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updated 2/10/2006 3:32:40 PM ET 2006-02-10T20:32:40
ANALYSIS

General Motors Corp. made some tough decisions this week. Unfortunately, the automaker's mess requires tougher moves and a jolt of imagination.

The numbers speak for themselves. The future cash savings from a dividend cut, a reduction in white-collar benefits and a cut in executive pay — totaling less than $800 million a year overall — merely skirt the problems facing a company that reported a net loss of $8.6 billion in 2005.

The issues, like two invisible monster trucks in the room, are more than a quarter million workers with hugely expensive benefits and a management team that hasn't figured out how to design and build cars as well as those sold by Asian rivals. You can't fix problems like these with financial nips and tucks.

It's logical to expect investors and the small fraction of GM workers affected by the company's latest plans to share the pain. But in all fairness to the union workers who ultimately will be forced to endure the worst, the reductions in the dividend, executive pay and health care benefits for white collar employees don't go far enough, particularly if management hoped to make a point.

Since GM is looking to shed a 51 percent stake in its highly profitable financing arm, General Motors Acceptance Corp., it's easy to argue that the dividend should have been eliminated rather than halved. GMAC contributed $2.5 billion in cash to GM last year, and the potential divestiture would cut future cash flow in half, while GM's dividend cut will save just $565 million.

Likewise, since the intent is so obviously symbolic, management could have made a far stronger statement by giving up all salary and agreeing to a bonus arrangement that only rewards a successful turnaround.

Instead, the plan includes an assortment of pay cuts at odd-sounding increments: a 50 percent reduction for the chief executive and board members, 30 percent for three vice chairmen and 10 percent for the general counsel. To their credit, there will be no bonuses for last year's dismal performance, but no pledges were made on that score for 2006.

The United Auto Workers union dismissed GM's moves as unworthy of new concessions, suggesting the upcoming contract brawl will be even more venomous. That's troubling, given that GM lost nearly $1,000 per vehicle in a year when it sold more than ever before. And with Toyota Motor Corp. making roughly $1,500 per car, GM obviously is spending too much to make a less exciting product.

The unavoidable fact is that GM's unionized workers enjoy a level of pay, health insurance and pension benefits that can't be sustained. And then there's the jobs bank, a singularly unique entitlement program that pays laid-off workers most of their salaries for an extended period.

Peter Morici, an economist at the University of Maryland, estimates that to make money, GM's hourly cost per employee needs to be nearly halved to about $40 — a number he derives from the steel industry, a business that's been dragged kicking and screaming into a new era of profitability. Some may dispute his math, but it's clear that more than incremental change is required.

The union argues that such a reduction would amount to a huge broken promise that would leave many of its members in dire straits. True enough, GM hasn't lived up to its word, but the union also bears responsibility for playing hard-enough ball to extract such extravagant promises.

Morici and other experts assert that without big sacrifices soon, there will be far more job losses than anyone wants to admit. And they contend workers in the steel industry and at Japanese auto plants in North America with lower pay and benefits don't struggle to make ends meet.

But analogies to the steel industry only go so far. Cars aren't a raw material. To make one that sells for a premium price, its needs to be hotter, more powerful, more efficient or more something else than a rival product.

"Cutting costs is not a business plan. You can cut costs but it doesn't sell cars," said Gary Chaison, professor of industrial relations at Clark University in Atlanta.

Here, the example of Motorola Inc. is instructive. The cell phone maker once ruled the market with technology and design before falling into a similar rut as GM, where innovation has often amounted to little more than slapping different brand names on the same vehicle platform.

Motorola's revival involved wrenching cost cuts. But it also developed sharp new handsets, including the single most recognizable phone in the industry's history, the RAZR.

GM needs a RAZR badly, and management has given little hint anything so bold is in the works.

© 2013 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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