GM looks to slim down, save billions

GM looks to slim down, save billions
General Motors Corp. will offer retirement incentives to 46,000 of its
hourly workers next month as part of a plan to cut labor costs, Chairman and Chief Executive Officer Rick Wagoner said during a presentation to analysts Thursday afternoon.
The analysts were encouraged by the move to shore up GM's sinking stock price and said they expected up to 20,000 workers to accept offers to leave.
That would allow the company to hire workers in nonassembly jobs at much lower cost under the UAW contract completed last fall, saving the company billions.
It wasn't known Thursday exactly who will be eligible or what will be offered. GM has 73,000 hourly workers.
The offers this year are expected to be similar to those made in 2005, when cash incentives ranged from $35,000 for those with at least 30 years of service to lump-sum buyout payments of as much as $140,000.
Wagoner also said if auto sales remain weak, GM may need to close some manufacturing operations.
Some workers contacted Thursday said they would stick with their jobs in tough times, having turned down the offer just two years ago.
Wagoner told analysts the automaker was working with the UAW to put the finishing touches on a package of retirement and buyout offers that it expects to offer in February.
Out in springtime
GM would expect those who take the offer to begin leaving by April.
GM announced packages for about 5,200 workers last month in specific locations as a first step in the process.
"We are now working through the details of phase two of the program," Wagoner said. "We expect to finalize that in February. In total, for the two phases, the base to draw against is about 46,000 who are currently eligible for retiring."
Wagoner did not say how many workers the automaker expects to take the offer, which is expected to look similar to a special attrition program in 2005 that prompted 34,410 workers to leave GM.
People familiar with the program expect GM to eventually offer buyouts and retirement packages to its entire workforce.
The retirement and buyout program is intended to help GM further cut costs after Wagoner said that $9 billion in cuts last year isn't enough to staunch the automaker's losses, which totaled $12.5 billion in 2005 and 2006.
GM has said that its new labor agreement can take it much of the way to being a more profitable and competitive company, with one analyst estimating that its new U.S. labor contract could cut nearly $1,400 from the cost of every vehicle GM builds.
All about savings
Wagoner said he expects the new labor agreement to save GM between $4 billion and $5 billion annually in labor costs by 2010. The automaker expects to save $5 billion by 2011, he said.
While much of the savings will come from the new retiree health-care trust -- known as a voluntary employee beneficiary association, or VEBA -- a significant amount will come from reduced hourly labor costs, and it will come sooner than many analysts expected.
GM has said it expects the VEBA to save it about $3 billion annually beginning in 2010.
GM can further cut its labor costs by reducing its workforce and replacing some of its hourly workers with lower-paid new hires, taking advantage of a clause in the new contract that allows the automaker to hire a second tier of workers at a lower wage and benefits rate.
Under the new UAW contract, GM can pay new hires in so-called noncore jobs about half the hourly wage rate and a lesser benefits package than current workers. Generally speaking, noncore workers are expected to be defined as workers doing nonassembly jobs that could be done by a supplier.
Will enough leave?
The big question, analysts say, is how many workers GM will be able to entice to leave.
Some have expressed concern that GM could have difficulty getting people to take the voluntary special attrition packages this year, since the company just reduced its workforce through the 2005 attrition plan.
Several thousand workers who weren't eligible to retire or to take the early-retirement incentive then, however, are now eligible. Since this summer, the number of hourly workers with 30 or more years of service has grown from about 17,000 to nearly 22,000.
Automotive analysts have estimated that between 11,000 and 20,000 will take advantage of the buyout and retirement offers this year, and were encouraged by additional comments from Wagoner that the automaker has set a goal of full-capacity utilization of its factories in high-cost countries. That could lead to further plant closures should vehicle sales remain below historical trends.
Analyst Brian Johnson of Lehman Brothers, who expects 11,000 workers to take the buyout this year, said GM North America operated at 82% capacity in 2007. He said he thinks GM could stand to close an additional three to four assembly plants in North America.
Stock slipping
Sean McAlinden, vice president of research at the Center for Automotive Research, said GM at most needs only half of the 46,000 who could take retirement offers to leave to reap the desired financial benefit and show Wall Street that it will see some benefit from its new UAW contract before 2010.
"GM has now decided to move quickly because of the dismal situation in the financial markets," McAlinden said. "GM's stock has been slipping" because of problems with the housing market and its 49% stake in GMAC, whose mortgage unit Residential Capital has been losing money as mortgage defaults have climbed.
"They've got to emphasize the savings from the labor deal more," McAlinden said. "The time to move faster is now."
Bradley Rubin, an automotive analyst from BNP Paribas, said Wagoner's comments were encouraging.
"I think they are getting people out the door a little quicker than we would have anticipated," Rubin said. "It's a positive that they're taking costs out."
With the new contract, GM now expects that it can reduce its structural costs from what had been 34% of total spending to about 23% by 2012, Wagoner said, "which is a very, very competitive number."
Wagoner said GM is reducing its hourly labor costs from what was about $18 billion in 2003 and $10 billion in 2007 to what should be about $5 billion by 2011.
Becoming competitive
"Spending for U.S. hourly and salaried legacy pension and health care will decline from an annual average of $7 billion over the last 15 years to approximately $1 billion per year in 2010," Wagoner said. "That cost reduction is obviously huge and really important to enabling us to get truly competitive."
McAlinden estimates that GM can save $2.4 billion a year by using its second-tier wage by 2011 if it replaces about 40% of its workforce with lower-compensated workers, which is what he expects.
Under the new contract, traditional workers with the highest wage and full benefits will cost GM about $62 an hour, while new hires at the lower wage and benefits level will cost just $26 per hour.
And even after GM begins moving new hires into higher-paid assembly jobs, McAlinden said, their costs will rise only to about $47 per hour, since their benefits package will not become richer.
"On paper, GM has about 16,800 Tier 2 jobs ... and could have 6,000 more if they do some in-sourcing," McAlinden said. That, he said, is the number of buyout and retirement deals for which GM is aiming.
GM has already offered buyouts to about 5,200 workers at GM's 23 service, parts and operations facilities, and a handful of plants that are closed or have large jobs banks.
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