Will GM Shrink Its Way to Success?

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General Motors isnt the most efficient automaker in America. It does not produce the highest-quality cars (that would be Porsche), the funkiest designs (check out Scion), or offer the best prices when you factor in resale values (versus Honda and Toyota). But say this for the General: nobody beats it at downsizing. GM CEO Rick Wagoner acknowledged as much in a press conference this week, noting that over the past 10 years, [GM] has had a lot of experience in this regard.

He aint kidding. In 1993, GM employed more than 266,000 hourly workers in North America. As of this year, the figure was 141,000. And its about to shrink even more. Some 35,000 blue-collar workers have agreed to take buyouts or early-retirement deals, which will save GM $8 billion in annual structural costs, starting in 2007. GM expects to take a $3.8 billion charge to account for the buyouts. But the savings are about $1 billion more than GM had initially targeted — a rare piece of good news for a company known more for its misfires. Said Wagoner, Were coming along very rapidly on the road back.

Given the exodus of autoworkers out of GM factories, you cant really argue with that. Not only has Wagoner cut GMs payroll by a third (including white-collar job cuts), hes done so while, surprisingly, preserving peace with the United Auto Workers union. Hes won concessions on health-care costs, convinced the unions to go along with a dozen plant closings and set the stage for deep production cuts. At the same time, he appears to have defused a crisis at Delphi, GMs former in-house parts maker, now operating under Chapter 11 bankruptcy protection. Some 12,600 Delphi workers have signed up for buyout packages. Delphi is negotiating a new labor contract with its unions and the buyouts should ease some of the pressure on Delphi to impose drastic wage cuts for remaining workers — and avoid a showdown with the unions that could result in a strike.

But trimming the fat is one thing; growing some muscle is quite another. So Wagoners next step, expanding sales in whats shaping up to be a brutal summer selling season, wont be easy. Already, a price war is looming, as dealers try to clear inventory for new models arriving in the fall. Chrysler is expected to announce rock-bottom employee-pricing for everyone, along with 30-day money-back guarantees. We lost momentum, said DaimlerChrysler chairman Dieter Zetsche at a luncheon in New York on Tuesday, adding that sales have been held hostage by the troubles at Ford and GM. Not to be outdone, GM has announced zero-percent financing sale for the July 4th holiday weekend. Analysts expect June sales for GM to be down 36% from last year — when GM launched an employee-pricing promotion that cleared dealer lots (and killed profits). GMs overall U.S. sales are down 8% this year and the company is on track to lose a few more points of market share. GMs redesigned full-size SUVs, the Cadillac Escalade and Chevy Tahoe, have sold well. But with gas prices staying around $3 a gallon — and even with GM touting controversial gas discounts — the luster of those models may soon fade (joining other full-size models that are languishing at dealerships like beached whales).

Wall Street, meanwhile, still seems skittish about GMs fortunes. Although GMs stock has rallied more than 40% in recent months, off lows around $18 a share, the share price slid nearly 7% on Tuesday after GM officials warned that 2006 sales may trail last years. Also unnerving: Standard & Poors says it may cut GMs debt rating, already at junk level, another notch. Last week, GM suggested that it may have to tap a new $4.5 billion credit line, a sign to some analysts that the company is burning cash. And if sales dont pick up... well, nobody wants to go there. We see GM burning its final precious dollars and raising prices just to try to stop the burn, notes Bank of America analyst Ron Tadross, who maintains a sell rating on the stock and a $15 price target. All of which suggests that no matter how many workers hit the exit ramp, Wagoner wont be cruising to profitability anytime soon.— With reporting by Joseph R. Szczesny/Detroit