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GM Cuts Costs to Stop Its Cash Burn

Reacting to the worst car market in a decade, General Motors laid out a series of moves on July 15 to slash costs and raise cash as the company struggles to get through radical changes in the car market.

Chairman and CEO G. Richard Wagoner Jr. said GM will save or raise about $15 billion in cash with a slew of moves. GM plans to slash salaried worker costs by 20% by cutting jobs and retiree health-care benefits. The company's U.S. salaried workforce is 32,000. GM also says it will cut marketing and advertising budgets and capital expenditures. Beyond that, GM also will sell more assets, perhaps even an equity stake in its profitable overseas operations. "We're going to have to ride it out until market conditions settle down," Wagoner told reporters.

Whether Wagoner's latest moves will be enough is an open question. GM is assuming American consumers will buy 14 million cars a year, down from 16.1 million last year, and that its market share will be around 21%. Last month, industry sales slowed to a 14-million-vehicle annual selling rate and GM's market share was 21%. GM will have to hold its market share to keep its turnaround plan from losing steam.

GM will need to stop the slide to have any chance of a turnaround. "They always say the latest restructuring will be enough," says Maryann Keller, an industry analyst who sits on the board of dealer chain Lithia Motors (LAD). "If things get worse, they will have to adjust again."

Uncertainty about auto sales and fuel prices have punished GM's stock, which recently traded for under $10 a share and is down 74% in the past year. Investors have been fearful that sales could keep falling and that GM's profit center—trucks and SUVs—has evaporated. Through June, GM's sales are down 16% with truck sales off 20%. GM shares rose 6% in afternoon trading July 15, to just under $10.

White-Collar Job Cuts
Wagoner and GM have been under intense pressure in recent months as $4-per-gallon gasoline has hammered the company's profitable pickup truck and SUV lines. GM burned through $6 billion in cash from the end of October to the end of March. The free fall in truck sales—GM's core business—even prompted Merrill Lynch (MER) analyst John Murphy to write in a report that GM would need to raise more cash to avoid bankruptcy.

The auto giant had $24 billion in cash at the end of March. Analysts figure the company has burned more since then.

To stay flush, Wagoner took the ax to his white-collar workforce. He wouldn't give numbers, but said the company will use mostly early retirement and attrition programs to thin the staff. GM also plans to eliminate health-care coverage for white-collar retirees over 65.

The cuts won't end there. GM has already said it will close four truck plants. But more closures are on the way. The company already said it will cut 150,000 trucks a year. New cuts at factories will take out the same amount by the end of next year. Shareholders will share the pain, too. GM is cutting its 25¢-per-share dividend, which should save some $800 million in cash between now and the end of 2009. Wagoner will also cut executive bonuses.

Competing While Cost-Cutting?
Some of GM's cost-cutting could put the company on a slippery slope. The company will cut its capital expenditures budget by $1.5 billion to $7 billion. Vice-Chairman Robert Lutz says no significant new-car programs will be cut. The savings will come from eliminating or delaying development of new trucks, since they're out of favor anyway.

But it could make a product race with Toyota tougher to sustain.
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