GM Cuts Dividends, Announces Asset Sales, Production and Job Cuts to Save US$15 bil.

GM CEO: "We are responding aggressively to the challenges of today's U.S. auto market"

General Motors (GM) will introduce a further round of job and production cuts, stop some retiree benefits and cut its share dividend in a bid to raise liquidity by US$15 billion through to 2009 (see United States: 15 July 2008: GM to Unveil Plan to Cut Jobs; Raise Cash Today). The company will also explore potential asset sales, credit lines and other financing measures, reduce capital expenditure and reduce executive compensation as well as investigating all options regarding its Hummer brand.

Speaking at a press conference, chairman and CEO of GM Rick Wagoner announced the plans as the company attempts to weather the current economic downturn in the United States, record high fuel prices and a weak auto market, and dramatic segment shifts which has left GM's U.S. sales down 16% at the half-year stage and its shares at 50-year lows.

"We are responding aggressively to the challenges of today's U.S. auto market," Wagoner said in a televised broadcast from a prepared 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." Wagoner added.

Wagoner assured the audience that GM has ample liquidity to meet its 2008 funding requirements, but "is taking additional measures to bolster liquidity to protect against a prolonged U.S. downturn." GM said it had US$23.9 billion in cash and a secured credit line of US$7 billion at the end of the first quarter. However, it is estimated the company could be burning through cash at a rate of between US$1.0 billion and US$1.5 billion a month at the current rate of decline.

Wagoner said that the assumptions GM has based its calculations on for planning purposes were on the conservative side of current estimates, based on 2008/09 U.S. auto industry sales of light vehicles at around 14 million units. This is not GM's belief, being more hopeful that sales will come in at just under 15 million units this year. The company also assumes it will have a lower share of the U.S. market, at about 21%, down from nearly 24% in 2007. GM also expects that oil prices will range from US$130-150 a barrel.

Detailed Breakdown of Cuts and Savings

GM will further reduce its white-collar salaried workers in North America this year through attrition, early retirements and other separation programmes. Furthermore, healthcare for salaried retirees over the age of 65 in the United States will be eliminated from January, although they will receive a pension increase as compensation. The company will also cut its executive compensation, including eliminating annual discretionary bonuses for 2008. The combined savings should make US$1.5 billion in cash costs through these adjustments.

GM will cut truck production further, reducing overall truck capacity by 300,000 units by the end of 2009, of which half will result from the acceleration of previously announced actions (see United States: 24 June 2008: GM Cuts Truck/SUV Production Plans, Adds Incentives; Stock Continues to Slide) and half stems from new actions. The company expects to reduce US$2.5 billion in North American structural costs through the additional adjustments.

GM also said it will reduce its capital-spending plan for 2009 to about US$7 billion, from the planned US$8.5 billion as the company will delay the next-generation large pick-up and sport utility vehicles (SUV) programmes, as well as V8 engine development. Spending for non-product programmes will also be reduced, while spending on powertrain programmes will increase to support new technologies, Wagoner said.

GM will also suspend future dividends on its common stock, expected to add US$800 million in liquidity through to 2009. Further to these direct actions, GM said it will carry out a global assessment of its assets for possible sale which could generate as much as US$4 billion of additional liquidity. GM is also looking at opportunities to access global markets, with an initial target of at least US$2 billion to US$3 billion in financing saying that it has unencumbered assets of more than US$20 billion, which could support a secured debt offering.

Additionally, Wagoner said GM has seen "a lot of interest" over the potential sale of its Hummer brand.

Outlook and Implications

GM's announcements have been expected for a couple of weeks, but the time taken to establish the plan has been accompanied with rumours of potential bankruptcy and the plunge of the company's stock price, hitting 50-year lows this week. GM's market capitalisation has dwindled as result by nearly 60% since the start of the year to US$5.31 billion.

GM has discussed further options to raise more cash, and retains these should the market deteriorate further than the assumptions made for the purposes of this strategy. GM is thought to have discussed options such as selling off its remaining 49% stake GMAC, or issuing more equity. Furthermore, before GM's U.S. operations were heading to insolvency, GM could consider separating its foreign subsidiaries such as GM Europe, GM Lat Am and GMDAT into an isolated unit or units, using this entity as collateral for additional financing or as a way to sell more equity. Ironically, it is in the emerging markets, particularly in South America, China and Russia that GM is performing better than many rivals and boosting the company's overall performance, but these successes are still long way from substantially reducing the burden of the millstone of GM's U.S. operations.

GM has been here before, in the oil shocks of the early 1970s and 1980s, when sharp shifts in vehicle segments caused the U.S. carmakers to rethink. They all made it through that crisis, even Chrysler, which was within a whisker of going bankrupt. Indeed the similarity to the plight of the Detroit Big Three now and in the early 1970s and again in the 1980s is startling, when a combination of smog legislation and soaring oil prices made their huge V8-powered models almost obsolete overnight. However, the lessons from then do not seem to have been learned, and market share and assets have all dwindled correspondingly over the passing decades. The failure of GM, Ford or Chrysler to take these lessons of the past and build a successful business model is in stark contrast to the Japanese manufacturers which are now swamping the market. The deep recession in Japan in the early 1990s that made many Japanese carmakers struggle and scale back operations, saw those companies emerge stronger and leaner, with a determination to invest in technology and product development that has seen them rise to become some of the best designers and engineers in the world—not an achievement GM can be accused of emulating. This could well be the last opportunity GM has to remould its business model, and it will be interesting to see where the company is situated in the next decade, with all of its plants and assets mortgaged to the hilt and huge debts to repay, needing to invest further vast sums in vehicle technology just to keep pace with the competition.