¹ QUESTION OF THE DAY

 

Vote: Is GM moving fast enough in its plans to return to profitability?²

Toyota said it is on track to invest $11.8 billion in plant and equipment before the end of its fiscal year March 31 -- up 29% from the $9.1 billion Toyota invested the previous year. Toyota also announced a 34% jump in fiscal third-quarter profit to a quarterly record of 398 billion yen ($3.3 billion). A decade after Tokyo's last serious round of friction with Washington over the auto trade, Toyota's exports to North America are increasing again, reaching 940,000 vehicles in 2005, up 16% on the year.

If GM, which racked up a staggering $8.6 billion loss last year, and Toyota stick to their current trajectories, Toyota will unseat GM as the world's largest auto maker, perhaps as soon as this year. What once seemed unthinkable -- that GM could be forced to seek the protection of a bankruptcy court to unload its escalating health-care and pension burden -- now is viewed by many Wall Street investors and analysts as a fair probability, despite the company's adamant denials.

Mr. Wagoner and others say that for GM to move from the painful cuts to possible recovery, it still must, among other things, extract further concessions from the United Auto Workers -- a goal that won't be easy to achieve. UAW President Ron Gettelfinger said yesterday: "We've done enough."

GM's move yesterday caps salaried retiree health benefits at 2006 levels starting in January 2007, affecting roughly 100,000 white-collar retirees and about 25,000 employees who have yet to retire. The company said it will freeze the accrual of pension benefits for salaried workers next month, and that it probably will replace GM's traditional defined benefit plan with a cash-balance plan or a 401(k) plan that would put more of the burden for retirement saving on workers. GM already had stopped offering retiree health coverage to salaried workers hired after Jan. 1, 1993, and it reached agreement last year with the United Auto Workers to pare union workers' health benefits.

GM's debt, like that of Ford, carries a rating of junk, or less than investment grade. Capping salaried retiree health benefits could slash at least $4.8 billion from the company's retiree health-care liabilities and reduce the reported annual pretax health-care expense by $900 million. Cash savings could increase to $200 million annually within five years. GM didn't provide numbers on the financial impact of overhauling salaried pensions because details have yet to be worked out.

Only the dividend cut will conserve significant cash in the short term. Reducing the annual dividend to $1 a share will save GM about $565 million a year. GM will save an additional $1.1 million by cutting Mr. Wagoner's salary in half, and a bit more by reducing base pay 30% each for the company's three vice chairmen and 10% for Executive Vice President and General Counsel Thomas Gottschalk.

GM shares tumbled yesterday afternoon as investors digested the impact of the dividend cut. In 4 p.m. composite trading on the New York Stock Exchange, GM shares were down 53 cents, or 2.3%, at $22.81.

Adding to the pressure on the company, Las Vegas investor Kirk Kerkorian, who owns 9.9% of GM's stock through his Tracinda Corp. investment vehicle, now has Jerome York, his point man for the GM investment, on GM's board of directors. Mr. York's appointment as a director was approved at the same meeting Monday at which GM's board decided to take some of the actions Mr. York had called for in previous weeks. A veteran of large-scale restructurings at Chrysler Corp. and International Business Machines Corp., Mr. York in January said GM should step up the pace of its overhaul, urging a 50% dividend cut and pay cuts for top executives, among other measures.

It isn't clear how much of what GM announced yesterday was in the works prior to Mr. York's January presentation. Mr. Wagoner yesterday rebuffed some of Mr. York's other proposals, such as killing the Saab and Hummer brands to focus GM's capital and management on high-volume brands. Mr. Wagoner said eliminating brands would be expensive, and that GM has plans to reinvigorate its brands with new models.

Mr. Wagoner also refused to give a timetable for returning GM to profitability. Mr. York last month called on Mr. Wagoner to follow the example of Nissan Motor Co. Chief Executive Carlos Ghosn, who laid out detailed milestones for regaining financial health as part of his 1999 revival plan for Nissan.

Mr. Wagoner suggested yesterday that he may be ready to set out more detailed financial projections once GM resolves "a couple of big issues we are wrestling around."

Mr. York will play a pivotal role in GM's overhaul from his board seat, where he is, in effect, replacing Merrill Lynch & Co. Chief Executive E. Stanley O'Neal, who resigned Monday, citing time pressures and potential conflicts involving Merrill's business.

So far, GM's outside directors, led by former Eastman Kodak Co. Chief Executive George Fisher, have stood by Mr. Wagoner as GM's troubles have mounted. But this week's actions indicate to some analysts that GM's outside directors are taking an increasingly active role. Mr. York, with his credentials as a turnaround leader, his penchant for blunt talk and detailed financial analysis, and, of course, the backing of Mr. Kerkorian's substantial shareholding, will likely become a central figure in GM's boardroom. For Mr. Wagoner, the crucial test will be whether he can deliver significantly better financial results this year, as he has indicated he will.

The next items on Mr. Wagoner's agenda include selling a controlling interest in General Motors Acceptance Corp., GM's profitable finance subsidiary, which needs a new majority owner to get clear of the parent auto maker's junk-debt rating. Mr. Wagoner had nothing to say yesterday about the GMAC situation.

Mr. Wagoner also is wrestling with the restructuring of Delphi, its former parts unit, which has sought bankruptcy-court protection. Delphi has said it must shed thousands of U.S. hourly workers and cut pay and benefits for those who remain.

Negotiators for the union and the companies are trying to fashion an agreement before a Feb. 17 bankruptcy-court hearing at which Delphi could seek to void its UAW contracts. The UAW is pushing GM to make up the difference between wages and benefits Delphi will pay and what workers were promised under their 2003 agreement.

One way in which GM could relieve pressure on Delphi would be to offer buyouts to UAW workers, freeing up jobs for Delphi workers. Mr. Wagoner said negotiating an "accelerated attrition" program with the UAW is a high priority. Delphi's efforts to shed its union contracts could provoke a strike by the UAW at Delphi plants that supply critical vehicle components to GM.

Mr. Wagoner declined to describe yesterday's actions as a signal to the UAW that the auto maker will seek additional sacrifices from union workers. Still, the message was clear. "The nearest-term priority other than resolving Delphi and working GMAC through is to be able to try to proceed with some accelerated attrition," Mr. Wagoner said.

At a UAW conference in Washington, UAW President Gettelfinger said "GM did the right thing" by cutting the dividend and executive pay. "We asked for that" when the UAW agreed to cut retiree health-care benefits last fall, he said. He added: "We're not going back into negotiations as far as concessions go." He said GM's actions will have "no impact" on the Delphi negotiations.

Richard Shoemaker, the UAW vice president in charge of the Delphi and GM negotiations, told more than 1,600 union members in Washington yesterday that if Delphi has its union contracts thrown out by the bankruptcy court, "it will probably be impossible to avoid a long strike,"

So far, it doesn't appear that Washington will try to help out GM or Ford by threatening trade retaliation against Asian or European auto makers. President Bush recently threw cold water on the idea that the federal government would offer a bailout to a troubled auto maker, as it did for Chrysler Corp. in 1980.

GM and Ford appear to have taken the position that they aren't interested in bailouts but do want the government to help create a level playing field with competitors whose home nations shoulder at least some health-care and pension costs through government programs. "I'm pleased to see the president of the United States, in the State of the Union, finally taking an interest in health care," Mr. Wagoner said.

Write to Joseph B. White at joseph.white@wsj.com³ and Lee Hawkins Jr. at lee.hawkins@wsj.com⁴