GM looks to slim down, save billions

GM looks to slim down, save billions
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General Motors Corp. will offer retirement incentives to 46,000 of its
hourly workers next month as part of a plan to cut labor costs, Chairman
and Chief Executive Officer Rick Wagoner said during a presentation to
analysts Thursday afternoon.

The analysts were encouraged by the move to shore up GM's sinking stock
price and said they expected up to 20,000 workers to accept offers to leave.

That would allow the company to hire workers in nonassembly jobs at much
lower cost under the UAW contract completed last fall, saving the
company billions.

It wasn't known Thursday exactly who will be eligible or what will be
offered. GM has 73,000 hourly workers.

The offers this year are expected to be similar to those made in 2005,
when cash incentives ranged from $35,000 for those with at least 30
years of service to lump-sum buyout payments of as much as $140,000.

Wagoner also said if auto sales remain weak, GM may need to close some
manufacturing operations.

Some workers contacted Thursday said they would stick with their jobs in
tough times, having turned down the offer just two years ago.

Wagoner told analysts the automaker was working with the UAW to put the
finishing touches on a package of retirement and buyout offers that it
expects to offer in February.

Out in springtime

GM would expect those who take the offer to begin leaving by April.

GM announced packages for about 5,200 workers last month in specific
locations as a first step in the process.

"We are now working through the details of phase two of the program,"
Wagoner said. "We expect to finalize that in February. In total, for the
two phases, the base to draw against is about 46,000 who are currently
eligible for retiring."

Wagoner did not say how many workers the automaker expects to take the
offer, which is expected to look similar to a special attrition program
in 2005 that prompted 34,410 workers to leave GM.

People familiar with the program expect GM to eventually offer buyouts
and retirement packages to its entire workforce.

The retirement and buyout program is intended to help GM further cut
costs after Wagoner said that $9 billion in cuts last year isn't enough
to staunch the automaker's losses, which totaled $12.5 billion in 2005
and 2006.

GM has said that its new labor agreement can take it much of the way to
being a more profitable and competitive company, with one analyst
estimating that its new U.S. labor contract could cut nearly $1,400 from
the cost of every vehicle GM builds.

All about savings

Wagoner said he expects the new labor agreement to save GM between $4
billion and $5 billion annually in labor costs by 2010. The automaker
expects to save $5 billion by 2011, he said.

While much of the savings will come from the new retiree health-care
trust -- known as a voluntary employee beneficiary association, or VEBA
-- a significant amount will come from reduced hourly labor costs, and
it will come sooner than many analysts expected.

GM has said it expects the VEBA to save it about $3 billion annually
beginning in 2010.

GM can further cut its labor costs by reducing its workforce and
replacing some of its hourly workers with lower-paid new hires, taking
advantage of a clause in the new contract that allows the automaker to
hire a second tier of workers at a lower wage and benefits rate.

Under the new UAW contract, GM can pay new hires in so-called noncore
jobs about half the hourly wage rate and a lesser benefits package than
current workers. Generally speaking, noncore workers are expected to be
defined as workers doing nonassembly jobs that could be done by a supplier.

Will enough leave?

The big question, analysts say, is how many workers GM will be able to
entice to leave.

Some have expressed concern that GM could have difficulty getting people
to take the voluntary special attrition packages this year, since the
company just reduced its workforce through the 2005 attrition plan.

Several thousand workers who weren't eligible to retire or to take the
early-retirement incentive then, however, are now eligible. Since this
summer, the number of hourly workers with 30 or more years of service
has grown from about 17,000 to nearly 22,000.

Automotive analysts have estimated that between 11,000 and 20,000 will
take advantage of the buyout and retirement offers this year, and were
encouraged by additional comments from Wagoner that the automaker has
set a goal of full-capacity utilization of its factories in high-cost
countries. That could lead to further plant closures should vehicle
sales remain below historical trends.

Analyst Brian Johnson of Lehman Brothers, who expects 11,000 workers to
take the buyout this year, said GM North America operated at 82%
capacity in 2007. He said he thinks GM could stand to close an
additional three to four assembly plants in North America.

Stock slipping

Sean McAlinden, vice president of research at the Center for Automotive
Research, said GM at most needs only half of the 46,000 who could take
retirement offers to leave to reap the desired financial benefit and
show Wall Street that it will see some benefit from its new UAW contract
before 2010.

"GM has now decided to move quickly because of the dismal situation in
the financial markets," McAlinden said. "GM's stock has been slipping"
because of problems with the housing market and its 49% stake in GMAC,
whose mortgage unit Residential Capital has been losing money as
mortgage defaults have climbed.

"They've got to emphasize the savings from the labor deal more,"
McAlinden said. "The time to move faster is now."

Bradley Rubin, an automotive analyst from BNP Paribas, said Wagoner's
comments were encouraging.

"I think they are getting people out the door a little quicker than we
would have anticipated," Rubin said. "It's a positive that they're
taking costs out."

With the new contract, GM now expects that it can reduce its structural
costs from what had been 34% of total spending to about 23% by 2012,
Wagoner said, "which is a very, very competitive number."

Wagoner said GM is reducing its hourly labor costs from what was about
$18 billion in 2003 and $10 billion in 2007 to what should be about $5
billion by 2011.

Becoming competitive

"Spending for U.S. hourly and salaried legacy pension and health care
will decline from an annual average of $7 billion over the last 15 years
to approximately $1 billion per year in 2010," Wagoner said. "That cost
reduction is obviously huge and really important to enabling us to get
truly competitive."

McAlinden estimates that GM can save $2.4 billion a year by using its
second-tier wage by 2011 if it replaces about 40% of its workforce with
lower-compensated workers, which is what he expects.

Under the new contract, traditional workers with the highest wage and
full benefits will cost GM about $62 an hour, while new hires at the
lower wage and benefits level will cost just $26 per hour.

And even after GM begins moving new hires into higher-paid assembly
jobs, McAlinden said, their costs will rise only to about $47 per hour,
since their benefits package will not become richer.

"On paper, GM has about 16,800 Tier 2 jobs ... and could have 6,000 more
if they do some in-sourcing," McAlinden said. That, he said, is the
number of buyout and retirement deals for which GM is aiming.

GM has already offered buyouts to about 5,200 workers at GM's 23
service, parts and operations facilities, and a handful of plants that
are closed or have large jobs banks.




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