Is GM Making the Right Moves?

DETROIT – General Motors Corp. (GM) has big plans to become a smaller company, and tried to prove it this week by offering buyouts to more than 100,000 workers and selling a majority stake in its commercial mortgage division.

While some analysts say those moves show the world's largest automaker is making progress in restructuring after losing $10.6 billion last year, others warn GM is unwisely seeking to cut its way to prosperity rather than investing in its vehicles to reverse sliding market share.

GM controlled about half the U.S. market 50 years ago, but that has slipped to less than 25 percent. The automaker's sales rose just 1.3 percent in the first two months of this year, largely due to increased fleet sales. That compares to a 6.9 percent increase for Asian brands and a 9.2 percent increase for European brands, according to Autodata Corp.

To compound GM's problems, the buyout plan will add retirees to the company's already bloated pension rolls even as market share is shrinking, Merrill Lynch analyst John Murphy said in a note to investors.

"Until GM stabilizes market share, rationalizes capacity at every point in the value chain and invests heavily in product, its restructuring actions will only allow it to tread water at best," Murphy said.

Still, GM is forging ahead with its restructuring efforts. GM said Thursday its finance arm, General Motors Acceptance Corp., has sold a 78 percent stake in its commercial mortgage business in a deal worth $9 billion. GM could get a share of that profit as loans or through its annual dividend from GMAC. The automaker is still in negotiations to sell a controlling stake in GMAC.

GM's buyout plan, one of the largest corporate buyouts in the last decade, offers between $35,000 and $140,000 to GM's 113,000 U.S. hourly workers. GM expects the buyouts will bring it close to its goal of cutting 30,000 U.S. hourly jobs by 2008.

GM also said it will bankroll early-retirement buyouts at Delphi Corp., its former parts division and major supplier. Delphi said in a court filing that up to 17,000 workers — or half its U.S. hourly work force — could be eligible for a $35,000 payment to retire. Also, up to 5,000 Delphi workers will be eligible to return to GM under the deal.

And more cuts are on the way. Workers at GM's technical center in Warren have heard rumors GM will cut engineering jobs at several technical centers next week. GM spokesman Robert Herta said Thursday the company won't respond to rumors, but he said GM has made no secret of its plan to cut 7 percent of its U.S. salaried work force this year. GM currently has around 36,000 U.S. salaried workers.

Burnham Securities analyst David Healy praised GM's efforts, saying the buyout offer was far larger than expected and will accomplish GM's job-cutting goals.

"It's well-executed. It's expensive, but they can afford it," Healy said.

But Murphy said the buyout deal was disappointing because it didn't spell out what will happen to the 17,000 Delphi workers who aren't eligible for the buyouts.

Delphi wants to cut its wage and benefit rates and has set a deadline of March 30 to reach an agreement with GM, the United Auto Workers and other unions. If no agreement is reached, Delphi could ask a judge to cancel its union contracts, an action that could lead to a devastating strike.

Delphi will ask the court separately to approve its buyout plan on April 7. It already has an agreement in place to buy out 13,000 UAW-represented hourly workers, but is still negotiating with its other unions. Delphi spokesman Lindsey Williams said the company expects to have agreements for those 4,000 workers by April 7.

Another big question is whether workers will take the buyouts. GM expects workers to begin retiring June 1, while the target date for the 5,000 Delphi workers to return to GM is Sept. 1.

JPMorgan analyst Himanshu Patel estimates as many as 39,000 GM workers could take the buyouts by the end of this year, which would cost GM around $4.2 billion but allow the company to accelerate attrition that was expected to take two years longer.

If all 13,000 UAW-represented Delphi workers retire and 5,000 return to GM, the automaker's costs could be close to the $5.5 billion GM has estimated for Delphi restructuring costs, Patel said.

As more workers enter GM's retiree ranks, GM's biggest problem could be soaring health care costs, Patel said. GM already has 2.5 retirees for every active worker, putting it at a significant disadvantage to companies like Toyota Motor Corp. (TM), whose U.S. work force is much younger.

GM and the UAW reached an agreement last year that would make retirees pay more for their health care, a plan expected to save GM $1 billion each year. A federal court judge is expected to approve or reject that agreement by April 1. But a new health care battle will come in 2007, when GM and the UAW negotiate a new contract.

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