GM Revises Viability Plan: Deeper cuts in costs, production

Rebuffed for its February 17 Viability Plan submittal to the U.S. Treasury Department, General Motors revealed a leaner, meaner version today. "The (latest) Viability Plan reflects the direction of President Obama and the U.S. Treasury that GM should go further and faster on our restructuring," said GM president and CEO Fritz Henderson.

This latest plan is little different in substance from the earlier one, but quite different in extent. Essentially, GM is showing a determination to implement the operational cuts and debt reduction measures the government will deem adequate to stave off a forced bankruptcy. Here are the details of the latest Viability Plan.

Beginning in 2010, GM's focus will be on four core brands - Chevrolet, Cadillac, Buick and GMC, with Pontiac being phased out by the end of that year. The dispositions of Saab, Saturn and Hummer will be determined by the end of this year, 2009.

Trimming its dealer network has been further accelerated with a current goal of 3,605 dealerships by the end of 2010, a reduction of 42pct from 2008 levels. Regarding inventories, the company has just announced overall production cuts of 190k vehicles through August.

Based on pricing, market share assumptions and total vehicles sold annually in North America, GM figures it can break even with a 19.5pct share of North American sales of 10 million vehicles this year and a mid-to-high 18 percent share in subsequent years.

Production cutbacks will be accompanied by reducing the number of U.S. assembly, powertrain and stamping plants by 13 to 34 by the end of 2010. Another three will be closed by 2012. The company will continue to emphasize its flexible global manufacturing strategy (GMS), which allows multiple body styles and architectures to be built in one plant - a further economy of scale.

From a high of 61,000 hourly employees in 2008, GM plans ultimate hourly staffing to level out at 38,000 by the beginning of 2011.

While cutbacks are always painful, there's a road map for this type of cost reduction. However, there's no concrete road map for a negotiated reduction of debt to improve the balance sheet; i.e., convincing bond holders to exchange approximately $27 billion in unsecured public debt for equity positions in the company - debt for GM stock, your paper for my paper. The proposed bond exchange includes converting half of GM's U.S. Treasury debt to equity.

The "other shoe" in GM's talks with the United Auto Workers (UAW) involves renegotiating the terms of the Voluntary Employee Benefit Association (VEBA) whereby half of GM's future contributions be covered by company stock.

Between these two entities - the Treasury and VEBA – GM is looking to achieve a $20 billion debt reduction by June 1 and some $44 billion long term. Such a transaction would make the Treasury and the UAW major stakeholders in GM - maybe as much as 50pct.

GM still has more than a month before the government passes final judgment on its viability plan. Releasing V2.0 this far in advance, gives GM a month to absorb and analyze feedback to determine if a V3.0 is needed before June 1.