Will Early Retirements Save GM?

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With financial losses continuing to mount and market share continuing to fall, General Motors Corp. is hoping more than 35,000 blue-collar workers will accept an early retirment package and, as a result, help expedite the floundering company's much-needed restructuring. It also hopes the packages will help bail out its principal supplier, the bankrupt Delphi Corp. But as so often happens with GM's attempted comeback, the announcement raised as many questions as answers.

What exactly are GM's workers being offered?

GM workers interested in quitting or retiring will be eligible for payouts of between $35,000 and $140,000, depending on their years of service and whether they want to keep benefits such as health care coverage, company and union officials said. GM currently has 113,000 hourly employees, including 36,000 with more than 30 years service, and all of them will be eligible for buyouts.

How many people are likely to accept a buyout?

GM says it is prepared to start offering buyouts to some workers as soon as next week, and it believes that 25% to 30% of its 126,000 eligible employees will eventually accept the packages. That means that over the next two years, the buyouts should enable GM to trim its hourly workforce in the U.S. — which approached 500,000 during the late 1970s — to around 80,000 or less, according to Sean McAlinden of the Center for Automotive Research in Ann Arbor, Michigan. In addition, the hourly payroll at Delphi, the supplier company GM spun off in 1999, could be trimmed from 34,000 today to about 10,000.

The buyouts have been the chief topic of conversation in GM plants for the past couple of weeks. "I expect about 60% of the people are going to take it," says John Weizman, union member from UAW Local 653 in Pontiac. "I know I'm thinking about it," adds Weizman, who first signed on with GM in Dayton, Ohio, more than twenty years ago and has now moved four times as GM has downsized.

Will the deal help turn around GM?

The buyouts certainly add a new sense of urgency to a turnaround effort that until now some critics, such as GM's newest board member, Jerry York, investor Kirk Kerkorian's man in Detroit, had considered stuck in neutral. But things are not looking up at GM these days. The automaker recently disclosed it had lost $10.6 billion in 2005, not $8.6 billion as the company reported in January. March sales estimates prepared by outside analysts suggest that GM's market share has dipped close to 21% in March, a far cry from the 45% GM commanded in its heyday of the 1970s.

Ironically, while the buyout agreement could help cut GM's payroll, it could also end up exacerbating its other major problem, crippling employee retirement costs. John Murphy, the auto analyst for Merrill Lynch, warned in a note to investors, "The accelerated retirements at GM may result in a lower active headcount, but further exacerbates GM's already heavy burden of 2.5 retirees to active workers. Furthermore, GM continues to structurally shrink as it loses market share in the U.S., which means that a smaller company is supporting more retirees. Until GM stabilizes market share, rationalizes capacity at every point in the value chain, and invests heavily in product, its restructuring actions will only allow it to tread water at best."

Will it help CEO Rick Wagoner keep his job?

Steve Harris, GM vice president of communications, insists Wagoner's job is not in any jeopardy. "A lot of very difficult things have been accomplished in a short period of time," Harris says. Not everyone agrees, of course. Peter Morici, a professor at the University of Maryland's Robert H. Smith School of Business, said the $10.6 billion loss GM posted for 2005 suggests the company needs new leadership. "GM needs a less expensive and more flexible labor contract, less overhead and red tape in marketing and design, brands realigned to attainable markets and a CEO who can convince employees and consumers he is serious about making good cars," Morici says.

Wagoner quickly followed up the buyouts with the announcement of a new deal Thursday to sell off 78% of General Motors Acceptance Corp., its commercial mortgate business, to a group of outside investors that includes Kohlberg Kravis Roberts & Co.and Goldman Sachs Capital Partners. Selling GMAC also will help cover the cost of the buyouts, which are expected to exceed $2 billion, pending approval by the bankruptcy judge presiding over Delphi's Chapter 11 filing — since GM also has agreed to assume Delphi's financial responsibility for post-retirement benefits as part of the deal with the union.

Will the deal eliminate the threat of a strike against Delphi?

Negotiators from the United Auto Workers seem to believe the most militant UAW members will opt for retirement rather than a confrontation over likely future wage cuts at Delphi, which is also covered under the buyout agreement. The buyouts give the union a little more room for bargaining on future concessions, says McAlinden. With the buyout agreement in place, representatives from the UAW and Delphi Corp. are slated to resume discussions on rewriting the bankrupt company's existing contract with the union. GM representatives also are expected to participate in the talks, suggesting that GM plans to keep a close eye on the discussions in an effort to head off any possibility of a strike that could cripple the automaker's operations across North America.

Murphy, the Merrill Lynch automotive analyst, said in a note to investors that a strike remains a very real threat as long there is no agreement on issues beyond the buyout proposal. Delphi chief executive Robert "Steve" Miller is pressing for more concessions and has said he will petition the court next week to set aside the company's existing labor contracts if there is no agreement with the UAW and other unions. Last fall, Miller briefly proposed cutting the wages of Delphi workers by 63%; the union has warned that a strike is possible if the court imposes a settlement on union members.

What could be GM's next trouble spot?

The Shanhgai Auto Corporation Inc., one of GM's principal partners in China, which GM's senior executives are counting on for the growth needed to stay ahead of Japan's Toyota Motor Corp, had its credit rating downgraded by a Hong Kong-based rating service. Key issues in the downgrade were concerns about over capacity in the midsized segment in China where ShanghaiGM has targeted investment, as well as the lack of fuel-efficient vehicles that both Chinese consumers and the Chinese government are demanding for the future, the report notes.