Lift from Zero-Percent Financing Helps GM, But More Cuts Loom
WESTLAKE VILLAGE, Calif. — Power Information Network reported late last week on the success of General Motors' zero-percent APR program.
According to the company, the program provided a lift for the automaker both in terms of loyalty and conquests from competitors. However, despite this success, the automaker said today it is making further cuts to salaried positions and more to withstand the tough marketplace.
"The increases are much greater when the program results are compared to the first three weeks of June than compared with the March/May time period, suggesting there may have been an artificial change in buying patterns in early June," PIN officials explained.
In fact, PIN indicated that the tendency of GM owners to trade in for another model from the automaker climbed by more than 10 percentage points thanks to the subvention offering, compared to early June.
However, this statistic only increased about 5 percent when measured against the March/May time period.
"The rates at which GM conquested Ford and Chrysler owners rose 5 percentage points or more when using early June as the benchmark, but substantially less when compared to earlier in the year," executives said.
"GM's conquests of owners of Asian products followed a similar pattern, though the results in all three time periods are much smaller," officials concluded.
Percent of owners by OEM, trading to GM products:
March/May: 52.8 percent
June 1-23: 46.6 percent
June 24-July 6 (zero-percent APR program): 57.9 percent
March/May: 14.2 percent
June 1-23: 10.8 percent
June 24-July 6: 15.8 percent
March/May: 14.2 percent
June 1-23: 11.6 percent
June 26-6: 17.3 percent
March/May: 31.9 percent
June 1-23: 26.4 percent
June 24-July 6: 36.7 percent
March/May: 5.6 percent
June 1-23: 3.7 percent
June 24-July 6: 6.6 percent
March/May: 8.9 percent
June 1-23: 6.8 percent
June 24-July 6: 9.1 percent
March/May: 6.2 percent
June 1-23: 4.8 percent
June 24-July6: 8 percent
March/May: 7.2 percent
June 1-23: 5.8 percent
June 24-July 6: 8.9 percent
Note: Data for the last day of the zero-percent APR program were not available at the time for analysis. Leases were not included in trading data.
GM Announces Further Cuts
As the automaker scrambles to shift its focus to producing more fuel-efficient models, it just isn't quite moving fast enough.
GM announced this morning that is taking further steps to adapt its business to rapidly changing market conditions, marked by the weak U.S. economy, record high fuel prices, shifts in consumer vehicle preferences, and the lowest U.S. industry sales volumes in a decade.
"We are responding aggressively to the challenges of today's U.S. auto market," explained Rick Wagoner, GM chairman and chief executive officer. "We will continue to take the steps necessary to align our business structure with the lower vehicle sales volumes and shifts in sales mix.
"We remain committed to bringing to market great products that target changing consumer preferences for more fuel-efficient vehicles," he added.
Wagoner pointed out that 11 of GM's 13 most recent major U.S. product launches, and 18 of its next 19 launches, are cars and crossovers, designed to drive consumer interest and purchases in a time of seemingly never-ending rising gas prices.
"Today's actions, combined with those of the past several years, position us not only to survive this tough period in the U.S., but to come out of it as a lean, strong and successful company," Wagoner said.
For liquidity planning purposes, GM indicated is it using assumptions of U.S. light vehicle industry volumes of 14 million units in 2008-2009, which are significantly below historical trends.
Other planning assumptions include lower U.S. share of approximately 21 percent and continued elevated average oil price estimates ranging from $130 to $150 per barrel by 2009.
Based on these assumptions, GM reported that it is taking actions to further reduce structural cost and generate cash, with the goal of maximizing liquidity.
At the end of the first quarter 2008, GM said it had liquidity of $23.9 billion, with access to U.S. credit facilities of an additional $7 billion. While the company indicated it has ample liquidity to meet its 2008 funding requirements, it is taking additional measures to bolster liquidity to protect against a prolonged U.S. downturn.
The actions include a combination of operating and related actions, as well as asset sales and capital market activities. The cumulative impact on cash through 2009 is projected to be approximately $15 billion, officials stated.
Where Are the Cuts?
Through a number of internal operating changes and other actions, GM expects to generate approximately $10 billion of cumulative cash improvements by the end of 2009, versus its original plans.
GM reported that it will be making salaried headcount reductions in the U.S. and Canada in 2008, which will be achieved through normal attrition, early retirements, mutual separation programs and other separation tools.
In addition, health-care coverage for U.S. salaried retirees over 65 will be eliminated, effective Jan. 1, 2009, the company said.
Affected retirees and surviving spouses will receive a pension increase from GM's over-funded U.S. salaried plan to help offset costs of Medicare and supplemental coverage.
Additionally, the automaker indicated that there will be no new base compensation increases for U.S. and Canadian salaried employees for the remainder of 2008 and 2009.
Continuing on, GM reported that there will be no annual discretionary cash bonuses for the company's executive group in 2008.
With the elimination of the annual cash bonus, combined with GM's long-term incentives which are driven by GM stock price performance to assure alignment with its stockholders, GM's executive group will have a significant reduction in their cash compensation opportunity for 2008.
In fact, officials indicated this bonus cut will impact the automaker's top executives, representing a reduction in their cash compensation opportunity of 75 to 84 percent.
These benefit changes, salaried headcount reductions and other related savings will result in an estimated reduction in cash costs of more than 20 percent, or $1.5 billion in 2009, according to GM officials.
Additional structural cost reductions of approximately $2.5 billion are expected in GM North America.
The reductions will be partially achieved through further adjustments in truck capacity and related component, stamping and power train capacity in response to lower U.S. industry volume.
Truck capacity is expected to be reduced by 300,000 units by the end of 2009, half of which is from acceleration of prior announced actions, and half from new capacity actions, executives highlighted.
GM also said it will reduce and consolidate sales and marketing budgets, with a focus on protecting launch products and brand advertising. Engineering spending in 2008 and 2009 will be held at 2006-2007 levels, substantially lower than original plans.
These operating actions, combined with the benefits of the 2007 GM-UAW labor agreement, are targeted to reduce North American structural cost from $33.2 billion in 2007 to approximately $26-27 billion in 2010, a reduction of $6-7 billion.
GM is revising its capital spending plan and reducing approximately $1.5 billion in expenditures versus prior plans. Capital expenditures are now estimated to total $7 billion in 2009 versus prior plans of $8.5 billion (these figures do not include the $1 billion in capital spending planned in both 2008 and 2009 in China, which is self-funded by the GM joint ventures).
The main reason for this revision in capital spending is the delay of the next generation large pickup and SUV program, as well as V-8 engine development and associated capacity.
Spending for non-product programs will also be significantly reduced, while power-train spending will be increased to support the development of alternative propulsion and fuel economy technologies and small displacement engines, the automaker stated.
The revised 2009 capital spending plan is higher than the average capital expenditures in 2005-2007, excluding large pickup and SUV-related spending. Excluding China, GM said it expects capital expenditures to run in the $7 to $7.5 billion range beyond 2009.
On another note, the automaker said aggressive actions are being taken to improve working capital by approximately $2 billion in North America and Europe, primarily related to the reduction of raw material, work-in-progress and finished goods inventory levels as well as lean inventory practices at parts warehouses.
GM said it will defer approximately $1.7 billion of payments that had been scheduled to be made to a temporary asset account over the balance of 2008 and 2009 for the establishment of the new UAW VEBA.
The GM Board of Directors has decided to suspend future dividends on common stock, effective immediately, which is expected to improve liquidity by approximately $800 million through 2009.
GM went on to say that it expects to raise additional liquidity of $4 to $7 billion through asset sales and financing activities.
Basically, the automaker indicated it is undertaking a broad global assessment of its assets for possible sale or monetization, which is expected to generate approximately $2 to $4 billion of additional liquidity.
Apparently, the company believes there is significant liquidity potential from asset sales, without impacting the strategic direction of the company. Outside advisors are currently engaged in evaluating alternatives. A strategic analysis of the Hummer brand is underway, as has been reported, and GM is continuing to focus on profit improvement initiatives across all remaining GM brands.
Furthermore, GM said it will continue to opportunistically access global markets to raise additional liquidity. The company is initially targeting at least $2 to $3 billion of financing.
The company has gross unencumbered assets of over $20 billion, which could support a significant secured debt offering, or multiple offerings, that would far exceed the initial target. Examples of such assets include stock of foreign subsidiaries, brands, stake in GMAC and real estate.
Further Loss Expected
Actions outlined today are designed to take into account the anticipated impact of second quarter results, which the company will announce soon.
Officials said, "GM anticipates it will report a significant second quarter loss, driven in part by the previously disclosed negative impact of the American Axle and local union strikes in North America, as well as the continued weakness in the U.S. auto market and adverse vehicle segment mix.
"In addition, the company expects to record significant charges or expenses related to its previously announced hourly attrition program in the U.S., the recently announced North American truck capacity actions, valuation of GMAC stock, lease assets, Delphi recoveries, the American Axle settlement, the Canadian labor contract and others," executives reported.
GM officials said they are "highly confident" that the initiatives announced today, in conjunction with the current cash position, and its $4 to $5 billion of committed U.S. credit lines, will provide the company with ample liquidity to meet its operational needs through 2009.
Wagoner said, "The actions announced today are difficult decisions, but necessary to respond to the current auto market conditions. Even under conservative planning scenarios, GM is well-positioned to withstand the U.S. market downturn and emerge a stronger company. We have a solid position in the rapidly growing emerging markets, a global operating framework that allows us to respond to changes in the U.S. market, a commitment to technology leadership, and an ever stronger and competitive product line-up."
A Positive Note
Tom Kontos, ADESA's executive vice president of customer strategies and analytics, released his monthly market analysis today and he continues to be optimistic that the sales market will get better going forward.
"Uncertain economic conditions have tested the fortitude of industry analysts, like ourselves, anticipating a better second half for 2008. High gas prices, a tough housing market, credit concerns and other issues have strained the ability of the government and the Federal Reserve Board to provide fiscal and monetary stimulus to sustain economic growth," he reported today.
"Nevertheless, there has been enough economic momentum to avert an official recession to date, and the Fed's interest rate reductions tend to take time to reach their full effect. We will continue to cling to these glimmers of hope and anticipate a solid end to 2008 with a new administration and a more positive public mood. There are still a lot of new- and used-vehicle shoppers in the market in need of replacement vehicles that get better fuel efficiency, and manufacturers, dealers, vehicle remarketers and auctions are poised to facilitate this transition," he continued.