General Motors Faces Pressure on Multiple Fronts

Strategic Insights -

As the American automotive industry continues to grapple with financial turmoil, General Motors (GM) is feeling the heat from all directions. The company's chairman and CEO, Rick Wagoner, has expressed growing frustration with the United Auto Workers (UAW) union over spiraling healthcare costs, which are expected to balloon by almost a quarter this year to $5.7 billion. Meanwhile, GM's financial health has deteriorated to the point where credit rating agencies now rate its bonds as suitable only for speculators.

GM's North American operations, which account for about three-fifths of the company's total revenues, are projected to post a pre-tax loss of $4 billion this year, according to Stephen Girsky, analyst at Morgan Stanley. This decline in profitability has led to a sharp decline in the company's share price, which has fallen by a third since the last annual meeting. Furthermore, Kirk Kerkorian's recent tender offer for 20 million GM shares has added to the pressure on Wagoner, making him GM's third-largest shareholder.

The unions are likely to be the focus of attention in the coming weeks, particularly as Wagoner announced that the company plans to close several more plants and trim its US blue-collar workforce by 25,000 "or more" over the next three years. This would bring the company's worldwide payroll below 300,000 for the first time since 1940.

Key Takeaways:

  • Rick Wagoner, General Motors' chairman and CEO, has expressed growing frustration with the United Auto Workers (UAW) union over spiraling healthcare costs, which are expected to balloon by almost a quarter this year to $5.7 billion.
  • GM's North American operations, which account for about three-fifths of the company's total revenues, are projected to post a pre-tax loss of $4 billion this year, making it difficult for the company to improve its financial situation.
  • The current contract with the UAW is due to run until September 2007, but GM has already canceled merit increases for salaried employees this year and reduced contributions to employee stock savings plans by 60 percent.
  • The UAW has shown flexibility in the past, such as allowing Delphi to hire new workers at a cost of $23 an hour, less than half the wages and benefits of existing UAW members.
  • Top UAW representatives are set to meet in Detroit tomorrow to discuss their negotiating strategies with GM.
  • Rick Wagoner has announced plans to close several more plants and trim the US blue-collar workforce by 25,000 "or more" over the next three years.
  • The company currently employs 111,000 hourly-paid workers in the US.
  • The UAW faces a further erosion in membership even with fresh concessions.

Statistics:

  • GM's North American operations are projected to post a pre-tax loss of $4 billion this year.
  • Healthcare expenses are expected to grow by almost a quarter this year to $5.7 billion.
  • The company's share price has fallen by a third since the last annual meeting.
  • The UAW has a contract with GM that is due to run until September 2007.
  • The UAW currently employs 111,000 hourly-paid workers in the US.

Sources:

  • The Financial Times, "Wagoner's patience wears thin as GM faces global headwinds"
  • Morgan Stanley, "General Motors: A difficult road ahead"
  • Bernstein & Co, "UAW's flexibility and its implications for the industry"
  • General Motors, 2005 Annual Report
  • United Auto Workers, 2005 Contract with GM