GM to slash nearly half its dealerships to survive
It will also cut Pontiac, as well as more jobs. But if dealerships and bondholders don't agree to the changes, bankruptcy looms.
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- A big reduction in the debts that represent a major competitive burden for the firm. Bondholders are being asked to swap debt for GM stock, as is the government, which is now another major creditor. In all, the plan would reduce GM’s debt by $44 billion from about $62.4 billion now.Skip to next paragraph
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- A lower sales profile across America, as GM calls for the number of dealerships to fall from 6,246 to 3,605.
The company hopes all this will show that it understands the get-real mind-set of President Obama’s automotive task force.
“I’m a believer in dealing with reality,” GM chief executive officer Fritz Henderson said in announcing the plan. “In the end, a lot of people are going to be asked to make sacrifices, including converting debt to equity.”
He said that, in addition to its talks with bondholders and the task force, the company will be talking to dealers in coming weeks to try to orchestrate that massive downsizing.
If it doesn’t work through negotiations, the company knows it must be ready for the possibility of bankruptcy. In that event, the goal would to be to move through the process as quickly as possible to minimize the effect of consumer uncertainty on GM sales.
But analysts say it will be hard to manage the process in a speedy “prepackaged” format.
Even if all goes smoothly, these are challenging times for all automakers. Ford Motor Co. has successfully bargained for its own concessions from bondholders and the United Auto Workers union (UAW). Chrysler is seeking an alliance with Fiat in its own bid to survive, draw more federal loans, and avoid a bankruptcy filing. Over the weekend, Chrysler announced a new cost-cutting pact with the UAW.
For GM, a key issue with the union is the “legacy” costs of retiree healthcare. To cap the rising cost of those promises, GM agreed to put a set amount into a trust fund for that purpose. Its new plan calls for the union to take company stock to cover half of the $20 billion owed to the healthcare fund.
With the government, bondholders, and the union all poised to become major stockholders in GM, current shareholders could be nearly wiped out. That explains why the stock has been trading lately at multi-decade lows. But investors greeted the new plan favorably, pushing the stock above $2 a share by early afternoon Monday.
The federal government has provided $15.4 billion in loans to GM since December, with the goal of preventing a disorderly collapse of the company and its far-flung network of dealers and suppliers.
The big question is whether the downsizing plan and additional government aid will be enough to turn around GM’s fortunes. The answer depends now as much on the wider economy as on anything the company does.
The depth of the recession has hit the car industry especially hard, since autos are big-ticket items. GM’s new plan envisions US sales returning to about 16 million units a year by 2012, but that may prove optimistic.
Still, Mr. Henderson said Monday that a restructured GM can break even with sales running at 10 million units, up just a bit from the low seen in recent months.