Despite cuts, GM stuck in low gear

Friday, May 04, 2007
Despite cuts, GM stuck in low gear
Sharon Terlep / The Detroit News






General Motors Corp. has broken sales records, turned out critically acclaimed vehicles and shaved tens of thousands of workers from its payroll.

But all that progress couldn't save the automaker from another money-losing quarter in North America -- a stark reality that underscores GM's competitive disadvantages and why it desperately needs a money-saving labor deal this year with the United Auto Workers union.

GM on Thursday reported a $46 million net loss in its North American operations for the first quarter and a narrow $62 million profit on its global operations. The results fell 80 percent short of projections by investment analysts surveyed by Thomson First Call.

While the North American loss is a $246 million improvement from last year, it comes at a time when GM is benefiting from aggressive cost-cutting measures, a deal with the UAW to cut its health care tab and a dramatically smaller work force.

In addition, GM's re-energized product lineup is bringing in $1,000 more in revenue per vehicle sold in North America than it did just a year ago.

But those improvements continue to be overshadowed by GM's crushing labor and retiree costs.

"If you look at the cost burden we bear in this area versus international competitors, it's really massive," GM Chief Financial Officer Fritz Henderson said in an interview with The Detroit News. "Health care remains for us and for the industry a major source of competitive disadvantage. It diminishes margins, diminishes cash flow."

GM is working urgently to close its labor-cost gap with Japanese competitors. Company leaders have said cutting health care costs -- a $4.8 billion tab for GM in 2006 -- will be central to labor talks.

Henderson said GM will enter labor negotiations with the UAW this summer "with a high sense of urgency." The goal is to secure a new labor agreement when the current four-year pact expires in September.

A 2005 deal with the UAW helped. Under that agreement, which shifts more health costs to retirees, GM is saving $1 billion a year.

But GM says it needs more -- especially when it comes to retiree health costs.

GM estimates it spends $3.3 billion a year to insure retirees and dependents, a cost not shared by foreign competitors, which offer less generous post-retirement benefits and have fewer retirees.

UAW talks a 'key event'

In addition to draining the bottom line, health care costs divert money from new product development, GM said. The automaker's 2007 capital expenditures are expected to fall more than $5 billion short of what Toyota Motor Corp. spent last year.

"The absolute key event looking ahead is the negotiations with the UAW," said auto analyst John Casesa, of Casesa Shapiro Group. "That's what's weighing on investors right now. There is more riding on this contract than there has been in decades."

UAW spokeswoman Christine Moroski declined to comment Thursday.

Union leaders in recent months have talked to rank-and-file workers about the need to help Detroit automakers become competitive and the sacrifice that will entail. But while they're warning of difficult negotiations ahead, the union also has said it's not going to cave in just because times are tough.

Tony Perrucci, a member of the UAW Local 595 in Linden, N.J., questions whether labor costs weigh on GM as much as the automaker says. The company already has outsourced a great deal of work, he said.

"We have all been through this before," Perrucci said. "And ultimately many people will lose their jobs if GM has its way in the name of their so-called competitive efficiencies."

Besides the labor costs, a number of factors played into GM's less-than-stellar first quarter.

The faltering housing industry is partly to blame. Defaulted mortgages led to a $305 million first-quarter loss at General Motors Acceptance Corp., the lending company still partly owned by the automaker. Also, GM results last year were inflated by the $395 million sale of its stake in Suzuki Motors.

Revenue down from '06

GM's overall first-quarter revenue was $43.9 billion, down from $52.4 billion a year ago, although the company sold a record 2.26 million cars and trucks worldwide through March.

GM also has increased the cost estimate of a settlement with Delphi Corp., its former parts operation, to $500 million this year instead of $400 million.

"I was looking for considerably better from them," said analyst David Healy at Burnham Securities. "The numbers were disappointing."

During a conference call with analysts and reporters Thursday, Henderson was pressed to explain how GM posted a North American loss after making so many improvements from a year ago.

"You're in a good spot right now in your product cycle; mix is up," Rod Lache, an analyst at Deutsche Bank, said during the call. "And you're not quite where you need to be by your own acknowledgment."

Henderson wouldn't forecast whether GM would make money in North America in the second quarter, but he expects global auto operations to improve. Gas prices, the housing sector and the rollout of key products, including the redesigned Chevrolet Malibu, will be deciding factors, he said.

"We need to stick to our plans, stick to the cost cutting," he said. "Keep doing what we're doing."

One analyst called GM's improvement in North America "paltry," especially since it managed to increase its revenue per vehicle by $1,000 from a year ago.

"This seems like a weak year-over-year performance to us given we are at the peak of GM's product cadence and GM North America revenue per unit showed significant strength," Goldman Sachs analyst Robert Barry wrote in a research note.

Investors sent GM's stock price down $1.75, or 5.4 percent, to $30.69 in trading Thursday.

You can reach Sharon Terlep at (313) 223-4686 or sterlep@detnews.com.
















© Copyright 2007 The Detroit News. All rights reserved.