GM Battled Costs, Renault-Nissan Alliance in 2006

Special Report

2006 Year in Review

General Motors Corp. waged a 2-front internal battle for much of 2006: One to fend off plans to create the world’s largest auto alliance from dissident shareholder Kirk Kerkorian and the other against its own massive cost structure that continued to tug North American operations into the red.

Kerkorian’s bid to create a 3-way hookup with Nissan Motor Co. Ltd. and Renault SA ultimately failed and GM declared success in shrinking its workforce in the U.S., cutting billions in fixed costs and squeezing out more efficiencies through shared global platforms.

In the biggest migration of workers in its history, GM moved 34,400 hourly employees – or 30% of its U.S. hourly staff – off the books through its special attrition program, which enticed workers to leave through buyouts or early retirement. It also flowed 5,000 former Delphi Corp. workers into the fold as part of the supplier’s bankruptcy agreement. That effort helped cut $6.8 billion in costs during 2006, with GM forecasting $9 billion in structural costs savings in 2007.

But overshadowing even that massive an event was Kerkorian’s play for GM to enter an alliance with Nissan and Renault, which made for nail-biting drama in the summer months of 2006.

The internal chess match over the soul of GM brought a storm of uncertainty on July 1, when Kerkorian’s Tracinda Corp. investment company filed papers formally pressing for a tieup. Press reports later chronicled Kerkorian’s direct talks with Renault/Nissan CEO Carlos Ghosn, who at the time said an alliance would benefit all parties, with Nissan gaining more capacity in North America and GM gaining work for its underutilized plants.

After two months of discussions, GM management, with help from Wall Street’s JP Morgan, argued against a linkup, concluding GM did not need a global partner to access world markets and that such a tie up would slow its North American turnaround. The Renault and Nissan boards also balked at GM’s demands cash compensation should an alliance be formed.

Ultimately, GM’s board, which included Kerkorian advisor Jerome York, unanimously voted down the proposal. Soon thereafter, York resigned from the board and Kerkorian reduced his GM holdings from 9.9% to 4.9%.

“As it turned out, we all agreed that the synergy levels were significantly in favor of Renault and Nissan,” GM CEO Rick Wagoner said when announcing talks had ended. “That’s just the way it came out.”

For his part, Ghosn said he got the message from shareholders when GM’s stock price rose and those of Nissan and Renault fell on news of the potential tie-up.

“It was clear that our shareholders were worried about it, and I’m sensitive to that,” Ghosn said. “Their concern was they didn’t want us to stretch ourselves too thin.”

GM’s success in fending off the alliance was viewed as a victory for Wagoner, who only a few months earlier had been considered vulnerable to an ouster, given GM’s close brush with bankruptcy. GM executives privately touted the company’s stock price, which grew 47% in 2006, as proof Wagoner was capable of leading a turnaround.

By year’s end, there was evidence some GM strategies announced in 2005 and executed in 2006, were working.

GM posted record net global revenue for the year of $207.4 billion, up 6.6% from $194.6 billion in 2005 and remained the world’s largest auto maker with worldwide wholesale deliveries totaling 9.1 million units in 2006 compared with 9.0 million the previous year.

That was enough to maintain a comfortable lead over hard-charging No.2 auto maker Toyota Motor Corp.’s 7.8 million units in 2006.

Although GM wound up the year nearly $2 billion in the red ($3.50 per share), that represented a sharp improvement from the net loss of $10.4 billion (up slightly from the originally stated $10.3 billion after adjustments for new accounting methods), or $18.42 per share, posted in 2005. The improvement included a net profit of $950 million in the fourth quarter

Company officials also went to lengths to point out in the annual report that excluding “special items” GM earned nearly $2.2 billion, or $3.88 per share from continuing core operations in 2006 compared with a loss of just over $3.2 billion in 2005, or $5.67 per share, the previous year.

Those items were costs the company was normally required by U.S. generally accepted accounting practices to include in its earnings reports.

Among the non-GAAP “special items” were adjustments in net income to encompassing “special attrition program” charges to related to the costs of GM’s financing of the early retirement program for Delphi Corp. workers.

Restructuring and impairment charges, defined as “ primarily consisting of severance costs and lease-abandonment costs” related to the auto maker’s own restructuring and downsizing program, including plant closings plus layoffs and early retirement programs were also among the excluded items.

Excluded as well were gains of the sale of business interests in other companies, such as its holdings in Isuzu Motors Ltd.

The second major battle within GM North America was scaling itself down to a size equaling its shrinking North American output. Wagoner tapped Troy Clarke, president-GM Asia Pacific, to take over for him as head of North American operations. Clarke oversaw the attrition program, but said GM’s transformation still had several steps to go. However, he projected sales for Saturn, Chevrolet and Buick would increase despite production cuts.

GM cut North American output in 2006 by 207,000 units compared with the previous year, as the auto maker looked to keep dealer inventories in check in the face of slowing consumer demand and a reduction in unprofitable rental-fleet sales. By 2008, the auto maker was expected to have reduced its North American capacity from 6.2 million units to 4.3 million, according to a Ward’s forecast, with a dozen plants on track to close in that timeframe.

Part and parcel of that strategy was a cut in the number of vehicles bound for rental fleets. That plan, started at the beginning of 2006, was designed to raise residual prices, of GM vehicles that lagged behind those of its Japanese competitors.

GM also pulled way back on incentives and vowed to stick to base prices that were closer to actual transactions.

Also on the sales block were international alliances and non-core business units.

The largest of those was GM’s late-November sale of a 51% stake in General Motors Acceptance Corp. to a consortium of investors led by Cerberus FIM Investors LLC. The consortium included the wholly owned subsidiaries of Citigroup Inc., Aozora Bank Ltd. and The PNC Financial Services Group Inc.

The long-anticipated transaction garnered about $14 billion in net cash proceeds and distributions over three years after repayment of inter-company debt, but before purchases of preferred equity in GMAC.

Internationally, GM in March also unloaded nearly its entire 20.4% stake in Suzuki Motor Corp. for about ¥234 billion ($2 billion). That followed 2005’s divestiture of GM’s 20% stake in Fuji Heavy Industries Ltd., maker of Subaru vehicles. However, GM retained a 3% share of Suzuki, the same level it had before 1998.

While retaining its engineering collaborative, GM sold its 7.9% stake in Isuzu for $300 million

At the same time, the auto maker poured investment into other overseas operations including:

The world’s biggest auto maker held onto that title, at least for 2006, selling 9.1 million vehicles globally, some 100,000 more than in 2005 and enough to fend off Toyota Motor Corp. for another year.

And, as 2006 drew to a close, GM was touting its global engineering capability.

A 7-year effort to build uniform global platforms across geographic regions was 80% complete, with all new vehicles now on global architectures, said Jim Queen, vice president-global engineering.

That included it’s new Global Crossover Vehicle, or Lambda platform, for the ’07 Saturn Outlook, GMC Acadia and the Buick Enclave, ushered in the end to GM’s failed stint as a minivan producer.

Saturn, slated to be completely integrated in product development with GM’s German Adam Opel Gmbh subsidiary by 2014, also based its highly praised ’07 Aura sedan on an Opel design and planned to bring ashore the Opel Astra subcompact to replace the Ion in ’08. The next Vue, arriving in May 2007 from GM’s plant in Ramos Arizpe, Mexico, shared its underpinnings with the Opel Antara CUV jointly developed and built in South Korea.

Of GM’s eight brands, only Saturn pulled out winning numbers both in sales and awards in 2006, winning the North American Car of the Year award for its new Aura sedan.

In other signs of the global footprint, GM announced it would import about 30,000 rear-drive V-8 powered Commodore sedans, rebadged as the Pontiac G8, from its Holden Ltd. unit in Australia beginning in model year ’08.

The auto maker also green lighted the Chevrolet Camaro for ’09 and moved up the launch of its ’07 GMT900 platform fullsize pickups by 16 weeks, hoping to get a jump on Toyota’s largest-ever Tundra, which premiered in February 2007.

On the other hand, GM shuffled its product portfolio toward more midsize vehicles and away from SUVs. It notably ended production of the Hummer H1, the iconic gas guzzler military vehicle made by AM General.

Yet it also axed the extended-wheelbase variants of the Chevy TrailBlazer and GMC Envoy midsize SUVs for the ’07 model year.

To bolster its “green” credentials in the face of mounting global-warming concerns and spiking gas prices, GM unveiled its Chevy Volt concept, designed as the gateway model between internal combustion engines and a far flung hydrogen vehicle future.