GM confident it can compete even after cuts
General Motors Corp will be able to invest more to develop cars and crossover vehicles even after $10 billion in cost cuts under a rushed restructuring that the US automaker sees as the last of its kind, the company's president said on Tuesday, Reuters reported.
"In an uncertain market we need to be in as much in control of our own fate as possible," GM President and Chief Operating Officer Fritz Henderson told Reuters.
Henderson, GM's No. 2 executive, was charged by Chief Executive Rick Wagoner in June with pulling together a plan to address deepening concerns about the automaker's ability to outlast a downturn in U.S. auto sales analysts saw as testing its $24 billion in cash reserves.
Facing high gas prices and a rush away from trucks and SUVs, GM surprised Wall Street with a plan that relies more heavily on cost-cutting than new borrowing or asset sales.
In fact, the central element of GM's plan to shore up liquidity by $15 billion through 2009 is cutting $10 billion in additional costs. That will come through the elimination of thousands of white-collar jobs, including engineers, and a $1.5 billion cut in capital spending.
Most of the cuts stem from GM's decision to suspend development of a new-generation of full-size trucks -- a line of once highly profitable vehicles including the Chevrolet Silverado and GMC Yukon.
Although analysts credited GM with addressing the threat that it could run short on cash, some questioned whether the cost-cutting could hamstring its ability to compete in the market for more fuel efficient small cars.
"In the medium term, the primary risk for GM will be that the cash-economizing measures implemented as part of this program will compromise product offerings for years to come," said Calyon Securities analyst Mark Warnsman.
But GM's Henderson said the automaker would still invest more on developing cars and crossovers than it would have under prior plans. GM will do that within a total capital expenditures budget that has been cut to $7 billion for 2009, he said.
"Trucks while being historically highly profitable, they also have a voracious appetite for capital," Henderson said.
By not redesigning a line-up of new big trucks for launch in 2012 and cutting GM's related investment on big V8 engines and components, "it frees up our resources and allows us to focus on where the customer is going," he said.
GM has been criticized for a series of cost-cutting moves since 2005 that have fallen short given the continued slide in sales. But Henderson said senior executives believed they had taken the sweeping steps needed this time.
"I think we're confident, but you can't say with certainty in today's market," he said.
Henderson also said the most recent GM restructuring had been prompted by doubts about the company's outlook reflected in skittish equity and credit markets in recent weeks.
"How do you deal with increasing levels of pessimism and what can the company do? You obviously saw that in the month of June and early July in terms of our stock price," he said.
Henderson stressed that GM had assumed that overall US auto sales would slump to 14 million units in 2008 and not recover in 2009 as a way to ensure that its liquidity plan would hold up even under a continued deep slump.
GM planners, Henderson said, assumed that bankrupt former parts unit Delphi Corp would not generate any cash savings for the automaker through 2009 and would still require the same amount of assistance that GM has already pledged.
GM will take a charge related to its 49 percent stake in former wholly-owned finance subsidiary, GMAC, in the second quarter. But Henderson said GM saw no need for a cash infusion in GMAC, now majority-owned by Cerberus Capital Management..
"We haven't invested cash in GMAC. Nor do we expect to. You can't rule it out but we just don't think at this point that it's necessary," Henderson said.