General Motors Corp. found itself under siege on several fronts in 2005.
Drowning in red ink to the tune of $10.6 billion for the year and suffering sagging sales and share in its critical home market of the U.S., management was forced to institute another massive cost-cutting and plant-rationalization program designed to better align its North American vehicle-building capacity and expenditures with unit sales and revenue.
Adding to GM’s duress were accounting irregularities that forced the auto maker to restate earnings for certain years and report an additional $2 billion in losses in 2005, eroding the confidence of Wall Street and the board of directors in top management. By December, GM’s credit rating had slid deep into junk status, falling to five steps below investment grade according to rating agency Standard and Poor’s.
A bankruptcy filing by GM’s former parts operations and still top supplier, Delphi Corp., further threatened the car maker’s bottom line and kicked off persistent speculation it, too, would have to file for Chapter 11 eventually.
In addition, GM’s marketing strategy, which had put a heavy reliance on sales incentives to keep volume up and plants humming the past three years, was running out of steam with buyers, who needed ever-bigger discounts to entice them into showrooms. That added to the profit erosion and severely damaged brand value, prompting the auto maker to launch a new, less-incentive-reliant value-pricing scheme in the fall.
Pressure from its new biggest shareholder, billionaire financier Kirk Kerkorian, to move faster on its turnaround plan added to the sense of urgency inside the executive suites at the world’s No.1 car maker.
GM opened the year mired in a messy divorce that ultimately saw it pay $2 billion to exit an ill-fated equity tie-up with Fiat Auto SpA.
The deal, originally struck in March 2000, began promisingly enough, with GM acquiring a 10% holding in Fiat Auto from parent Fiat SpA for $2.4 billion. Almost immediately the two merged their purchasing and powertrain operations into more efficient joint ventures and moved toward collaboration on small-car development.
Together, they reported vast savings of up to $2 billion from the JVs. But ultimately, because a full merger was not in the cards, the two auto makers continued to suffer from overcapacity and inefficiency in Europe. As each struggled to independently right its ship, the relationship turned sour.
The critical sticking point was a put option that gave Fiat the right to force GM to purchase the remaining 90% of Fiat Auto. With the financial fortunes of both companies sinking, GM could ill afford to deepen ties with the Italian auto maker, and the costly separation turned out to be its only real option.
Under the split, the two would maintain shared intellectual property rights on certain powertrains developed during their partnership and share 50/50 a JV plant in Bielsko-Biala, Poland, making 1.3L diesel engines. Fiat Auto also was pulled into GM’s alliance purchasing program that included shared parts sourcing with other GM partners.
The $2 billion payout came in two stages, an initial $1.3 billion in February and the final $700 million in May, when the relationship officially was dissolved.
While GM was paying off Fiat, it was drawing investment from Kerkorian, who in June became the auto maker’s single-biggest shareholder, boosting his holdings from 3.9% to 7.2% at a cost of $585.9 million. He quickly escalated his stake to 9.5% in September and to 9.9% in October in transactions valued at $463 million and $56.8 million, respectively.
Almost immediately, Kerkorian began lobbying GM to put his lieutenant, former Chrysler Corp. Chief Financial Officer Jerome B. York, on the board.
GM initially resisted Kerkorian’s arm twisting, but in February 2006 relented with a board seat for York.
The auto maker later would begin implementing many of the cost-cutting suggestions York laid out in a January 2006 speech to the Society of Automotive Analysts. Among those was a 50% cut in the dividend paid to shareholders and pay given to board members, plus a reduction in top executive compensation that saw CEO Rick Wagoner’s salary slashed in half.
GM denied pressure from Kerkorian was behind a move to bring Frederick “Fritz” Henderson back to North America as vice chairman and CFO in December. Henderson, who was chairman of a recovering GM Europe, replaced John Devine as CFO. Carl-Peter Forster, president of GM-Europe, substituted for Henderson atop GM’s European operations. Devine was to remain at GM for at least a year in an advisory capacity.
In mid-October, GM announced its intention to sell a majority stake in its General Motors Acceptance Corp. finance arm, part of a series of moves to shed assets and build up a war chest to finance its recovery plan.
It wasn’t until the following April that GM completed the transaction, selling a 51% stake in a complicated arrangement to private investment firm Cerberus Capital Management L.P. The deal called for Cerberus to pay $14 billion over three years, with $10 billion coming due in fourth-quarter 2006. Notably, there also was an escape clause that would allow the buyers to call the whole thing off if GM’s credit rating were to fall below triple-C.
Prior to that, GM dumped its 20% stake in Fuji Heavy Industries Ltd., adding an estimated $422 million to its nest egg in an early October deal. Toyota Motor Corp. quickly jumped in to fill the void left by GM, acquiring an 8.7% stake in Fuji that would lead to plans to tap into capacity at its Subaru of Indiana Automotive Inc. plant in Lafayette, IN, to build Toyota vehicles.
In jettisoning Fuji, GM had to abandon a strategy to use Subaru vehicles to underpin new models for its Saab Automobile luxury division. Plans for Saab to get a version of Subaru’s B9 Tribeca cross/utility vehicle were scrapped immediately, and the Saab 9-2X, based on the Subaru Impreza WRX, was earmarked for phase-out in 2007.
GM would follow the Fuji divestiture with similar moves to sell its 17.4% holding in Suzuki Motor Corp. in March 2006 and 7.9% stake in Isuzu Motors Ltd. a month later. Those transactions were expected to net up to $750 million and $300 million, respectively.
Among other things, the cash hoard was needed to finance a restructuring program announced in November that was expected to see GM close nine facilities, affect operations at four other plants and slash 30,000 hourly jobs over the following three years.
Included in the closings were assembly plants in Oklahoma City (midsize SUVs), Doraville, GA, (minivans) and Lansing, MI, (Chevrolet SSR). GM also announced it would idle the No.1 line at its Spring Hill, TN, Saturn plant and end output of Ion small cars, while cutting the third shift at the Oshawa, Ont., Canada, plant (midsize cars).
It also planned to mothball one of the lines at the Oshawa car facility and cut a third shift at its Moraine, OH, (midsize SUVs) plant.
Stamping plants in Lansing and Pittsburgh and parts distribution centers in Portland, OR, and Ypsilanti, MI, also would be shuttered, as would a components facility in St. Catharines, Ont., Canada, and the 3.8L V-6 engine plant in Flint, MI.
The shutdowns were to take place by 2008 and reduce GM’s North American capacity 16% to 4.2 million vehicles annually. The cutbacks included eliminating capacity for an estimated 308,000 midsize cars and 377,000 midsize SUVs annually.
Once completed, the restructuring would knock off $5 billion from its annual operating costs of $41 billion-$42 billion, the auto maker said.
Wagoner said the closings weren’t a sign GM was conceding market share in North America, however.
“We will retain flexibility to meet market demand, but in a more cost-effective manner,” he said in announcing the moves. “We can run on three shifts – and we have in a number of cases. So we have the capacity to reach reasonable demands in the market.”
Wagoner’s announcement of plant closings and job cuts followed on the heels of a critical deal with the United Auto Workers union to slash health-care costs by $6 billion annually by the end of 2006.
“This is a huge move,” Wagoner said of the agreement. “This is the biggest cost reduction in a single day (ever) for GM.”
Bearing the brunt of the benefit reductions were GM’s hourly retirees, but active workers also agreed to forego a $1 an hour cost-of-living adjustment and a 3% pay increase in September 2006, plus absorb higher co-pays for prescriptions. GM estimated the deal would save it $3 billion annually on a pre-tax basis. The auto maker subsequently made moves to reduce white-collar costs in early 2006, trimming its annual health-care pre-tax expense by almost $900 million.
All that out of the way, GM turned its attention to Delphi, which filed for bankruptcy on Oct. 8, saddled with losses of $6 billion in 2004 and uncompetitive operations in North America.
The Delphi crisis put GM in a tough spot in two ways. First, the auto maker, under its 1999 spin-off of Delphi, guaranteed hourly worker retirement benefits should the supplier be unable to foot the bill. That left GM on the hook for up to an estimated $12 billion, if the bankruptcy court were to declare Delphi no longer capable of funding its retiree programs.
GM also relied on Delphi for a high percentage of parts, and any sudden interruption of supply – either through a Delphi shutdown or a work stoppage by disgruntled unions – would impact GM almost immediately. Some analysts put the cost to GM of a Delphi strike at $1 billion per month.
The conundrum remained in effect well into 2006, when GM, Delphi and the UAW worked out a deal to transfer up to 5,000 Delphi workers back to GM and provide early retirement incentives for up to 13,000.
But that didn’t close the book on the Delphi issue. Immediately following the 3-way deal, Delphi began negotiations to rework its union contracts. That also involved GM, which was being asked to foot some of Delphi’s wage bill. Negotiations remained deadlocked into May 2006.
Despite the enormous structural hurdles plaguing GM, it wasn’t all doom and gloom and cutbacks in 2005. There also was new investment and a few success stories for the auto maker.
In March, GM announced it would sink C$2.5 billion ($2 billion) into its operations in Canada to expand production and establish new research and development centers. Chipping in were the Ontario and federal governments, which promised to contribute C$235 million ($189.7 million) and C$200 million ($161.5 million), respectively, to the so-called “Beacon Project” that would add up to 500 jobs.
The outlay included tooling to produce the ’06 Chevrolet Impala and Monte Carlo in Oshawa, Ont., plus new flexible manufacturing systems and a new paint shop for a second plant there.
It also covered investment at GM’s CAMI Automotive Inc. joint venture with Suzuki to add output of the ’06 Pontiac Torrent cross/utility vehicle, as well as an upgrade to the St. Catharines engine plant to produce a new eco-friendly V-8 and new research centers in Oshawa and Hamilton, Ont.
GM also scored well in The Harbour Report North America 2005 study on plant efficiency, where it finished fourth overall and placed tops in seven of the study’s 13 vehicle segments in terms of total labor per unit.
It also posted its best performance in the 19-year history of the J.D. Power and Associates Initial Quality Study, grabbing five first-place honors and placing 12 vehicles in the top three spots of 18 vehicle segments, a performance bested only by Toyota.
GM managed to launch its critical new fullsize SUVs ahead of schedule, rolling the new Chevrolet Tahoe off the line in early December. The auto maker sped up development of the big, high-margin SUVs as a way to generate more cash more quickly.
“This program proves we can execute ahead of schedule when we put our minds to it – and resources,” noted Gary White, fullsize truck vehicle line executive.
Despite suddenly spiking gasoline prices, the new models appeared to be off to a strong start in early 2006.
The auto maker also managed a bloodless contract negotiation in Canada with the Canadian Auto Workers union. The pact, ratified in early October by 79.6% of the rank-and-file, called for a shrinking workforce in exchange for modest wage increases of 1.5% in the first year and 1% in each of the final two years. As many as 1,000 jobs could be cut over the life of the contract through attrition, including about 300 at a vehicle assembly plant in Oshawa and 500 from engine operations in St. Catharines and a transmission plant in Windsor, Ont.
GM appeared to have a winner in its purchase of former Daewoo Group operations, now under the aegis of GM Daewoo Auto & Technology Co. GMDAT, supplying vehicles to GM in the U.S. and Europe, as well as to Suzuki, eked out its first-ever profit in 2005. It also added another plant to its portfolio in picking up a Daewoo facility in Bupyeong, South Korea, that was not part of the purchase deal and launched construction of a new $95 million test track to be completed near Incheon, South Korea, in 2007.
