General Motors to Close 12 North American Locations (Update4)
Nov. 21 (Bloomberg) -- General Motors Corp. Chief Executive Rick Wagoner today said he will close 12 facilities and eliminate 30,000 jobs in the biggest round of cuts in 14 years.
The world's largest automaker will idle or reduce operations at nine manufacturing sites and several non-manufacturing facilities, Wagoner said at a press conference today in Detroit. The moves will lower GM's $41 billion annual operations expenses by $7 billion by the end of next year, Wagoner said.
``This is the bad medicine they need to swallow to get back to some form of profitability,'' said Rebecca Lindland, senior analyst with Global Insight Inc. in Lexington, Massachusetts. ``If they can combine these actions with some concessions on the health-care side, and some really exciting products, it definitely sets them on the right path.''
The cuts go 20 percent deeper than the 25,000 jobs Wagoner said he planned to eliminate in June. Since then, GM's North American losses have ballooned to $4.8 billion for the first three quarters. Competition from rivals such as Toyota Motor Corp. has pushed the automaker's U.S. market share to 80-year lows. Ratings companies responded by reducing the automaker's debt to junk.
GM will close assembly plants in Doraville, Georgia; Lansing, Michigan; Oklahoma City; Spring Hill, Tennessee, and a car plant in Oshawa, Ontario. The automaker will shut down engine plants in St. Catharines, Ontario, and Flint, Michigan. GM will also reduce shifts at plants in Moraine, Ohio, and a second car plant in Oshawa.
The majority of the closings and shift reductions will be complete by next year. The Georgia and Oshawa closings will come by the end of 2008. Today's announcement was the biggest since GM said on Dec. 18, 1991, that it intended to close 21 assembly and manufacturing operations and eliminate 74,000 jobs, in the following four years.
Capacity Reduced
The closings will reduce GM's North America assembly capacity to about 4.2 million cars and trucks by the end of 2008, a 30 percent reduction, or 2 million units reduction, since 2002. GM will have flexibility to add production if there is market demand, Wagoner said.
``If they're not selling the cars, I don't know how they can keep running the plants,'' said Al Benchich, president of United Auto Workers Local 909 at a GM transmission factory in Warren, Michigan. ``The UAW has acknowledged that GM doesn't have the market share to support its current structure.''
GM shares, which on Nov. 17 touched their lowest level since 1987, have fallen 40 percent this year through Nov. 18. That is the most of any company in the Dow Jones Industrial Average as investors waited for Wagoner's job-cut plans. GM shares rose 14 cents to $24.19 at 10:33 a.m. in New York Stock Exchange composite trading.
Swaps
The cost to insure GM debt against default fell as Wagoner's announcement eased concern the world's biggest carmaker will declare bankruptcy.
Traders last week demanded upfront payments of more than $2 million plus $500,000 a year to insure $10 million of GM debt for five years with credit-default swaps. The premium fell to about $1 million a year without upfront payments today, according to Deutsche Bank AG and ABN Amro NV prices.
Investors use credit-default swaps to bet on a company's creditworthiness or protect against non-payment. A buyer typically pays an annual fee and gets the full amount insured if the borrower defaults. In return, the swap seller gets the defaulted loans or bonds. Swap prices typically decline when creditworthiness improves, and rise when it worsens.
Bonds
GM's 8.375 percent bond due in 2033 rose about 2.5 cents on the dollar to 73.5 cents today in New York, according to Trace, the bond-price reporting system of the NASD. The yield fell to 11.6 percent. The bond reached as high as 75.5 cents in earlier trading. It hasn't closed as high as that since Oct. 26, according to Trace data.
The extra yield, or spread, investors demand to own the debt rather than Treasuries narrowed 38 basis points to about 693 basis points, according to Trace. A basis point is 0.01 percentage point. The bond was the most widely traded company bond in transactions of $1 million or more, Trace data showed.
GM's U.S. sales fell 26 percent in October, and the automaker this month returned to rebates as high as $12,000 on some sport-utility vehicles to regain buyers. Asian automakers' October U.S. market share rose to a record.
Toyota is adding plants in North America and has released cars this year such as a redesigned Avalon sedan targeted at people who might otherwise buy GM's Buick Lucerne. Toyota plans to open a factory for Tundra pickups in San Antonio next year and a plant for the RAV4 sport-utility vehicle in Woodstock, Ontario, in 2008.
The Toyota City, Japan-based carmaker has said it plans to take 15 percent of the global auto market in the next decade, rising from about 12 percent now.
`Up in the Air'
``Over the long term, if GM keeps losing market share, everything is up in the air,'' Canadian Auto Workers President Buzz Hargrove said last week. The CAW agreed to more than 1,000 GM jobs cuts last month. ``The October numbers were just horrible.''
GM's U.S. market share, which peaked at 51 percent in 1962, fell to 26 percent in the first 10 months of this year. That's the lowest since 19.1 percent in 1925, according to the trade publication Automotive News.
Taking Charge
Wagoner reassigned two top lieutenants and took charge of North American operations on April 4 after the automaker lost $1.6 billion in U.S., Canadian and Mexican auto operations in the first quarter. He pledged to end losses.
Since then, in addition to the job cuts, UAW members agreed this month to concessions that will trim GM's estimated $5.6 billion annual health-care costs by $1 billion. Wagoner also said for the first time Oct. 17 he is seeking a buyer for a majority of the General Motors Acceptance Corp. finance unit, GM's most profitable group.
``The decisions we're announcing today were difficult to reach because of their impact on our employees and the communities where we live and work,'' Wagoner said. ``But these actions were necessary for General Motors to get its costs in line with the major global competitors.''
Wagoner Under Pressure
Wagoner has been under increased pressure since May 4, when billionaire investor Kirk Kerkorian, who led an unsuccessful Chrysler Corp. takeover a decade ago, said he was making a passive investment in GM shares.
Kerkorian, 88, has spent $1.7 billion this year for a 9.9 percent stake in the automaker. He said in September that he may ask for a board seat. At the Nov. 18 closing price, his holdings in GM had lost $334 million in value.
Delphi, of Troy, Michigan, filed for bankruptcy-court protection from creditors last month. Delphi Chief Executive Steve Miller has proposed cutting wages by two-thirds to as low as $10 an hour. He also has proposed reducing the number of U.S. hourly workers to about 10,000, from 33,650, according to the UAW. Union President Ron Gettelfinger has called the offer an ``insult.''
Concern about a bankruptcy at GM from a Delphi strike or other problems last week prompted Wagoner to send an e-mail to employees assuring them he didn't plan to declare bankruptcy. The letter helped the stock gain more than 6 percent each day on Nov. 17 and Nov. 18.
Even More?
The extent of the capacity reduction and jobs cuts shows ``the UAW realizes they have to move even before the expiration of their contract in 2007 to help this company,'' said Mirko Mikelic, a senior portfolio manager at Third Asset Management in Grand Rapids, Michigan. He questioned how significant the savings would be from the workforce cut if GM has to continue paying the laid-off union workers through the union's job banks program.
To contact the reporters on this story:
Jeff Green in Southfield, Michigan, at jgreen16@bloomberg.net;
John Lippert in Southfield, Michigan, at jlippert@bloomberg.net
Last Updated: November 21, 2005 10:35 EST
