General Motors' Garage Sale

Faced with a combination of falling sales, an increasingly unstable U.S. economy and rising gasoline prices, General Motors Corp. has unleashed another huge wave of budget and financial cuts that the company's top executives described as a "self-help" plan designed to stave off any potential "liquidity crisis." The cutbacks appear to involve every level of GM's operations, including shedding the Hummer and decreasing its support for NASCAR. Said GM's chairman and chief executive officer Richard Wagoner: "Conditions are extremely unsettled. We're trying to protect the enterprise long-term. We're going to have to ride this out for a while."

Wagoner said the cuts are based on very conservative assumptions that oil prices will hover in the $130-to-$150-per-bbl. range through 2009, while car sales will fall to an annual rate of about 14 million units this year and next — a level last seen during the recession of the 1990s, when GM controlled just under one-third of the U.S. market. GM is still the nation's largest carmaker, but its market share is down to about 22% and its stock price has dropped to its lowest level in more than half a century, having fallen from the $20-per-share range in early June to the current price of below $10.

Industry watchers were alarmed last week when Wagoner had to insist that the company was not considering bankruptcy. Ray Young, GM's chief financial officer, conceded that the company will post a "significant" loss when it reports its second-quarter earnings, but, he told TIME after the announcement of the latest cuts, the talk about bankruptcy was "unfortunate." He said, "It's a distraction. We wanted to dispel any concerns anyone might have. Frankly, that's just not in the cards."

The list of new cuts included the elimination of the dividend on common stock, all executive bonuses and, with the apparent approval of the United Auto Workers (UAW) union, health-care coverage for salaried retirees over the age of 65. In addition, GM plans to launch a new wave of buyouts among its 32,000 salaried employees while freezing their salaries for the remainder of 2008 and 2009. The benefit cuts and early retirements are expected to reduce GM's salary costs by 20%, saving the company $1.5 billion by the end of 2009, GM executives said.

The company's engineering and capital spending are also being cut, freezing development of new trucks and SUVs. Marketing budgets will also be trimmed, including as yet unspecified support for motorsports such as NASCAR. GM is also planning to defer a $1.7 billion payment to the special trust created last year to cover the cost of health care for retired blue-collar workers; it would also expedite the shutdown of four truck plants originally announced at the company's annual meeting in June. GM plans to raise another $4 billion to $7 billion by selling off assets like its Hummer brand. That is all part of the company's realization that it will be difficult to raise cash from external sources because of tight credit markets.

Wagoner says that the plan will leave the company with an additional $15 billion in funds, which will be more than enough to survive and even prosper in the future. Tuesday's actions, he said, "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 as a lean, strong and successful company."

Analysts were mostly positive. David Cole, chairman of the Center for Automotive Research, said critics have underestimated GM's resilience. "They have a lot of resources, and if they need to, they can always go back to the UAW for help," Cole said. Rod Lache, an analyst for Deutsche Bank, agreed, saying, "It looks like [GM's] cost structure is pretty competitive." But, he said, "where they're at a disadvantage versus other mass-market automakers is in pricing." Buyers won't pay as much for a GM vehicle as they will for a Toyota or Honda. GM stock dipped immediately after the announcement before climbing back to around $10 by mid-afternoon.