GM “Transforming” With Thousands Of Job Cuts, Plant Closures

by Ike Obudulu Posted on November 27th, 2018

Detroit, Michigan, USA: General Motors (GM) is “transforming” away from the car business. That’s how the flagship American automobile company described the massive cuts it announced Monday, part of an “accelerating transformation” that includes shuttering plants in Detroit, Ohio, Maryland, Michigan, and Ontario—as well as two overseas plants by the end of 2019.

The company will be slashing its staff by about 15 percent and its executive ranks by a quarter, totaling more than 10,000 job losses including 6,000 workers at its plants.

The layoffs and plant closures are part of a transformation sweeping the U.S. auto industry as it largely abandons conventional passenger cars and instead focuses almost entirely on trucks, SUVs, and crossovers, along with development of fully electric and self-driving vehicles. Ford announced earlier this year that it would sell only two vehicles in North America that aren’t a type of truck: the Mustang and the Focus Active, a crossover.

“The actions we are taking today continue our transformation to be highly agile, resilient and profitable, while giving us the flexibility to invest in the future,” said GM Chairman and CEO Mary Barra. “We recognize the need to stay in front of changing market conditions and customer preferences to position our company for long-term success.”

GM expects to record pre-tax charges of $3.0 billion to $3.8 billion related to these actions, including up to $1.8 billion of non-cash accelerated asset write-downs and pension charges, and up to $2.0 billion of employee-related and other cash-based expenses. The majority of these charges will be considered special for EBIT-adjusted, EPS diluted-adjusted and adjusted automotive free cash flow purposes. The majority of these charges will be incurred in the fourth quarter of 2018 and first quarter of 2019, with some additional costs incurred through the remainder of 2019.

GM put the blame for the plant closures on “market-related volume declines in cars” while noting that it had “refocused capital and resources to support the growth of its crossovers, SUVs and trucks.” For example, one plant being shut down in Lordstown, Ohio, is where the Chevy Cruze is assembled.

The Cruze is just one example of a suffering GM sedan—Cruze deliveries in the most recent quarter were down more than 25 percent compared with the same quarter last year, while deliveries of the Chevy Malibu had fallen by more than 45 percent. By comparison, the hulking Suburban and Tahoe saw their deliveries go up more than 10 percent and 20 percent respectively. Overall, in the first nine months of the year, GM’s total deliveries had slightly declined.

Along with the Cruze’s U.S. manufacturing, GM will also scrap North American production of the Buick LaCrosse, Cadillac CT6, and the Chevy Impala, as well as its hybrid Volt.

While the SUV and truck market should be buoyed by the Trump administration’s assault on mileage and environmental standards imposed by the state of California and the Obama administration, GM has said that tariffs on steel and aluminum have hurt its business. In July, the company said that it had “unmitigated exposure” to rising steel and aluminum prices, which have been boosted by the tariffs.

GM’s actions add up to the biggest restructuring for the U.S. No. 1 carmaker since its bankruptcy a decade ago, and mark a turning point for the North American auto industry. U.S. automakers have enjoyed nearly a decade of prosperity since the 2008-2009 financial crisis and the government bailouts of GM and the former Chrysler Corp.

GM’s announcement immediately drew criticism from U.S. President Donald Trump, highlighting the political risks facing GM.

He demanded the automaker find a new vehicle to build in Ohio and added that he had told GM Chief Executive Mary Barra he was unhappy with her decision to cut production at an Ohio factory. Ohio will be a key state in the 2020 presidential campaign.

“I have no doubt that in the not too distant future, they’ll put something else. They better put something else in,” Trump, who has pushed for more manufacturing jobs throughout his almost two years in office, said.

GM did not immediately comment on Trump’s remarks, but the company noted it has other facilities in Ohio including a transmission plant in Toledo and metal center in Parma.

GM and its rivals are facing rising bills for technological transformation, increased risks from U.S. trade policy and investors reluctant to fund their traditional product strategies.

Barra on Monday portrayed the decision to put five North American factories on notice for potential closure and cut nearly 15,000 jobs as necessary to keep the company strong as it plows money into new technology and new businesses such as robo-taxi services.

“This industry is changing very rapidly,” Barra said during a press briefing. “These are things we are doing to strengthen our core business.”

GM shares rose as much as 7.8 percent following the announcement, and were nearly 6 percent higher at $37.97 in mid-afternoon trading. Shares of Detroit rivals Ford Motor Co and Fiat Chrysler Automobiles NV also rose, outpacing the broader market.

GM plans to halt production next year at three assembly plants: the Lordstown small-car factory near Youngstown, Ohio; the Detroit-Hamtramck complex in Detroit; and the Oshawa, Ontario, assembly complex near Toronto. It will also stop building several models now assembled at those plants, including the Chevrolet Cruze, the Chevrolet Volt hybrid, the Cadillac CT6 and the Buick LaCrosse. The Cruze compact car will be discontinued in the U.S. market in 2019, although GM may continue building it in Mexico for other markets, Barra said.

Plants in Baltimore, Maryland, and the suburban Detroit community of Warren, Michigan, both of which make powertrain components, have no products assigned to them after 2019 and are at risk of closure, GM said. The company said it will also close two unidentified factories outside North America.

“We are right-sizing capacity for the realities of the marketplace,” Barra said.

GM is also moving to cut capital spending overall, even as it says it will double the resources dedicated to electric and self-driving vehicles over the next two years.

GM last year promised to launch a fleet of 20 new battery electric vehicles in North America by 2023, along with at least 10 new electric vehicles in China by 2020. The expenditures to bring those vehicles to production will start to hit with new batteries and body architectures designed to generate profits.

GM also is ramping up hiring at its GM Cruise autonomous vehicle unit, pushing to overcome technical challenges and make good on a plan to launch a robo-taxi service next year.

Even with the higher spending on electric and autonomous vehicles, GM plans to reduce overall annual capital spending to $7 billion by 2020 from an average of $8.5 billion a year during the 2017-2019 period. The automaker has come under pressure from investors to return more cash in the form of share buybacks and dividends.

Cost pressures on GM and other automakers and suppliers have increased as demand has waned for traditional sedans. The company has said tariffs on imported steel, imposed earlier this year by the Trump administration, have cost it $1 billion.

Barra did not link Monday’s cuts to tariff pressures, but said trade costs are among the “headwinds” GM faces as it deals with broader technology change and market shifts.

GM’s actions provoked anger from political figures on both sides of the U.S.-Canada border, and from its main North American unions.

The United Auto Workers, which represents U.S. workers, vowed to fight the cuts. “General Motors’ decision today … will not go unchallenged by the UAW,” said Terry Dittes, the union’s vice president in charge of negotiations with GM. Some UAW workers could land jobs at other GM factories, but many will face uncertain futures unless GM reverses course.

Canadian Prime Minister Justin Trudeau said he spoke with Barra and expressed “deep disappointment.”

In the United States, Trump’s economic adviser, Larry Kudlow, was scheduled to meet with Barra on Monday.

GM said it will take pre-tax charges of $3 billion to $3.8 billion to pay for the cutbacks, but expects the actions to improve annual free cash flow by $6 billion by the end of 2020.

GM’s North American salaried workforce, including engineers and executives, will shrink by 15 percent, or about 8,000 jobs. The company said it will cut executive ranks by 25 per cent to “streamline decision making.”

Even as GM is moving to lay off salaried staff, the company is hiring. At GM’s Detroit headquarters on Monday, there were signs directing people to a “new hire orientation” meeting.

Barra said GM can reduce annual capital spending by $1.5 billion and increase investment in electric and autonomous vehicles and connected vehicle technology because it has largely completed investing in new generations of trucks and sport utility vehicles. Some 75 percent of its global sales will come from just five vehicle architectures by the early 2020s, which means GM can reduce the people and capital required to keep its product portfolio updated.

Unlike Japanese automakers Nissan Motor Co Ltd, Honda Motor Co Ltd and Toyota Motor Corp, which rely on a more flexible system where they make multiple vehicles at a single plant, GM has too many factories that make just a single model.

The collapse in sales of compact and midsize sedans has hit certain GM models harder than rival Japanese brands. Sales of the Honda Civic are down 11 percent through the first 10 months of 2018. But sales of the Chevrolet Cruze are off 22 percent.

The Hamtramck and Lordstown assembly plants are currently operating on one shift. A rule of thumb for the automotive industry is that if a plant is running below 80 percent of production capacity, it is losing money. GM has several plants running well below that, and Barra said North American operations overall were operating at 70 percent capacity. Consultancy LMC estimates that Lordstown operates at just 31 percent of production capacity in 2018.

Through the UAW, workers at Lordstown have worked to improve quality, cut the number of union locals to make it easier for GM to negotiate and agreed to the outsourcing of some jobs, in a bid to persuade the automaker to add more models to its factory line.

Trump won Ohio in 2016 campaigning on bringing manufacturing jobs back to America.

“So far, President Trump has been asleep at the switch and owes this community an explanation,” U.S. Representative Tim Ryan, a Democrat whose district includes Lordstown, wrote on Twitter.

At the same time, many of GM’s plants producing its higher-margin trucks and SUVs are running on three shifts, with some running six and sometimes seven days a week to keep up with demand. Some displaced GM car plant workers could find jobs at truck factories, GM officials said.

Rivals Ford and Fiat Chrysler have both curtailed U.S. car production. Ford said in April it planned to stop building nearly all cars in North America. Fiat Chrysler moved even earlier to discontinue most of its sedans.

Author

Ike Obudulu

Ike Obudulu

Versatile Certified Fraud Examiner, Chartered Accountant, Certified Internal Auditor with an MBA in Finance And Investments who has both worked for and consulted with some of the world's largest companies on main street and wall street in over 20 countries, Ike brings his extensive reporting and investigations experience to bear on his role as Chief Editor.
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