing to a new contract that kept the union's rich benefits largely intact. But those costs have since risen faster than GM expected.

Company executives earlier this year discounted speculation that they might ask the UAW to reopen its master agreement. People familiar with the situation said last week that GM could seek cooperation from UAW leaders to take stronger action within the bounds of the contract to reduce GM's health-care bill, as Chrysler has now done.

In 2007, when the contract expires, industry analysts expect GM to press for concessions, possibly modeled on the UAW's recent six-year agreement with heavy-equipment maker Caterpillar Inc. That pact provided for active UAW members for the first time to pay premiums for health coverage.

UAW Vice President Richard Shoemaker, the union's top negotiator at GM, met with a UAW subcouncil of local and union officials in early March and said health-care costs would be the biggest issue in the next labor negotiation, people who attended the meeting said. But they said Mr. Shoemaker didn't discuss any possibility of reopening the current contract.

Even if the UAW agrees to concessions now, that may not be enough to overcome GM's competitive disadvantage against rivals such as Toyota. Health care isn't GM's only problem. GM has forecast its cash outlays for health care will rise to $5.6 billion in 2005, up $800 million from 2003 levels. But that change is less than the projected reversal in GM North America's results this year. The company has had a string of disappointing new-model launches. It spent nearly $4.4 billion on a failed alliance with Italy's Fiat SpA. Overly optimistic sales assumptions led GM to stack up 101 days of unsold cars and trucks in the U.S. at the end of February. Sales of GM's high-profit large SUVs are declining with about nine months to go before new models arrive.

Now, GM is slashing production in the first and second quarters and laying off thousands of workers -- who will continue to receive the bulk of their pay and benefits under a costly UAW contract provision GM management has renewed in each round of contract talks since 1990.

"This company needs restructuring," said Morgan Stanley analyst Stephen Girsky. "This company is sized for 35% share and it's got 28%" for 2004. GM's share has now slipped even further, to just above 25%, during the first two months of this year.

In announcing the profit warning last week, Mr. Wagoner and GM's vice chairman and chief financial officer, John Devine, declined to offer specifics of their program for repairing GM North America, except to say that management will be "more aggressive."

"Don't underestimate our focus on improving our revenue and reducing the cost structure," Mr. Devine said in an interview last week.

When Detroit auto makers get into trouble, their pattern is usually to hit nonunion, salaried workers before turning to the UAW. GM started planning the latest round of white-collar buyouts in December, and made its offers to employees earlier this month. Thousands of employees are expected to accept the packages by sometime this week.

GM spokeswoman Toni Simonetti declined to offer specific numbers detailing the program, but said the company is implementing an "accelerated attrition program" offering early-retirement packages to those who qualify and buyouts to other salaried employees with less seniority.

"There was no specific target set. It was basically a tool to use to certainly address the resource needs of the company versus the resources that we have on the books right now," Ms. Simonetti said.

Analysts say GM needs a more radical restructuring. "They definitely need to downsize their scale in North America. The consumer does not want to pay as much for GM vehicles as GM is demanding right now," said Himanshu Patel, an auto analyst with J.P. Morgan.