GM's Recovery Depends on the Goodwill of Its Labor Union. Good Luck With That
Just one year removed from bankruptcy, General Motors is reveling in both a turnaround in operating profitability and a cleaned up balance sheet. Going forward, however, both events remain highly dependent on continued cooperation from labor unions -- which is most definitely not a certainty.
"Successor GM" reported income of $2.2 billion in the first six months of 2010, helped by a 17 percent increase in global vehicle sales and a drop in cost of goods, from 98 percent of sales in 2009 to 87 percent in the first half of 2010.
An impressive reversal of fortunes, considering the "old GM" had lost about $88 billion between 2005 and 2009, due to a plethora of foolish missteps, from debt-service on a highly-leveraged balance sheet to unmanageable legacy labor costs to slowing auto sales.
On July 10, 2009, the "new GM" emerged from bankruptcy after a short 39 days. This quick rinse of reorganization had but one goal -- as repeatedly articulated by management: improve its cost structure so the automaker could become more competitive and profitable at lower industry volumes.
When GM sneezes, America catches cold. ~ Alfred P. Sloan, Chairman (1937 - 1956)
Gone are the days when GM sold one out of every two cars made here in the U.S. The venerable Mr. Sloan wouldn't recognize the changed car manufacturer -- but, the smaller and leaner automaker expects to successfully achieve volume breakeven levels in North American with only an estimated 20 percent market share of the projected new auto sales of about 10.5 million to 11 million vehicles sold a year, according to specifics found in the GM 2009 Restructuring Plan submitted to the Treasury Department in February 2009.At June 30, GM's U.S. market share stood at 18.9 percent.
GM's bankruptcy experience helped the company to eliminate some $92.7 billion in debt and other liabilities through debt forgiveness, bondholder restructurings, and a new labor agreement reached with the United Auto Workers (UAW) -- which transferred billions in legacy labor costs from GM's books to a new UAW managed trust, called the Voluntary Employees' Beneficiary Association (VEBA), which now has fiduciary responsibility for management of hourly retiree healthcare obligations.
With the help of capital infusions totaling $43 billion and $8.1 billion, respectively, from the U.S. Treasury and the Canadian government, GM's balance sheet now shines respectability:
- at June 30, the company had $31.5 billion in available cash and a manageable debt load of only $8.2 billion, with no significant contractual obligations due until 2015. A recently secured $5 billion revolving credit line with several banks should help with any unexpected financial shortfalls.
GM is consolidating U.S. manufacturing operations and eliminating certain car brands to refocus U.S. sales growth exclusively on four core brands: Chevrolet, Cadillac, Buick, and GMC. 
As part of its restructurings to reduce operational overhead, GM is shuttering factories, jobs, and U.S. dealerships:
- GM has sharply reduced the total number of powertrain, stamping and assembly plants in the last two years, from 47 in 2008 to an expected 34 by the end of 2010 and 31 by year-ending 2012;
- From a recent high of 62,403 hourly employees in 2008, the company looks to eliminate 29,000 jobs by 2014, up from initial estimates of 15,200 jobs; and,
- The total number of U.S. dealership closings is targeted to fall from 6,246 in 2008 to 4,500 by December 2010.
Continued good relations with the labor unions are critical to the overall success of the automaker's plans and operating profitability going forward. There are signs suggesting this reciprocal "goodwill," however, is beginning to fracture, as new jobs and plants are being rewarded to non-union workers:
- Teamsters, members of the Internation Union, took to the streets to protest the replacement of member union car haulers with cheaper, nonunion labor this past January.
- The "New GM" opened a non-union shop -- for the first time in 30 years -- in Brownstown, Michigan, near Detroit, to produce lithium-ion batteries for its electric vehicle, the Chevrolet Volt.
Worrisome labor-related issues are bubbling beneath the balance sheet of GM's pensions plans, too. U.S. and non-U.S. pension plans were under-funded by $16.7 billion and $9.6 billion at June 30. Nonetheless, management believes it unlikely "material mandatory pension contributions" would be necessary until 2014.
Furthermore, benefit outflows total more than $10.5 billion each year. Management doesn't expect these annual expenses to crimp cash flow, too, as most of these benefits would be paid from plan assets.
Mishaps are like knives that either serve us or cut us, as we grasp them by the blade or the handle. ~ American poet James Russell Lowell, "Cambridge Thirty Years Ago," Literary EssaysThe necessary liquidity to meet pension funding obligations through mid-decade is dependent on expected asset returns of at least 8.5 percent a year. Despite GM's optimism, actual pension returns could fall short of guidance, according to the company's preliminary common stock filing with the SEC on August 18. Such a performance mishap could cut through both GM's income statement and balance sheet:
We believe that a discount rate calculated as of June 30, 2010 ... for U.S. pensions would be approximately 65 to 75 basis points lower than the rates used to measure the pension plans at December 31, 2009, the date of the last measurement for the U.S. Plans.Ergo, the funded status of the plans could require higher required contributions of approximately $285 million (annual service costs) and add $7.2 billion in more liabilities to GM's balance sheet.
Chief financial officer Chris Liddell warned on the company's second-quarter 2010 earnings call that car sales were expected to slow in the second half. With the real possibility of a "double-dip" recessions in key markets, GM will be tempted to look even more at closely at further labor cost cutting to improve operating metrics. Labor unions are unlikely to prove so willing a partner this time around.
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