Corp. celebrated its 100th anniversary in 2008, but it will not look back fondly on its centennial.
The auto maker arguably witnessed in less than one year every hiccup a major manufacturer might fear, including weak sales, labor strife, production cuts, sky-high material costs, a stalled supply chain and deep consecutive quarterly financial losses.
“We’ve had a tough year, we’ve had to slug it out,” Mike DiGiovanni, GM’s top sales analyst, told journalists and Wall Street analysts at one point.
Unfortunately, it was only August when DiGiovanni made his remarks. Over the next few months, GM would add to its list of woes a deflated market capitalization, a failed acquisition of cross-town rivalLLC, an appeal for government rescue loans, the potential divestiture or winding down of three brands and the yoke of a potential bankruptcy it almost certainly will carry well into 2009.
As early as third-quarter 2007, however, GM knew 2008 would be a roller coaster. The auto maker reported a headline-grabbing, record corporate loss of $39 billion in the period, a result burdened by a non-cash charge of $38.6 billion related to unused tax credits.
The loss, which immediately took the luster off a landmark collective bargaining agreement with the United Auto Workers union, drew down the auto maker’s year-end results and meant it would start the New Year reporting a record annual loss of $38.7 billion.
Cruelly, however, the market would lift GM and its competitors in the year’s opening months before rushing them back downhill.
In February, GM bucked expectations by reporting a 2.6% uptick in January U.S. sales, witnessing a particularly strong response to its fullsize trucks and SUVs; the new Saturn lineup; large cross/utility vehicles from Buick, GMC and Saturn; and the redesigned Cadillac CTS and Chevrolet Malibu midsize passenger sedans.
An optimistic Mark LaNeve, GM’s North America sales and marketing chief, told Ward’s a few weeks into 2008 the “doom and gloom” surrounding the auto maker had been replaced by positive response to its new products.
“We are getting our mojo back in developing and building great products that can compete with anybody’s,” LaNeve said.
Despite the growing critical acceptance of its new offerings, April’s results brought GM’s North American unit back to Earth, as consumers’ worries over a persistent housing slump and grumblings of turmoil on Wall Street pulled down the auto maker’s sales in the region by double digits in consecutive months.
GM’s first-quarter global sales reflected the weakness in its home market. North American demand in the period fell 10.2%, knocking out gains in every other region and leaving the auto maker’s quarterly deliveries down 0.6%.
A stalemate in contract negotiations between the UAW andMfg. & Holdings Inc., a key supplier to GM’s truck programs, also began brewing in the first quarter. Unable to reach common ground on wage and benefits costs, a UAW walkout at two of the supplier’s original U.S. locations lasted 11 weeks and left GM reeling from parts shortages, forcing it to slow or idle production at more than 30 manufacturing and assembly plants.
In the end, the strikes cost GM $2.6 billion of operating income and 330,000 units of truck production. GM came to the bargaining table with $215 million to help AAM fund a worker-attrition program, a move considered a key turning point in the negotiations.
Though costly to GM, the AAM strike helped trim the auto maker’s pickup and SUV inventories, a stock bloated from a sudden rise in gasoline prices during the weeks between late spring and mid-summer that sent casual truck buyers scrambling from the segment.
Compounding GM’s difficulties at AAM were labor problems of its own, a result of its failure to button up local agreements in the wake of the previous year’s national contract. GM witnessed walkouts at key manufacturing sites, including assembly plants making its popular large CUVs and Chevy Malibu.
Many Wall Street analysts believed the union may have struck GM over local agreements as a way to pressure AAM into a deal.
With its own labor woes settled by late May and production restarting at sites crippled by the AAM walkout, GM delivered a haymaker in June’s opening week. With gasoline prices continuing to drive consumers away from trucks and the economic downturn worsening, GM announced plans to shutter three North America assembly plants and end medium-duty production at a fourth site, as well as put its Hummer division on the sales block.
“These higher gas prices are changing consumer behavior rapidly and significantly affecting the U.S. auto industry sales mix,” Chairman and CEO Rick Wagoner told investors at the company’s annual meeting in Delaware, as crude oil prices eclipsed $130 a barrel and moved the national average for regular-grade gasoline to $4 a gallon.
“We at GM don’t think this is a spike or a temporary shift. We believe it is, by and large, permanent,” he said.
As expected, the decision roiled UAW members, but the Canadian Auto Workers union expressed particular outrage because GM had negotiated a new contract with the organization just a month earlier and never mentioned Oshawa, ON, Canada, as one of the doomed manufacturing sites.
It took a Superior Court judge’s order to lift a union blockade of the auto maker’s regional headquarters. GM later would accelerate the closure of its Moraine, OH, and Janesville, WI, SUV plants to the end of December from 2010, and move Oshawa’s closure six weeks earlier to May 2009.
But a month after GM announced the massive restructuring, gasoline prices would reach a record $4.11 a gallon and investment and brokerage houses trading in securities backed by subprime mortgages would begin reporting deep quarterly losses.
Escalating material costs, driven up by the sudden rise in oil prices, added to GM’s woes.
“Commodity prices are what they are,” GM’s purchasing boss, Bo Andersson, told reporters in July. “The only thing you can do is reduce your consumption or find alternatives.”
So the auto maker took additional action later in the month, putting in motion a plan to reduce by 300,000 units truck and related stamping and engine capacity by the end of 2009. Half of the reductions represented an acceleration of previously announced cutbacks, while the remaining actions would be incremental.
Additional cost-cutting came via planned attrition in its salaried workforce; elimination of health-care coverage for U.S. salaried retirees who reach the age of 65; pay freezes and the elimination of bonuses for executives; deferment until 2010 of a $1.7 billion cash payment, previously due in 2008 and 2009, to the new employee health-care fund administered by the UAW; a suspension of dividend payments; a reduction in sales and marketing budgets; and cut engineering-related expenditures in the remainder of 2008 and all of 2009 to 2006-2007 levels.
Two weeks after announcing the additional cutbacks, GM revealed a second-quarter loss of $15.47 billion. The red ink was precipitated by the AAM crisis, but also by write-downs from money it was forced to set aside to cover its lease portfolio. As consumers flocked to more fuel-efficient vehicles, the residual values of pickups and SUVs on lease plunged. Global sales fell 3% in the period.
GM responded by stepping back its leasing (cross-town rivaleliminated the programs altogether and Motor Co. took a more measured approached), but in retrospect the $2 billion charge represented yet another warning signal of the tsunami-like storm about to slam the industry.
An August sales month propped up by big incentives and a September boosted by a flood of fleet and commercial deliveries, temporarily would mask a growing credit crisis and severely weakened consumer confidence.
With investment banks and brokerage houses imploding in September, an effort got under way to bail out Wall Street, but the $700 billion rescue would not come before Main Street felt the pinch in October. GM’s captive financing arm chose to limit loans to only those customers with the very best credit scores and, with local banks equally stingy, the auto maker’s dealers found themselves unable to close deals and finance inventory for their showrooms.
“It’s like somebody turned the lights off in October,” LaNeve said of the month’s sales results, which reached a level not witnessed on a per-capita basis in the post-war era.
A week later, GM dropped the year’s biggest bombshell – its ongoing negotiations to absorb Chrysler. Although GM did not acknowledge the negotiations publicly, saying later in its third-quarter financial report it called off talks of a potential acquisition to focus on a liquidity crisis, industry experts supported a consolidation that would help alleviate nagging overcapacity in the U.S.
Indeed, as talks with Chrysler parent Cerberus Capital Management LP intensified, so did GM’s cash crisis. With the business and consumer credit markets shut due to Wall Street’s failure and growing global financial crisis, sales tanked as consumers either were unable to secure loans or lacked confidence in the weakened economy.
“I don’t care if you own a grocery store, a drug store or a lemonade stand,” DiGiovanni said. “You borrow money to get the goods you need to sell and you pay it back after you make a profit. That’s the U.S. economy, and when you can’t borrow it stymies that.”
GM Vice Chairman Bob Lutz told Ward’s: “We were hit with an unforeseen financial market tsunami that has overwhelmed Wall Street and is now overwhelming Main Street, devastating suppliers, dealers and customers.”
Global sales had fallen 5.8%, reflecting an economic downturn that was spreading throughout the world’s key markets.
Record-weak U.S. sales continued in November, compelling Wagoner and leaders from Chrysler,and the UAW to head to Washington on two different occasions to plea for a rescue.
On their initial visit to request $25 billion in direct loans, the executives were chided by lawmakers for flying in on corporate jets. For their second appearance, this time to pitch for a $34 billion rescue package, they returned to Washington by car.
GM, which swore off talk of bankruptcy through the fall, admitted if it did not receive support by the end of the year it would not have the money to fund operations.
At one point during the second round of hearings, GM said it would seek a takeover of Chrysler again should the government desire the combination, and it revealed in a viability plan to Congress intentions to divest Saab, begin negotiating a range of options with its Saturn dealers, pare Pontiac down to a niche division and focus on a future strategy comprising the Chevrolet, Cadillac, Buick and GMC channels as its core brands.
However, as negotiations between Democrats and Republicans trudged into December, Wagoner’s future became the focal point.
Sen. Christopher Dodd (D-CT) suggested on national television Wagoner “move on,” as punishment for the auto maker’s previous missteps. Sentiment in Detroit and on Wall Street differed, with experts and analysts calling for Wagoner, who joined the auto maker out of college in 1977, the best choice to guide GM through its restructuring.
Lutz, who came out of retirement at Wagoner’s behest in 2002, compared the ouster to “blaming the mayor of a city that has been hit by an earthquake.”
As Wagoner’s fate remained up in the air at year’s end, so too did that of the auto industry at large. With a credit crisis sweeping the globe, even “hot spots” such as China and India began seeing lackluster demand. In Europe, governments raced to the rescue of their national auto companies with credit lines and cash infusions.
In the U.S., however, partisan and regional agendas took precedence, with Republicans from the transplant-laden and union-averse southern states torpedoing a $14 billion package meant to keep GM and Chrysler afloat with restructuring oversight from a national “car czar.”
But citing a fragile economy, President Bush stepped in and pledged enough support to at least get GM and Chrysler into February and under a friendlier, more Democratic administration and Congress.
By then, GM reportedly had hired a law firm specializing in bankruptcies, just in case.