Plan fails to go to core of problem, critics say
GM has to figure out how to sell cars without incentives, analysts say.
NEW YORK (AP) -- General Motors Corp., which has operated more like a bank than an automaker by offering low-cost financing, may have to do more to placate investors who shrugged off the massive staff cuts it announced Monday.
"They have to figure out a way to sell cars. To be successful they have to have a product that sells without incentives," said Andrew Harding, chief investment officer at Allegiant Asset Management, where he helps run $15 billion worth of fixed-income assets such as bonds issued by the automaker's finance unit, General Motors Acceptance (GMAC).
Last week, GM's shares dropped amid heightened worries it would be forced to seek bankruptcy protection by rising health care costs and declining sales of its autos. The company, which has $19 billion of cash on its books, said the talk about a bankruptcy was without merit.
"If the best thing a company can say is they are not going bankrupt, then there is a lot of work that still needs to be done," said Harding.
Announcement
GM said Monday it will cut 30,000 jobs and close nine North American assembly, stamping and powertrain plants by 2008 as part of an effort to get production in line with demand. The world's biggest automaker has absorbed almost $4 billion in losses this year.
The announcement by Rick Wagoner, GM's chairman and CEO, represents 5,000 more job cuts than the 25,000 that the automaker originally predicted. The latest figure represents about 9 percent of the company's global work force.
But Jeff Given, portfolio manager at John Hancock Financial Advisers where he helps run a $4 billion bond portfolio and owns GMAC debt, said the staff cuts may help "a little bit, but they do not have a lasting impact."
"It does not change their long-term outlook. They still have the overhang of high health care costs," he said.
Relying on loans
Critics also object to the fact that the company has had to offer low-cost loans to sell its cars. GM's zero-percent financing, which started after the Sept. 11, 2001, terrorist attacks, ended last year only to be replaced with other incentives, including employee discounts and red tag sales.
"They did borrow from the future," Given said, referring to the sales incentives. GM is a "deteriorating credit. They have to do something with regards to retirement pension plans and health care costs."
The world's largest automaker has bolstered sales by offering low-cost financing in much the same way that banks have spurred home buying with low-interest mortgages. Sales of both have slowed since the Federal Reserve began raising interest rates last year, making it more expensive to borrow.
At the same time, the steady increase in interest rates has boosted the value of the U.S. dollar against foreign currencies, making it easier for foreign automakers to undersell GM at home.
More problems
Dr. Robert Smith, chief investment officer of Smith Affiliated Capital where he helps run a $1.4 billion portfolio of investments, believes the drop in the yen's value will hurt as it gives rivals such as Toyota Motor Corp. more room to cut prices and offer incentives in GM's biggest market.
Smith, like other investors, was not upbeat about the automaker's future in spite of the massive staff cuts announced. "They have a legacy problem, they have a model problem -- they have the wrong mix of models -- and they now have a currency problem," he said.
Monday's news prompted Banc of America's GM analyst, Ronald Tadross, to reiterate his "sell" recommendation on the automaker's stock.
"GM suggested these closures could save $3 billion by the end of 2006 and maybe more thereafter, but has not said whether they expect revenue loss, how much of this is cash savings, the cost to actually get the people in the plants to move. ... We think this will end up looking like the myriad of restructurings we have heard about from GM and Ford," Tadross wrote.
His outlook for the shares was also unchanged, calling for a drop to $16 in the next 12 months.
GM shares fell 47 cents, or 2 percent, to $23.58 in trading Monday on the New York Stock Exchange, where they've had a 52-week range of $20.60 to $40.82.