What the GM Cutbacks Mean for Traders, Unions, Drivers and Politicians

12/06/2018 1:04 pm EST


Paul Dykewicz

Editor, Eagle Finanical Publication

General Motors job cuts of 14,000+, cutting six car brands by year-end 2019 and $10.5 billion in cost and expense cuts aimed to focus on self-driving and electric vehicles have spurred criticism from President Trump and lawmakers, writes Paul Dykewicz Wednesday.

General Motors (GM), still profitable after receiving billions of dollars in funds from the federal government to emerge from its 2009 Chapter 11 bankruptcy, is insisting that the cuts need to be pursued before the cyclical industry’s next downturn.

However, the plan has managed to unite Republicans and Democrats in Washington from states such as Michigan, Ohio and Maryland, where factories may close amid GM’s goal of developing next-generation battery-electric vehicle architectures.

The brands slated for termination are the Chevrolet Volt, a hybrid electric car; Chevrolet Cruze, a compact car offered both as a hatchback and sedan; the full-size Chevrolet Impala; the Cadillac CT6, a turbo-engine luxury car; the full-size luxury Cadillac XTS; and the Buick LaCrosse, yet another full-size luxury sedan. The elimination of four full-size car brands and the preservation of all of GM’s crossover vehicles, pickups and sports utility vehicles (SUVs) reveals what GM’s management views as expendable, compared to products its leaders expect to fuel the company’s future growth in the years ahead.

General Motors job cuts will trim executive ranks by 25%

General Motors plans to trim 15 percent of its 54,000 North American salaried and contract jobs, as well as 25% of its executive positions. The reduced number of executives will help to “streamline decision making,” according to the company.

GM’s announcement that it will stop building cars at six plants in Michigan, Ohio, Maryland and Ontario, Canada, puts upwards of 6,000 hourly manufacturing jobs at risk.

“These actions will increase the long-term profit and cash generation potential of the company and improve resilience through the cycle,” Chief Executive Officer Mary Barra explained in a statement.

General Motors job cuts require negotiating plant closing with UAW

However, GM and the United Auto Workers have a contract that requires negotiating any U.S. plant closures. The UAW could refuse to reach a new collective bargaining agreement next year when the current deal expires and call for a nationwide strike to pressure GM into reducing job cuts. Such a strike could stop production of profitable pickups and SUVs that are helping to fund the development of autonomous and electric vehicles.

GM intends to reap cash savings of approximately $6 billion, while reducing costs by $4.5 billion and trimming its annual capital expenditure run rate by almost $1.5 billion. The company’s actions include product development streamlining and prioritizing future vehicle investments in electric vehicle architectures. As the current vehicle portfolio is optimized, it is expected that more than 75 percent of GM’s global sales volume will come from five vehicle architectures by early next decade.

The auto maker aims to support the growth of its crossovers, SUVs and trucks by adding shifts and investing $6.6 billion in U.S. plants that have created or maintained 17,600 jobs, GM announced. With changing customer preferences in the United States hurting car sales, production will be allocated to fewer plants next year.

GM job cuts could occur at factories “unallocated” for production

Assembly plants that the company announced will be “unallocated” for production in 2019 include: the Oshawa Assembly in Oshawa, Ontario, Canada; Detroit-Hamtramck Assembly in Detroit; and Lordstown Assembly in Warren, Ohio. Propulsion plants that will be “unallocated “ next year consist of Baltimore Operations in White Marsh, Maryland, and Warren Transmission Operations in Warren, Michigan.

Aside from a previously announced closure of an assembly plant in Gunsan, Korea, GM plans to stop operations of two additional plants outside North America by the end of 2019.

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, as well as up to $2 billion of employee-related and other cash-based expenses. Most of the restructuring charges will be incurred in the fourth quarter of 2018 and first quarter of 2019, with some additional costs absorbed through the rest of 2019.

General Motors job cuts spur analysis beyond next election campaign

“GM needs to forget about the politics and concentrate on doing what’s prudent for its business and financial survival,” said Jim Woods, editor of Successful Investing and Intelligence Report. “Mary Barra, if you’re reading this, ignore the presidential tweets and shrug off the pressure from grandstanding lawmakers, and make the right decisions for shareholders.”

“The automobile industry in general and GM in particular need to change,” said Bob Carlson, who heads the Retirement Watch investment advisory service. “There’s a secular shift away from passenger automobiles toward pickup trucks, SUVs and eventually self-driving and electric vehicles.

“GM needs to change from an auto manufacturer to a transportation company. The recent moves are part of a plan to accelerate that transformation and are necessary to improve the company’s future. Of course, these changes aren’t sufficient. The company still needs to execute well and produce vehicles people prefer to the many others available. It’s still a speculative investment at this point.”

General Motors job cuts reflect marketplace reality

“This was a bitter dose for everyone, but Barra got right at the heart of the issue: this is not a profit grab, it’s all about facing up to the fact that GM overbuilt for the domestic car market,” said Hilary Kramer, a seasoned Wall Street professional who leads investment advisory services that range from Value Authority to Turbo Trader.  

“Capacity got too far ahead of U.S. demand,” Kramer continued. “Unless the government wants to artificially stimulate demand for the kinds of vehicles those plants make, keeping them open will only bleed the company dry. It’s asking shareholders to subsidize jobs that just don’t make economic sense — not necessarily a form of charity, but not the kind of thing investors are usually asked to accept.

“If anything, GM is arguably still delaying some of the hardest decisions. They’re keeping redundant car plants open and keeping niche models alive longer than a company with its eyes fixed on the bottom line would normally contemplate. Sales have stalled. Factor out the tax cut that applied to everyone and we’d already be looking at fairly staggering negative profit growth.”

Earnings before interest taxes, depreciation and amortization (EBITDA) is “tracking down” 32 percent since 2016 and nobody really expects it to recover for years to come, said Hilary Kramer, who recommended the sale of Ford Motor Company (F) to subscribers of her Turbo Trader and Inner Circle advisory services several months ago. The tax cuts “papered that over” and it’s going to take serious innovation to shift back into “racing gear” and catch up with rivals that are already investing in autonomous vehicles and more flexible manufacturing systems, she added.

General Motors job cuts will allow refocus of precious capital

“Innovation costs money,” Kramer opined. “Closing these plants will help but a management team focused on strategy would make even harder calls. Retrain people like Ford is doing. Shuffle production lines to better keep up with changing tastes. But if you can save money by turning the lights out on a plant that’s idle 75 percent of the time anyway, that’s what shareholders deserve."

“The real question is what employees deserve and the government can demand. Historically, the union would have owned a large block of GM shares through the pension fund and got boardroom representation that way. Their rights as workers and as shareholders were aligned. Modern retirement plan design has diluted that big concentrated position in favor of a better diversified portfolio, wiping out the employees’ voice at the top in the process. The last UAW director resigned last year and wasn’t replaced. Instead the fund that put him there decided to sell 40 million shares (worth $1.6 billion at the time) and gave up its right to a seat on the board. It just wasn’t worth it to the union or the fund’s managers to nominate anyone else who would speak for the employees as shareholders."

“Likewise, the bailout gave the government a lot of leverage over GM strategy but that evaporated as it sold what was once a 60 percent stake in the company between 2010 and 2013. That was the time to engage with GM as an activist shareholder, but anyone who’s ever seen big business and bureaucrats mix knows what a disaster that would’ve been. Now the company has no obligation to the government beyond usual legal compliance. If anyone wants to change its policy, they’ve got to negotiate and come to a mutually agreeable decision.”

Until and unless that happens, management will chart its own course on behalf of the shareholders, unless, of course, the shareholders themselves speak up, Kramer said.

General Motors job cuts officially shift emphasis to autonomous vehicles

General Motors and its autonomous vehicle ride-sharing company Cruise recently took the next step toward commercializing self-driving vehicle technology with the appointment of Dan Ammann as CEO of the business unit. Kyle Vogt, Cruise co-founder, will partner with Ammann to set strategic direction for the company and will lead technology development as Cruise president and chief technology officer. The appointments are effective Jan. 1.

Cruise has grown from 40 employees to more than 1,000 at its San Francisco headquarters and recently announced an additional expansion of 100-200 employees in Seattle. With recent investments by SoftBank and Honda, Cruise’s valuation has rapidly grown to $14.6 billion.

The appointments demonstrate GM’s commitment to transforming mobility through the safe deployment of self-driving technology and toward a future with zero crashes, no emissions and limited congestion, Barra said in a statement.

As GM president, Ammann orchestrated the 2016 Cruise acquisition. Ammann’s appointment means GM’s global regions and GM Financial will now report directly to Barra, who is expected in Washington to speak to both Ohio senators on Wednesday and the Michigan congressional delegation on Thursday.

GM Job cuts will spark a sustained scuffle with lawmakers and the UAW

While not addressing President Trump’s call for GM to cut jobs and production facilities overseas to build vehicles domestically, GM issued a statement expressing appreciation for the administration acting to “improve the overall competitiveness” of U.S. manufacturing.

United Auto Workers (UAW) leaders blasted the proposed job cuts.

“UAW members and U.S. taxpayers invested in GM during their darkest days,” UAW President Gary Jones said in a statement. “Now it is time for them to invest in us.”

UAW Vice President Terry Dittes described GM as a major importer of vehicles built in China, Canada and Mexico that are sold in the United States. He cited versions of the Chevy Cruze and Impala that are assembled in Mexico and Canada, respectively, and imported to the United States even though those two vehicles are also assembled at plants in Lordstown, Ohio, and Hamtramck, Michigan.

chart 1
Chart Courtesy of stockcharts.com

GM is far from finished in deflecting criticism from President Trump and a bipartisan group of Washington lawmakers who will be championing the need to protect U.S. jobs and factories from cuts. The company’s leadership probably expects tough negotiations with the union next year and is preparing workers, lawmakers, Wall Street and others for the next steps required to pursue the promise of autonomous and electric vehicles.

Subscribe to Paul Dykewicz' Stock Investor Insights here…

Watch Jim Woods talk about picks FLOT, ITA ETFs and large-cap techs here.
Recorded: MoneyShow Dallas, Oct. 5, 2018.
Duration: 7:56.

Watch Hilary Kramer interview Louis Navellier on commodities, crude, inflation, interest rates, Treasuries and bank stocks here.
Recorded: MoneyShow Dallas, Oct. 5, 2018.
Duration: 5:39.

Watch Mark Skousen and Jim Rogers talk about how changing demographics in Asia, China and Japan affect the Emerging Markets investing outlook here.
Recorded: MoneyShow San Francisco, August 24, 2018.
Duration: 5:45.

Watch Mark Skousen: Five stocks that could be the next trillion dollar companies here.
Recorded: MoneyShow San Francisco, August 24, 2018.
Duration: 46:04.

Watch Jim Rogers, Mark Skousen on global investing ideas here.
Recorded: MoneyShow San Francisco, August 24, 2018.
Duration: 6:12.

Related Articles on STOCKS

Keyword Image
Here's a Split to Bank On
05/24/2019 5:00 am EST

There is no question in my mind that my crystal ball is getting more cloudy by the day. Portfolio pe...

Keyword Image
Nothing Rallies like a Deere?
05/23/2019 9:35 am EST

Deere & Company appears ready for a rally as its recent poor performance has put it in oversold ...