General Motors Cuts Deeper

Updated from 9:02 a.m. EST

The world's largest automaker announced deeper restructuring plans Monday in an effort to assure Wall Street that bankruptcy isn't a threat.

General Motors(GM) raised the number of jobs it plans to cut over the next three years to 30,000, and said it expects to lower its annual cost structure by $7 billion by the end of next year.

GM CEO Rick Wagoner said up to nine GM plants are now slated to cease operations as part of the restructuring, which represents an expansion of the cost-reduction program the company outlined earlier this year. The moves will reduce GM's North American assembly capacity by about 1 million units by the end of 2008.

Previously, the company was targeting 25,000 job reductions. "Much" of the reduction will be carried out through attrition, Wagoner said, adding that they will result in a significant restructuring charge.

The $7 billion of annual cost reductions reflect $6 billion in structural cost cuts, up from a previous goal of $5 billion, plus $1 billion of material cost savings. "Our collective goal remains the same: to return our North American operations to sustained profitability as soon as possible, thereby helping to ensure a strong General Motors for the future," Wagoner said.

Spreads on GM bonds widened last week, indicating that the market was beginning to price in the possibility of bankruptcy for the ailing manufacturer. Those spreads tightened Thursday when Wagoner rebutted the speculation, saying the company was not headed for Chapter 11. Monday's announcement for deeper job and production cuts marked another step the company is taking to convince investors that it's turning a corner.

"If you look at our liquidity structure, we're on very sound financial footing," Wagoner said on a conference call with Wall Street following Monday's news release. He declined to provide earnings guidance for 2006 and said he has not considered leaving his post amid widespread criticism.

GM said production will cease at its Oklahoma City plant; its Lansing, Mich., craft center; its Doraville, Ga., plant; its Lansing, Mich., metal center; its Pittsburg metal center; its Portland, Ore., parts distribution center; its parts processing center in Ypsilanti, Mich.; its engine facility in Flint, Mich.; and its power train components facility in Ontario.

Operations will also cease at Line No. 1 at its Spring Hill, Tenn., plant; on the third shift at its Oshawa car plant No. 1 in Ontario; and on the third shift of its Moraine, Ohio, plant. GM said the parts distribution center in St. Louis will cease warehousing activities and be converted to a collision center and one other parts processing center will cease operations.

GM has been focused on cost reductions in turning around its business, because remedies for fixing its top-line woes appear to be non-existent at the moment.

"Clearly, they eventually need to make better products that are more competitive with their foreign competitors, but that's a long-term proposition," said Morningstar analyst John Novak. "The company has a bloated cost structure that's built for a company with 30% market share in North America. Now, the company's market share has dipped below 25% and it continues to decline."

The cornerstone of GM's plan for fixing its cost structure remains winning further concessions from organized labor to reduce its burgeoning healthcare and pension costs. The company announced last month that it reached a deal with the United Auto Workers that would allow it to slash some of its multibillion-dollar health-care costs by cutting benefits for UAW-protected blue-collar workers and retirees.

Still analysts said the savings were too small to boost GM out of its predicament, and they viewed it as a sign that the union was unwilling to make the kind of concessions that GM needs. Wagoner said on the conference call that negotiations with the union were ongoing, but he declined to comment further on the subject.

Meanwhile, whatever positive spin resulted from the October deal was drowned out by news of Delphi's (DPI) bankruptcy and a formal probe launched by federal regulators into GM's accounting methods.

"The impact of the Delphi bankruptcy on GM is very uncertain right now and poses a substantial risk," Novak said. "They could be on the hook for some of Delphi's liabilities, and a labor strike at Delphi would be devastating for GM."

Delphi, GM's biggest auto parts supplier, was once a subsidiary of the automaker. Analysts have estimated that GM could be responsible for as much as $6 billion to $7 billion in Delphi employment costs as a result of the bankruptcy.

"Additionally, you have the accounting investigation, which is another wild card," Novak said. "I think that has the market on edge, because there's just no telling what may come of it. People are losing faith in Wagoner and the rest of the team there."

Shares of GM were recently up 32 cents, or 1.3%, to $24.37.

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