Cuts signal deepening woes at GM

Mounting problems fueling possible deal with Chrysler, analysts say.

Robert Snell, Christine Tierney and Alisa Priddle / The Detroit News

General Motors Corp.’s move to force out white-collar employees for the first time in about 20 years and cut benefits underscores the deepening problems facing the automaker. The escalating challenges are driving a possible acquisition of rival Chrysler LLC, analysts said.

GM’s cost-cutting moves coincided with fresh signs of the devastating impact of the global financial crisis and the worst auto sales market in 15 years on Detroit’s Big Three automakers.

On Thursday, Chrysler said it plans to cut 1,825 more factory jobs and accelerate the closure of a sport utility vehicle plant in Delaware. News of the cuts came as Daimler AG said it had reduced the book value of its almost 20 percent holding in the Auburn Hills company to zero — a stark sign of the U.S. automaker’s deteriorating fortunes.

GM is in negotiations to acquire Chrysler from owner Cerberus Capital Management LP, but it may have trouble raising money to finance a deal. The Detroit automaker’s worsening financial problems suggest it is in desperate need of aid, analysts say. That helps explain the insistence by Michigan’s congressional delegation that the Big Three be included in a $700 billion Wall Street rescue package and why GM is seeking cash from outside investors and, possibly, government aid.

GM did not disclose how many more salaried workers it plans to cut, but a GM official said the number depends on a range of factors, including whether GM acquires Chrysler.

"All the troubles going through the economy are hitting the auto industry at warp speed," said Harley Shaiken, a labor professor at the University of California-Berkeley.

In contrast to the difficulties in the banking system, which prompted quick action, there’s a view that the collapse of the U.S. auto industry involves just a few companies, a view Shaiken considers misguided.

"The auto industry is central to the manufacturing base of the United States," he said. "A collapse of that industry would have much wider repercussions."

Automakers are grappling with slumping sales — U.S. sales industrywide are down 13 percent through September with no improvement in sight. A forecast released Thursday by the auto research Web site Edmunds.com suggests October sales will drop to the lowest level since 1992.

GM is responding by instituting cuts that go beyond a previously announced plan to slash $10 billion in costs by the end of 2009 and raise $5 billion through asset sales and borrowing to fund its operations through the downturn.

Benefit cuts on horizon

GM exceeded its goal of eliminating more than 5,000 salaried jobs through early retirements, but concerns about the worsening global economy mean GM must further cut costs, the company said in a letter sent to GM executives. The moves will include involuntary layoffs later this year and early next year, as well as the suspension of the company match in employee 401(k) accounts and other benefit cuts.

The other salaried benefit cuts include suspending at the end of the year college tuition assistance, a dependent scholarship plan and an adoption-assistance plan. The 401(k) benefit will be suspended Nov. 1.

The GM official said the new benefit and salaried cuts are motivated by a growing need to reduce the company’s cash burn rate, which analysts estimate at least $1 billion a month.

"We just have to stop the cash outflow at all costs so that we can ride this out," the official said.

GM is expected to report a hefty third-quarter loss when it releases its results, expected in the next two weeks.

Sean McAlinden, chief economist and vice president for research at the Center for Automotive Research in Ann Arbor, could not recall the last time GM fired salaried workers — maybe in the early 1980s.

"Normally, our companies haven’t done that to permanent staff until very recently — Ford in July, Chrysler last month and now GM. That’s a sea change for Detroit."

GM employs 28,000 white-collar workers, down from 47,000 seven years ago.

Firings at GM are rare, Shaiken said. Previously the automaker has sought to cut its work force through buyouts.

"There’s nothing as demoralizing to everyone as a forced departure," he said. "The fact that they’ve taken this route indicates the toughness of the moment, and the urgency they feel in addressing it."

Shaiken said he didn’t think GM was preparing cuts to press its request for federal aid. "I don’t think that’s the purpose, but it doesn’t conflict with lobbying for the loan guarantees," he said.

The industrywide woes mean few automotive operations are off-limits to cuts, analysts said.

"It’s no longer taboo to cut production or shut plants," said Aaron Bragman, research analyst with IHS Global Insight. "There is no limit to what you can do because everyone’s backs are against the wall."

Chrysler to shut plant sooner

To that end, Chrysler is temporarily getting out of the large SUV business, as well as hybrids and is cutting back production of some smaller SUVs. Chrysler said it is moving up plans to shutter its Newark, Del., plant that is the sole source of the Dodge Durango and Chrysler Aspen SUVs, including hybrids. The final 1,000 employees on a single shift will cease production Dec. 31– a full year earlier than planned. One of two shifts at the Toledo North Jeep plant also will be eliminated at that time, with a loss of 825 jobs.

The plant moves bring inventory in line with demand, which has sunk amid high gas prices, a credit crunch and souring global economy, a Chrysler executive said in a statement.

"The markets are facing unprecedented turmoil and we are in a time of historic change in the auto industry," said Frank Ewasyshyn, executive vice president of manufacturing. "These tough, but necessary steps are vital to our long-term viability."

The company said it would work with the United Auto Workers union to handle the layoffs in a "socially responsible manner," which likely means buyouts and early retirement incentives.

The cuts are about 6 percent of Chrysler’s U.S. hourly work force of 33,000.

Jim Press, vice chairman and president of Chrysler told an audience of engineers in Detroit on Wednesday that Chairman Robert Nardelli has led the way for the automaker to be more financially viable and regain stability.

"Maybe that’s the reason people have been smelling around the Chrysler vault," Press said.

But speaking to reporters after his speech, Press refused to say how much cash Chrysler currently has, nor would he confirm that the $11.7 billion in hand at the end of June is still intact.

As a private company, Chrysler doesn’t disclose financial results. Even if did, the figures wouldn’t conform to Daimler’s report Thursday that it booked a $450 million third-quarter loss on its 19.9 percent Chrysler stake. Daimler records results for Chrysler with a one-quarter delay.

The $450 million loss for the Chrysler stake in the second quarter translates into a $113 million loss under U.S. accounting standards, or $565 million for all of Chrysler Holding LLC. Chrysler said in a statement that the difference also reflects $118 million in losses due to adjustments unrelated to Chrysler Holding, which comprises the auto company and Chrysler Financial.