GM Plans Deep Cuts in U.S. And Overseas; 'Olds' Is Killed 

GREGORY L. WHITE and JOSEPH B. WHITE / WALL STREET JOURNAL 13dec00

DETROIT -- The auto industry's giant is shrinking again.

General Motors Corp. announced a major restructuring of operations in its biggest markets, killing off the slow-selling Oldsmobile division and cutting back its European operations. Altogether, the No. 1 auto maker is eliminating about 15,000 jobs over the next year or so, 4% of its world-wide work force.

On Wednesday, GM also announced the appointment of John M. Devine as chief financial officer and vice chairman. Mr. Devine, who left a job as Ford Motor Co. chief financial officer just over a year ago, is highly respected in the investment community for his financial acumen and knowledge of the auto business.

GM has been looking at outside candidates for the chief-financial-officer job for much of this year, seeking a high-powered executive to help drive the company to be more efficient. Mr. Devine's appointment as vice chairman, making him one of two GM executives with that title, reflects the strength of his mandate. GM's previous chief financial officer, company veteran J. Michael Losh, held the rank of executive vice president. He retired Sept. 1.

The cuts announced Tuesday are the latest chapter in 15 years of often-painful downsizing for the world's largest auto maker, which has struggled to bring its huge factory and marketing footprint into line with its diminished market shares in the U.S. and Europe. Killing Oldsmobile has tremendous symbolic significance, the first casualty in the once-sacrosanct family of brands inherited from Alfred P. Sloan. But in recent years, Chairman Jack Smith and Chief Executive Rick Wagoner have drastically reshaped the company, spinning off its huge parts unit and sections of its Hughes Electronics Corp. satellite unit, as well as combining once-independent divisions within the auto business.

But GM hasn't been able to reverse its sliding market share. In North America, the demise of Oldsmobile could potentially bring GM sales low enough to threaten its No. 1 market position, although company executives insisted that they will woo current Oldsmobile buyers to GM's remaining brands and that overall sales won't suffer significantly in the medium term.

GM's Wagoner Wields the Axe

GM Chief Executive Officer Rick Wagoner has become the latest in a string of GM CEO's to take an axe to the auto giant. In moves outlined Tuesday, GM will:

• Eliminate about 14,000 jobs in North America and Europe.
• Phase out its U.S. Oldsmobile division over the next several years, directing the savings to speeding new products for other brands.
• Close a U.K. plant as part of a plan to cut European vehicle making capacity by 15%, or 400,000 vehicles by 2004.
• Close a Lansing, Mich. engine plant; reduce production at two Saturn plants, and convert Oklahoma City, Ok. car plant to truck production.
• Take a fourth quarter charge of $1.5 billion to $2.5 billion to cover restructuring costs and "reserves for certain legal matters."
• Establish special team to speed cost reductions from European suppliers.

Source: The company

GM also warned that earnings for the fourth quarter will fall well short of expectations, even without the $1.5 billion to $2.5 billion one-time charge the company plans to take, mainly for the restructuring. Blaming deepening losses in Europe and Asia, largely from its Isuzu Motors Ltd. affiliate, GM said fourth-quarter earnings will be $1.10 to $1.20 a share, below the current First Call/Thomson Financial consensus of $1.70 a share.

The overhaul comes as Mr. Wagoner is trying to speed change at the famously slow-moving auto maker. He said the moves would help GM reach its goal of sustained 5% net-income margins sooner, although he wouldn't specify when that might happen. In the first three quarters of this year, GM's net margin was 3.2%, even as overall U.S. vehicle sales ran at record levels.

The decision to undertake the restructuring was reached in "the last couple of weeks," Mr. Wagoner said.

Investors initially welcomed the news Tuesday, but GM shares gave up most of their gains later in the day, ending up 19 cents at $51.75 in 4 p.m. New York Stock Exchange composite trading. Analysts said that while the restructuring moves were a welcome sign that Mr. Wagoner and his team are taking on GM's bloated size, it isn't clear that they will be enough.

"It's not as much of a turning point as we'd like, but it's decisive action on a number of fronts before the problems hit," said David Bradley, J.P. Morgan auto analyst. Mr. Bradley and other analysts long had been calling on GM to kill Olds, arguing that the company had too many vehicle brands for its shrunken market position.

But while the death of Oldsmobile, at 103 the oldest auto brand in the U.S., had more emotional resonance, the cuts in Europe seemed more significant financially.

The restructuring will eliminate 5,000 jobs in Europe over the next year or so, about 6% of GM's total employment there. In addition to a 10% cut in salaried jobs, GM is eliminating more than 3,000 factory jobs, closing a car plant in Luton, England, and streamlining other operations.

Altogether, GM will cut more than 400,000 units, or about 15%, of its production capacity in Europe by early 2004. That is about the time when GM might be able to buy the rest of Fiat SpA's Fiat Auto unit, under an option included in the deal signed earlier this year in which GM bought a 20% stake in Fiat Auto.

Once one of GM's biggest profit contributors, the European unit had a loss of $181 million in the third quarter, and GM warned that slowing sales and intensifying price competition would mean the fourth-quarter loss will be "significantly greater." GM officials said the latest moves, which also include a new effort to reduce parts costs, will help bring the unit back to profitability, but declined to say when.

In response to questions from British journalists, Mr. Wagoner said that the strength of the pound against the euro wasn't a major factor in the decision to close a U.K. factory instead of one on the Continent. "Given the timing [of new products] and overall competition, we felt it was logical to close Luton," Mr. Wagoner said. In addition, he said, GM has a truck plant nearby that could absorb some of the idled workers.

In the U.S., GM officials wouldn't be specific about how much factory capacity they are eliminating, other than to announce the closing of an engine plant in Lansing, Mich., and plans to overhaul a huge car factory in Oklahoma City to make a smaller number of trucks.

GM also will eliminate 10% of its white-collar work force and contract employees in North America next year, for a total of about 6,000 jobs, through early retirements and other incentives. Amid layoffs in the slowing auto industry, the cuts could hurt some parts of the Michigan economy, which already has been cooling off faster than much of the rest of the country.

Only a few of the GM job cuts are related to the demise of Oldsmobile. Officials said the bulk of the savings from that move would come in freeing up the billions of dollars that GM would have had to invest to update the Olds product line. Much of the savings will be spent on GM's other divisions to speed up the introduction of new products.

Over the past five years, GM spent more than $4 billion on a new product lineup and marketing for Olds. Though the effort was beginning to pay off, winning younger, more affluent consumers, they didn't come in sufficient numbers. The division has been losing money for years, Mr. Wagoner said. "There was no workable solution," he added.

As long as they sell in economically viable volumes, GM will continue to make Oldsmobile's current models -- the Alero, Intrigue and Aurora sedans, the Silhouette minivan and the Bravada sport-utility vehicle -- until the end of their planned life cycles, which run to about 2004.

GM will have to make arrangements with the roughly 2,800 Oldsmobile dealers. Under many state franchise laws, the dealers are entitled to substantial compensation for GM's decision to kill the brand, but GM officials declined to estimate how much the total cost will be. All but 63 Olds dealers also own other franchises, either GM facilities or those of rivals, GM officials said, noting the elimination of Olds is likely to result in fewer GM dealers.

As it kills off Oldsmobile, GM will be adding a new brand with the arrival of the Hummer line of extreme sport-utility vehicles. GM bought the rights to the brand last year and plans to expand its current lineup of military-inspired trucks significantly with as many as five new models aimed at a broader market starting in 2002.

Separately Tuesday, GM announced that it is reducing production starting in February at a plant in Pontiac, Mich. that makes full-sized pickup trucks, some of GM's most profitable vehicles and until recently, hot sellers. A GM spokesman said the layoff, which affects 1,000 workers, is indefinite and will last as long as market demand remains slack.

The overhaul at GM comes as auto makers hunker down despite record sales in North America. Overcapacity has been driving new-vehicle prices lower for the past several years, squeezing already-thin profit margins. With the U.S. auto market slowing, the Big Three are facing pressure on their bottom lines, even though many economists expect next year to be the third-best sales year ever in the U.S.

DaimlerChrysler AG's U.S. unit slipped into the red in the third quarter, prompting its parent to install new management from Germany to implement a major restructuring. Ford has cut production plans and revised downward its fourth-quarter earnings forecast.