GM overhaul to cut 25,000 US jobs

Chairman and chief executive Rick Wagoner told the company’s annual shareholder meeting in Delaware on Tuesday the overhaul will include the closing of a number of assembly and component plants and save $2.5 billion annually.

“The most challenging and important operating issue we face is getting GM North America, our biggest business unit, turned around and back into a profitable position,” he said.

GM lost $1.1 billion in the first quarter of 2005, with the North American division posting a $1.3 billion loss.

The announcement suggested a new push by GM to streamline operations in the US in the face of high costs and a steady decline in market share, mainly to Asian-based automakers.

Rising costs

Wagoner acknowledged that GM has been pressured by the rising costs of materials and healthcare and also by the “weaker sales mix” resulting from waning interest in high-profit four-wheel-drive vehicles.

Wagoner said GM will raise its capital expenditures by nearly $1 billion, mostly in North America. He said he expects to hold this higher level of spending through 2006.

GM will continue talks with unions to trim healthcare expenses

Another focus will also be on surging US healthcare costs, which have been a highly publicised drag on GM’s earnings.

“Our $1500-per-unit healthcare expense represents a significant disadvantage versus our foreign-based competitors,” Wagoner said.

The chief executive said GM would continue talks with the United Auto Workers in an effort to trim these costs.

“We have not reached an agreement at this time, and, to be honest, I’m not 100% certain that we will, but all parties are working hard on it,” he said.

Another part of the plan includes “clarifying and focusing” the role of each of GM’s eight brands, which will mean “fewer but strong entries” from Pontiac and Buick, Wagoner said.

Turnaround prospect

GM shares rebounded 1% to close at 30.73 on the prospect for a turnaround in the automaker’s performance.

“The market certainly doesn’t consider this as a cure-all, but this is certainly a step in the right direction,” Art Hogan, market analyst at Jefferies and Co, said.

Efraim Levy, senior automotive analyst at Standard and Poor’s, added: “The key will be how they refresh their vehicles” to adapt to changing consumer preferences and higher fuel costs.

“The most challenging and important operating issue we face is getting GM North America, our biggest business unit, turned around and back into a profitable position” Chairman and Chief Executive Rick Wagoner

“The biggest problem is products,” he said. “If you have the right products, then you can overcome a whole bunch of other challenges.”

UBS analyst Rob Hinchliffe said the plan is not aggressive enough and the job cuts are just a fraction of the 324,000 workforce of GM at the end of 2004.

“This amounts to little more than past 5% annual attrition levels,” he told clients in a note.

“Fundamentals remain poor given soft SUV sales and declining market share.”

Burnham Securities analyst David Healy said the move is positive but may not be enough. “General Motors North America has become structurally unprofitable,” he said. “It’s not temporary. It’s not cyclical.”