- The Washington Times - Friday, March 18, 2005

DETROIT — After forecasting a hefty first-quarter loss because of deep difficulties in North America, General Motors Corp. says it will not reduce spending on new models. That leaves the question of how it can cut costs and increase revenue until those new model lines have the chance to boost sales.

Chairman and Chief Executive Rick Wagoner made it clear when he announced the revised earnings forecast Wednesday that GM would not let up on its product pipeline because of its financial difficulties — and, in fact, will place even more emphasis on rolling out new models.

“Product remains the first and most important element of this strategy to get North America back on track,” he said.

GM’s problems are many — growing competition from Asian rivals and rising health-care costs, among them — but one of the biggest obstacles at present is product mix. Its truck lineup — the area with the highest profit margins — is aged, while its new cars are not runaway hits. Unless it can turn the situation around, the company has little hope of remaining the world’s biggest automaker.

“If they don’t have strong consumer response to their trucks, then they have to shrink their company,” said B. Craig Hutson, senior bond analyst at research firm Gimme Credit. “But if they can regain some of their lost luster with trucks, maybe they can still pursue a market share growth strategy.”

Either way, GM needs to take a hard look at issues like plant capacity and possible brand consolidation, Mr. Hutson said.

Merrill Lynch analyst John Casesa said the company, as it’s structured today, cannot afford to let its market share dip much below its current level. For the first two months of 2005, GM’s market share was 25 percent, down 1.8 percentage points from a year ago, according to Autodata Corp.

If market share falls below 25 percent, “GM begins to lose money and starts to use a considerable amount of cash,” Mr. Casesa said in a research note.

But stemming the loss of market share likely will be a slow process. GM has had difficulty moving vehicles off dealer lots without costly incentives, and even those have become less effective in recent months.

In recent years, GM has relied heavily on its finance arm, GMAC, to make money, instead of its struggling automotive operations. The current climate puts even more pressure on GMAC to bring in profits.

While GM expects GMAC to generate at least $2.5 billion in 2005, its profits are falling because of higher interest rates.

Furthermore, the looming threat that GM’s bond rating will be downgraded to junk status could hinder those operations, Mr. Casesa said.

In the short-term, GM will need to drastically reduce costs to ensure it meets even its lowered full-year income forecast of $1 to $2 per share.

GM is expected to seek price cuts from its suppliers. Also, the company recently put its entire advertising business up for bid partly as a way to cut costs.

GM’s shares fell to the lowest point in more than a decade Wednesday.

The shares fell 27 cents yesterday to close at $28.62 on the New York Stock Exchange.

The company’s employees are already bearing some of the burden.

On Wednesday, GM notified its 38,000 salaried U.S. employees they will not receive merit pay raises this year. Bonuses based on the company’s 2004 performance will still be paid.

Starting April 1, the company match for the employee savings stock purchase program will drop from 50 cents on the dollar to 20 cents.


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