Not much has gone right this year for General Motors Corp., which has seen quarter after quarter of huge losses, production cuts, falling U.S. market share and high gas prices.
So it was with much relief Monday that GM Chairman and CEO Rick Wagoner announced a tentative agreement with the United Auto Workers that could save the company $3 billion a year before taxes in health care costs. GM has lost $3 billion in the first nine months of this year.
“It was critical for Rick, critical for the company and really for the whole industry,” said David Cole, chairman of the Center for Automotive Research. “GM’s board didn’t have Rick on a short leash and they weren’t threatening his removal, but they clearly expected to see something of substance and they got it.”
Wall Street analysts reacted positively to the news, although some said GM’s challenges are so numerous and varied that the health care agreement may not be enough. Among those challenges are competition from leaner Asian automakers, health care inflation, huge pension obligations and GM’s heavy reliance on sport utility vehicles, which have been faltering as gas prices rise.
“Severe operating challenges still confront GM, including mix, pricing and market share pressures plus a tough macro outlook as consumers face rising interest rates and energy costs,” Goldman Sachs analyst Robert Barry said in a note to investors.
GM, the world’s largest automaker, said Monday it lost $1.6 billion in the third quarter, or $2.89 per share, compared to a profit of $315 million, or 56 cents a share, a year ago. The loss included charges of $861 million for restructuring and lower asset values in North America and Europe.
Prompted by its deteriorating credit rating, GM also said it may sell a controlling interest in its profitable finance arm, General Motors Acceptance Corp., despite the boost GMAC gives the struggling automaker’s bottom line.
John Devine, GM’s vice chairman and chief financial officer, said the tentative agreement on health care would reduce GM’s retiree health care liabilities by about 25 percent, or $15 billion, over seven years. Cash savings are estimated at around $1 billion annually.
GM pays for health care for 750,000 U.S. hourly employees, retirees and their dependents. The company expects to spend $5.6 billion on health care this year. GM’s UAW members now pay 7 percent of their health care costs, while the company’s salaried employees pay 27 percent, according to GM. It’s not yet clear how that will change under the agreement.
Himanshu Patel, an auto analyst with JPMorgan Chase & Co., said the agreement will make a substantial dent in GM’s $80 billion health care liability.
Wagoner said the agreement marks the largest reduction GM has ever announced in a single day. GM had asked the UAW to help it lower its health care costs before its contract with the union expires in 2007, and both parties have been negotiating since the spring.
Wagoner refused to say whether GM would have unilaterally lowered retiree benefits if the UAW hadn’t agreed to the concessions by Monday, although he has said in the past the company had that option.
“These negotiations were done in a positive, cooperative, problem-solving spirit,” Wagoner told employees at GM headquarters in Detroit. “While it may have taken some time to reach this cooperative solution, I think it was time well-spent.”
The UAW said Monday that it agreed to the changes after an in-depth analysis of GM’s financial situation. UAW members must ratify the agreement, the union said.
“We believe it is clearly in the best interests of UAW-GM active workers, retirees and their families,” UAW President Ron Gettelfinger and chief GM negotiator Richard Shoemaker said.
Under the agreement, GM would expand eligibility for some benefits to former GM employees who became employees at auto supplier Delphi. GM spun off Delphi in 1999, and the auto supplier filed for bankruptcy protection earlier this month. GM had said it could be liable for anywhere from nothing to $11 billion in benefits for Delphi employees, but the company said that now could reach $12 billion because of the new agreement. Devine said it’s more likely GM’s liability will be about half that amount.
In its earnings report, GM said its loss excluding special items amounted to $1.1 billion, or $1.92 a share, far more than the loss of 87 cents a share expected by analysts surveyed by Thomson Financial.
Total revenue was $47.2 billion for the quarter, up 5 percent from $44.8 billion in 2004.
Wagoner said the results were disappointing but the company is moving ahead with its turnaround plan. He said the company is on track to reduce 25,000 manufacturing jobs and close several plants by 2008, a goal it announced earlier this year. GM plans to announce more details about that plan before the end of this year, Wagoner said,
GM expects to reduce its costs for plants and employees by $5 billion by late 2006, Wagoner said. In addition, GM wants to reduce its materials costs by $1 billion next year by using lower-cost suppliers.
Wagoner said the company is confident consumers will respond to its new vehicles, including a lineup of more refined and fuel-efficient SUVs.
“I think we’re trying to address the issues we face very proactively. We’re not relying just on cost reductions,” Wagoner said.
Wagoner wouldn’t say whether some of his turnaround plans have been accelerated since billionaire investor Kirk Kerkorian acquired a 9.9 percent share in the company this month. Kerkorian’s investment firm, Tracinda Corp., has said it may seek a seat on GM’s board.
GM’s North American division lost $1.6 billion in the quarter versus a loss of $88 million a year ago. The automaker’s North American market share was down to 25.6 percent from 28.5 percent a year ago.
GM Europe reported a loss of $150 million in the quarter compared with a loss of $236 million a year ago, but earnings more than doubled in GM’s Asia Pacific region to $176 million from $78 million earned in the year-ago quarter.
GMAC earned $675 million in the third quarter, up from $620 million in the same period in 2004. Wagoner said GM is looking for a partner to buy a controlling interest in GMAC and restore the division’s investment-grade rating. GMAC has had a harder time borrowing money since its credit rating was downgraded to “junk” status along with GM earlier this year.
The tentative health care agreement with the UAW includes contributions to a new, independent voluntary employee benefit plan, which will be partially funded by GM. GM said it will contribute $1 billion annually to the fund in 2006, 2007 and 2011.
Wagoner said the modified plan will continue to provide high-quality health care for GM’s hourly workers and retirees. He said more details will be released soon.
Wagoner said some job reductions will happen through attrition, but he acknowledged the process will be a difficult one.
“We will do our best to minimize this impact on each of you and your families,” he said. “We hope you will understand that, with these difficult actions, we will help to ensure a viable and growing GM for the future.”