GM Plans to Cut 25,000 Jobs

Washington DC June 7, 2005; USA Today .com reported that in a surprise announcement at a contentious annual shareholders meeting Tuesday, ailing General Motors said it will eliminate 25,000 U.S. hourly jobs by 2008 and shut an unspecified number of factories.

It also said, for the first time, that it might sell part of its profitable GMAC finance unit. That would generate cash, probably let GMAC borrow money more cheaply and still let GM dealers use it to finance the sale of new vehicles.

But GM acknowledged that the job cuts are little more than it would get through normal retirements, and it refused to say how soon it would close the plants - something it cannot do without union approval under its contract with the United Auto Workers, which runs through September 2007. The UAW represents most GM hourly workers.

Without giving deadlines or specifics, GM CEO Rick Wagoner said the moves would cut $2.5 billion from the automaker's annual costs and push its core business, North American automotive operations, toward profitability.

"Our absolute top priority is to get our largest business unit back to profitability as soon as possible," Wagoner said at the 97th annual meeting here.

GM said it lost $1.3 billion on North American operations the first quarter. Auto analysts expect it to lose about $73 million this year, the average estimate provided by Thomson First Call, though GM forecast in March that it would earn about $565 million to $1.1 billion.

GM previously announced cuts that will reduce assembly capacity in North America to 5 million by the end of this year from 6 million in 2002. The cuts announced Tuesday amount to 23% of GM's remaining U.S. hourly workforce.

The UAW answered forcefully.

"The UAW is not convinced that GM can simply shrink its way out of its current problems," UAW Vice President Richard Shoemaker, head of the union's GM unit, said in a statement. "What's needed is an intense focus on rebuilding GM's U.S. market share, and the way to get there is by offering the right product mix of vehicles with world-class design and quality.

"It's one thing to present in a speech specific targets for job reductions and closing plants by the end of 2008," Shoemaker said. "In reality, various important factors will come into play, including the natural attrition rate, changes in (sales) volume and market share and, of course, the 2007 UAW-GM negotiations.

"We will do all that is possible to protect" members and their families, he added.

GM agrees that the normal rate of retirement - 5% a year - will eliminate most of the hourly jobs GM wants to cut. But vacancies will leave GM much smaller.

The planned cuts are far short of the 74,000 that GM announced in 1991 to stop huge losses that nearly put the company out of business, and they include 2,000 jobs eliminated when GM closed a factory at Linden, N.J., in April and one at Baltimore last month.

But it is the largest number announced at one time in the USA since Kmart's 37,000 in 2003, according to Challenger Gray & Christmas, an outplacement firm. It's close to Toyota's total U.S. employment of 31,420. And it's only the latest in GM's shrinking act.

The company has struggled for decades to size itself to fit its share of the U.S. market, held back from more radical action by the unrealized hope that its share would rebound. Since Wagoner became CEO in 2000, GM has eliminated 24,000 hourly and 5,000 salaried positions in the USA.

Getting right-size is a problem that pre-dates Wagoner. In 1986, saying it had "turned the corner," GM said it would close 11 factories employing about 29,000.

Even after the planned cuts, GM will remain the biggest automaker, but it has just 25.4% of new vehicle sales, down from 27% a year ago.

"The details weren't there," in Wagoner's comments to shareholders, says Burnham Securities analyst David Healy.

Argus Research analyst Kevin Tynan describes GM's plans as "a step in the right direction, but I don't think it's aggressive enough. Capacity-wise, you're just going to need more" cuts.

Maybe not. New models that start to go on sale early next year look "pretty damn good," says Jim Hall, an analyst at consultant AutoPacific, who has gotten a peek at some of the still-secret vehicles.

Investors bid up GM shares, seeming to agree with Himanshu Patel, industry analyst at JPMorgan, who said in a note to clients that Wagoner made "important and positive comments about the company's restructuring efforts."

In New York trading Tuesday, GM's stock closed at $30.73, up 31 cents, or 1%. An offer by investor Kirk Kerkorian to pay $31 expired Tuesday afternoon. Kerkorian's Tracinda investment firm, which already owns 3.9% and wants to buy another 4.9%, plans to announce the results of that offer today.

After speaking to shareholders, Wagoner told reporters that he's reluctant to supply the missing piece of the plan - a timetable - because of outside factors.

"If the U.S. market booms, if gas prices go down and large SUVs come back, then our return to profitability will be quicker," he said. "If the U.S. enters into a downturn or gas prices go much higher, it's going to be a tougher job."

He added: "No one's job security is forever, and that applies to me. But I'm very confident we have the right plan, and there's no question that we have the right management team."

Some shareholders disagreed.

John Lauve of Holly, Mich., unsuccessfully proposed his own slate of candidates for the board. He held aloft a picture of the ocean liner Titanic, comparing that disaster to GM's losses and sinking market share. "Changes must be made now," he said. "The Titanic sank because the directors ignored the warnings. Everybody in this room can change the direction of the company."

Jim Dollinger, a Flint, Mich., Buick salesman and GM shareholder activist, complained that security guards didn't allow him to pass out copies of his own GM recovery plan. "The company is sick, and I'm here to offer a hand," said Dollinger, who also complained that GM's rebate plans are gimmicky and are ruining the image of its brands.

GM, which says it wants to move away from profit-eating sales incentives, recently said it would give all buyers the same steep discounts it gives its employees.

Shareholder John Chevedden said GM needs a board member who knows the car business well. "I'm on the board, sir," responded Wagoner, who has a background in finance. "You're not a car person," Chevedden retorted.

Wagoner didn't say how GM could get around the UAW contract provision that prohibits GM from unilaterally shutting plants. The contract permits GM to temporarily idle some factories, but that wouldn't eliminate the jobs. Those workers stay on the payroll at nearly full pay if replacement jobs aren't found for them.

Regardless of whether the plant closings and job cuts are sufficient, GM remains burdened by health care costs for more than 1 million workers, retirees and families. GM says those amount to $1,500 per vehicle. Ford Motor says its health care tab is about $1,000 per vehicle. Foreign-brand automakers with U.S. operations have fewer and younger workers, and fewer retirees, so they pay lower health care bills.

GM says it is making little progress getting the union to have its members pay a higher portion of the medical and drug costs. They currently pay about 7% of the total costs; GM's salaried workers pay 27%, and by GM's calculation the U.S. average is 32%.

"We have not reached an agreement at this time, and to be honest, I'm not 100% (certain) that we will," Wagoner said. "But all parties are working hard on it, in the spirit of addressing a huge risk to our collective futures."

In comments to reporters, Wagoner signaled that GM might be running out of patience. "We are focused on moving to a solution with them," the CEO said. "But if we can't do that, we have to consider our other options. But I don't think threats and speculations really help the process."

GM expects to spend $5.8 billion on health care this year, up from $5.2 billion last year.