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GM cuts bring temporary relief for ailing giant

News of massive jobs cuts at GM may temporarily remove the cloud of bankruptcy now hovering over the world’s largest automaker, but stormy weather still lies ahead for the automotive icon, analysts say. By Roland Jones.
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News of massive jobs cuts at General Motors Corp. may temporarily remove the cloud of bankruptcy hovering over the world’s largest automaker, but stormy weather still lies ahead for the auto icon, analysts say.

GM said Monday it plans to cut 30,000 workers, or about 9 percent of its global work force of about 325,000 people. The job cuts — 5,000 more than expected — are part of an effort to slash $7 billion of expenses by next year, which includes closing nine North American assembly plants and three service and parts facilities.

A spate of downsizing would seem to be just the ticket for GM, now struggling to cope with a slump in demand for gas-guzzling SUVs — its longtime cash cow — and the crippling costs associated with its workers’ massive healthcare bills and pensions, while at the same time warding off competition from nimbler and more efficient foreign car manufacturers like Toyota.

But GM still has a long road ahead to profitability, auto industry analysts say.

In October, GM struck a deal with unions that should cut its annual healthcare costs by $3 billion. But its pension plan, the biggest in U.S. industry, remains in crisis. And the company faces tough negotiations with its unions to reduce its costs, keep them under control and must convince Wall Street it can entice car consumers with a new and exciting product line Global Insight’s automotive industry analyst Rebecca Lindland told CNBC.

“And all these areas have to be maxed out,” she said.

2005 has been a rough road for GM. The car maker has lost almost $4 billion this year alone, shocked investors with earnings restatements and seen its stock price tumble to 18-year lows. GM’s massive staff cuts did little to brighten the outlook for the company or its stock price Monday. Shares of GM were down 1.95 percent at $23.58 by the close of trading on the New York Stock Exchange.

Monday’s layoff plan also did little to impress industry analysts like Efraim Levy, automotive industry analyst at Standard & Poor’s. While Levy believes the company has enough cash to keep it from filing for bankruptcy any time soon, he thinks serious challenges lie ahead for GM, most particularly its negotiations with its labor unions.

“This [announcement] is not enough,” Levy told CNBC, noting that the company will face challenges when it comes to removing employees who are employed under union agreements from its payrolls.

“There has been some progress with healthcare costs, but GM has to negotiate these job cuts with the unions and they have their work cut out for them,” Levy said in a CNBC interview. “They can’t just close down plants without union agreements.”

GM said Monday the job cuts will come primarily through attrition and early-retirement packages to mitigate the impact on workers. Some workers who don’t choose to retire could go into jobs banks, which pay laid-off workers their salary and benefits. GM’s Chairman and Chief Executive Rick Wagoner said details about layoffs and early-retirement packages still need to be worked out with the United Auto Workers (UAW) and other unions.

More union woe could come in the form of a strike at Delphi, GM’s top parts maker, which filed for bankruptcy last month. If the UAW’s negotiations with Delphi break down and workers strike it could force GM to quickly burn through its $19 billion in cash and make a bankruptcy filing far more likely analysts say.

Last week, GM’s Wagoner rejected claims that the company may be heading for bankruptcy. On Monday, the UAW, which is in talks with GM about labor concessions, said GM’s 30,000 layoffs were “extremely disappointing, unfair and unfortunate” and said they would make negotiations more difficult.

Critics of GM say the company has operated more like a bank than an automaker by offering low-cost financing loans to sell its cars. The company has offered a constant series of incentive programs since the Sept. 11, 2001, terrorist attacks. Its most recent discount plan, announced last week, allows anyone in the United States to buy vehicles at the same price employees of GM’s auto suppliers pay.

Using its discount programs, GM has effectively bolstered sales by offering low-cost financing in much the same way that banks have spurred home buying with low-interest mortgages, but sales have slowed since the Federal Reserve began raising interest rates last year, making it more expensive to borrow.

Now Wall Street wants the company to drive up revenue with a new and bold line of products.

“They have to figure out a way to sell cars. To be successful they have to have a product that sells without incentives,” said Andrew Harding, chief investment officer at Allegiant Asset Management, where he helps run $15 billion worth of fixed-income assets such as bonds issued by the automaker’s finance unit, General Motors Acceptance.

GM’s job cuts will shake consumer confidence across the United States and ripple through the auto parts industry, but the impact on the economy as a whole will be slight according to economists. The job cut plan is the largest single U.S. layoff announcement in nearly three years — and just more bad news for consumers already weighed down by high energy prices.

“Everyone understands the old adage that ‘What’s good for GM is good for the U.S. economy,’ and if GM, the bellwether, is struggling, it very clearly affects confidence,” said Michael Gregory, senior economist at BMO Nesbitt Burns. “From a manufacturing standpoint, it’s going to have ripple effects into the parts industry as well — adding to the headwind on the manufacturing side,” he added.

Further down the road, bigger problems may be lurking for GM and the broader automotive business.

Over the next decade, automotive manufacturers are likely to find it hard to find good workers, as they are hit hard by a looming shortage of skilled labor in the U.S. manufacturing industry according to research conducted by Advanced Technology Services, a manufacturing services company, and AC Nielsen, a consulting and custom market research firm.

The big problem for Detroit is an aging workforce. The average age of an automotive worker is 55, and so as the Baby Boom generation nears the traditional retirement age of 60 and these experienced workers retire, automakers and suppliers are going to be left with an inexperienced and less proficient workforce. Fewer apprenticeship programs and fewer high school graduates pursuing manufacturing skills are likely to exacerbate the problem.

“There was a time when Detroit families would pass down their manufacturing job to a relative, but all that has really stopped because there has been so much instability and uncertainty in the business,” said Jeff Owens, president of Advanced Technology Services. “Young people no longer want to pursue a career in manufacturing.”

ATS surveyed some 100 automotive industry executives for its survey, asking then about their views on the coming skilled worker shortage, which the U.S. Bureau of Labor Statistics says will reach 5.3 million people by 2010, increasing to 14 million by 2015. The decline in skilled workers, which is projected to hit in the next five to 10 years, is expected to cost manufacturers an average of $50 million each.

Most auto executives who participated in the survey said most of their costs would come from having to train and recruit new skilled workers, while missed production, paid overtime and lost customer satisfaction are also expected to crimp company profits. Seventy percent of the executives polled said they would be prepared to outsource an entire department or job to avoid doing it in-house.