Business - GM's latest retooling;The Chrysler Merger

David Welch

General Motors (GM) is getting closer and closer to taking Chrysler off the hands of its owner, private equity giant Cerberus Capital Management. If GM can come up with funds—perhaps as much as $10 billion—from the government (BusinessWeek.com, 10/28/08) to solve its problems and help restructure the smallest of the Big Three, it could be a done deal.

Assuming it happens, show 'em what they won, Vanna. It's an 83-year-old car company that's badly in need of restructuring. That's the problem. GM has been lousy at restructuring.

GM's strategy all along has been to grab Chrysler and its $11 billion in cash and estimated $35 billion to $40 billion in yearly sales, and then slash overhead, dump unwanted products and plants, and remake the combined company into a profitable business. Industry sources say the two sides still have many issues to settle. There's some agreement on how to resolve them, but ironing out the remaining details could take a week or more.

GM's Losses Soar in 2008
You would think GM executives would be good at this sort of thing by now. The company has decades of experience at it. GM had 215,000 union workers in 1998. After 10 years of retiring union workers and buying others out, GM now has about 64,000. But in all of that time, GM has only occasionally made real money selling cars in North America.

In the past three years, GM bought out 52,000 workers and bragged that it cut $9 billion in structural costs. But in 2006 and 2007, GM lost about $2.3 billion in North America on an adjusted basis. That happened before the mayhem of this year's fuel price spike and credit crunch kicked in. This year's losses have topped $15 billion

It isn't all the fault of management. The United Auto Workers union makes it very tough for any car company to shed jobs without costly buyout deals. When the UAW agrees to a deal, there are usually still too many workers and plants left afterward. GM hasn't gotten ahead of the curve to the point where its sales exceed production in good times and require just modest cutbacks in leaner days.

Despite the big job numbers, GM's restructuring efforts have amounted to incremental downsizing that chases chronic market-share loss.

Worker Buyouts Will Cost Billions
It doesn't help that management has long been overly optimistic about its real share of the U.S. market. Early in the decade, GM thought it could get to 29%. Today, its share sits at 22%. Throw it all together and after decades of tinkering, GM still can't make money at home.

So now, GM's management team hopes to take Chrysler over and make two troubled companies into one fierce competitor (BusinessWeek.com, 10/15/08). With Chrysler sales down 25% this year, will GM be able to cut deeply enough (BusinessWeek.com, 10/23/08) to make a profit? History says no.

Chrysler has 47,500 union workers in the U.S. and Canada. The Center for Automotive Research (CAR) estimates that GM would need to cut 32,000 Chrysler jobs at a cost of $91,000 each. That's the average cost of a buyout for union workers under the various programs covering early retirement and other departures. Add it up and the buyout costs alone come to $3.2 billion, says CAR.

Already, sources say, the UAW wants GM to give furloughed workers first crack at job openings at GM plants once the market turns around. If GM agrees, forget about hiring new workers at half the pay rate of current staff. That was a landmark concession won by Big Three management in last year's UAW contract.

Lawsuits from Dealers
Even if the UAW plays ball, consider the cost of the actual factories, and handling the car dealers who will suddenly have fewer products to sell. GM will have to somehow manage three new brands in addition to the eight it already has. Plus, it would add a further 3,700 dealerships.

GM could cut product lines and let Chrysler's already-suffering dealers bail out. But lawsuits would follow as dealers try to recoup their investment in real estate and franchises. The price tag for clearing that legal tangle could be huge—it cost GM $2 billion and took several years to phase out the Oldsmobile brand, starting in 2001—unless GM can find the kind of creative solution for disposing of brands that so far has eluded every domestic carmaker.

And that, ultimately, is the challenge facing GM's executives: They'll have to prove a lot more creative than they have in the past, finding ways to fix two huge companies in ways that have eluded them with just one.