FREE PRESS SPECIAL REPORT DAY 1 OF 3: GM's dilemma: No easy answers to halt decline


April 29, 2005

It's the business story of the year: How can General Motors Corp. work its way out of the devastating predicament it has fallen into?

The behemoth automaker is fresh off its worst financial quarter in 13 years and its stock price is at a decade-long low. And automotive industry and Wall Street experts agree:

•This bleak situation is likely to get worse before it gets better.

•The old way of solving such crises may not work this time.

During the past 25 years, Detroit's automakers have fallen into a depressing cycle. Sales suffer as foreign competitors grab a greater and greater share of the U.S. car and truck market.

A company starts losing billions of dollars a year and investors clamor to cut costs. So plants are closed, tens of thousands of workers are laid off and the company emerges smaller, but profitable -- at least for a while.

The problem is that GM has been losing market share, shutting plants and eliminating white-collar jobs for more than two decades. The smaller GM gets, the harder it becomes to generate the money needed to provide 1.1 million employees, retirees and their families with all the benefits they've been promised.

Many investors and GM leaders worry that the automaker is now at the point where it needs all of its remaining plants making as many cars and trucks as the company can possibly sell to generate enough cash to keep up with ever-rising medical bills and pension checks -- and still have any hope of making an acceptable profit for the shareholders who own the company.

They fret that closing more plants and eliminating thousands of additional white-collar jobs will be especially futile if it just pushes more employees into retirement where they still get paid health care and pensions or into special programs where laid-off UAW workers still collect a major portion of their wages, and all of their benefits, not to work.

"GM may need to shrink a little, but it needs to do so without making all these people retirees that cost you money. If it were the obvious answer, they'd have closed three or four plants yesterday," said Robert Hinchliffe, who studies the auto industry at UBS Inc. in New York.

As a result, GM is resisting a big purge, at least for now. It remains focused on selling its way out of this crisis -- hoping its new models will sell well enough to reverse its 25-year slide in the U.S. market.

That means every new model is being scrutinized and its sales evaluated with an unusual sense of urgency by investors, not to mention a nervous Detroit automotive community, that wants proof -- and wants it right now -- that the automaker can stop the bleeding.

If losses continue to mount during the spring and early summer, a GM official acknowledged to the Free Press, a major cost-cutting plan with lots of layoffs and closures "will have to be put on the table; it becomes a possibility if this doesn't turn around."

"There is no easy answer for GM," said Darren Kimball, who advises investors on the auto industry for Lehman Brothers, a New York-based stock brokerage firm. "There are a whole bunch of things they've got to get right, that have to go right for them, like their costs, their brands and their products."

Everybody's talking

From Wall Street to Washington, business and government leaders are debating GM's predicament.

In just over a month, GM has shaken up its executive ranks, watched its stock tumble by 25 percent, been dragged into a Securities and Exchange Commission investigation of Delphi and reported that it lost $1.1 billion in the first three months of the year after car and truck sales unexpectedly fell.

It also spent $3.5 billion in savings during the first quarter and stunned investors by refusing to project how much money it might make or lose the rest of 2005 -- a year that will almost certainly be ugly for GM. A "year of reckoning," automaker insiders say.

Most expect GM will suffer all year, at best breaking even and at worst losing hundreds of millions of dollars.

"This is a major crisis for GM. It's waking up into a world that is fundamentally different than the world it grew up in," said former Clinton administration labor secretary Robert Reich.

"The GM story says a lot about where America was, is and will be in the future. It's one of the country's biggest stories, right there with Wal-Mart. GM will survive -- the question is just what it will look like, what form it will take and what happens to Detroit."

In a CNBC interview on April 19, President George W. Bush was asked about GM and how high gas prices might hurt the sales of its most popular and profitable vehicles, big pickups and SUVs.

"Well, I think they're going to have to learn to compete," Bush said. "In other words, if the consumer starts saying we want a different kind of automobile, they're going to compete once again with, say, the Japanese automobile manufacturers ..."

Competing with the Japanese automakers has been GM's biggest challenge for more than 25 years.

In 1980, GM made 44.7 percent of the cars and trucks sold in this country. Japan's biggest automakers -- Toyota, Honda and Nissan -- combined for just over 15 percent of the market. By 1997, their combined share was 20 percent, while GM's had fallen to 31 percent.

Through the first three months of this year, GM's market share has tumbled to 25.6 percent, while the three Japanese automakers are at a combined 27.7 percent. If that keeps up, 2005 will be the first year that the combined share of Toyota, Honda and Nissan exceeded GM's.

GM's current financial problems can be largely traced to the fact that its new cars aren't selling as well as it hoped and its once-popular pickups and SUVs have become less popular.

Through March, GM vehicle sales are down 5.1 percent and car sales down 9.2 percent, despite new models like the compact Chevrolet Cobalt, full-size Buick LaCrosse and midsize Pontiac G6. Analysts estimate that a third of GM's sales are discounted vehicles to GM employees, retirees, friends, family or fleets.

A GM official, who asked not to be named, told the Free Press "that first quarter surprised us. It was a lot worse than we expected."

Rick Wagoner, GM's chairman and chief executive officer who just took over the day-to-day operations of the North American car-making business, is emphasizing new products and getting new cars and trucks out to the market as fast as possible, such as the next generation of big GM trucks.

He is determined to stay the course, keep investing billions in new products, and sell GM out of this downturn. GM will spend $8 billion on new products this year, up from $7 billion in 2004.

When GM announced its big first-quarter loss last week, Chief Financial Officer John Devine reiterated that strategy, saying GM is focused on "getting our products right today" and cutting costs -- chiefly in the area of health care.

GM declined to make a senior executive available for this story, but in a conference call earlier this month, GM executive director of industry analysis Paul Ballew described the automaker's strategy this way: "Our focus remains on getting the basics right, continuing to leverage our new product, continuing to build our brands in the marketplace. And as long as we can continue to do that we expect to see our sales improve as we move into the back end of this year and into 2006."