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High-Cost Workforce in Peril as GM Eyes Profitability in 2010

Detroit automaker offered all 74,000 of its hourly UAW workers buyout packages that could average about $100,000 per worker.

February 12, 2008
By 2010 or 2011, General Motors should be solidly profitable in North America, says CFO Fritz Henderson, but it is going to take major cost reductions and the replacement of older, high-cost workers to help the automaker get there.

“In order to get North America sustainably profitable and generating cash, we need to win in the market and rein in costs,” Henderson said Tuesday, February 12, in a conference call with journalists and analysts. “We need to step on the gas on how we are performing in the market.”

Henderson said GM expects to earn money in North America when it realizes the full benefits of lower-cost workers, reduced health care costs and capacity reductions that bring production in line with retail demand.

For all of 2007, GM’s global operations reported a record net loss of $38.7 billion. But much of that came from the way GM calculated certain tax assets. When stripping away one-time charges and write-downs, GM’s worldwide automotive operations were profitable last year. GM earned $553 million in 2007, after losing $339 million in 2006.

But GM is still losing money in North America, its highest-volume market. For 2007, GM recorded a pretax loss of $1.5 billion. But the losses could start shrinking in the second half of 2008, Henderson said, when GM begins to realize savings from the latest round of UAW buyout offers.

One way GM expects to reduce costs is by replacing older, high-cost workers with new employees who will do the same jobs for less money. On Tuesday, GM offered all 74,000 of its hourly UAW workers buyout packages that could average about $100,000 per worker.

GM would then hire new workers at lower wages. Henderson would not say how many workers GM expects to accept the buyout package. But he did say about 1,700 of the union jobs are in non-core positions, such as housekeeping and plant maintenance.

“Looking at the situation, we don’t really know what the take rates will be,” Henderson said of the buyout plan. Reducing payroll costs with new workers is one way GM plans to cut costs.

Henderson said GM wants to dry up the Jobs Bank, which under the UAW contract allows laid off workers to continue receiving the lion’s share of their wages and benefits.

“There is a fair amount we can do to adjust the workforce,” Henderson said.

GM will pay the cost of the buyouts from cash and not take on new debt.

Although the news for GM’s North American operations wasn’t good, sales and profits in China and Latin America continue to be strong and growing.

“It’s rare when all of the Latin American operations are going well at the same time,” Henderson said. “We saw that in 2007. It was a great year. The drivers are still there in 2008. Those of us who have worked in these operations realize they can turn.”

Filed by Automotive News, a sister publication of Workforce Management. To comment, e-mail editors@workforce.com.