GM Not Addressing Underlying Issues

GM's announcement yesterday of nine plant closings in an effort to reduce costs by $7 billion in 2006 doesn't seem to have convinced industry observers that these actions will solve GM's problems.

"GM's announced plant closings do little to address the underlying problems. It has too much capacity because its labor, product design and management are too costly. It will be smaller but its per unit costs will still be too high to compete. It keeps shrinking but never gets more competitive," explains Peter Morici, business professor and a recognized expert on the automobile industry, University of Maryland.

The UAW weighed in via a statement issued by UAW President Ron Gettelfinger and vice president Richard Shoemaker, director of the UAW General Motors Department. "We have said consistently that General Motors cannot shrink itself to prosperity. In fact, shrinking GM only exacerbates its problems. Workers and their unions have worked hard to improve product quality and productivity at GM facilities in the U.S. and Canada, and these efforts have produced strong gains in both these critical areas, as reported in recent studies by J.D. Power and Associates and the Harbour Report."

Deutsche Bank analysts said they do not expect GM "to be more than marginally profitable" after the restructuring, but that would be "a vast improvement" on its current steep losses. David Healey, an analyst with Burnham Securities says, "It's a step in the right direction. A further decline in market share, which I think is likely, will eat away at the savings they're accomplishing."

Healy added, "I've been relatively underwhelmed or unimpressed with the new lineup. One of the problems with the auto business is if you make a decision on a new model today it's not in the showroom for three years."

The UAW statement also addresses the issue of product offerings, "GM's return to prosperity depends on it offering products that consumers find attractive, exciting and want to buy. Only then will GM's market share stabilize and grow, only then will revenues increase and only then will General Motors return to prosperity...".

GM also faces challenges from its former subsidiary, parts supplier Delphi Corp, which recently declared bankruptcy. GM chairman and chief executive officer Rick Wagoner expressed confidence on Nov. 21 that Delphi will continue to supply parts throughout its transition. Even if that is not the case, GM "could survive 4-6 months and perhaps much longer" if Delphi workers go on strike, Morgan Stanley analyst Jonathan Steinmetz wrote in a note to clients Nov. 21.

AFP contributed to this report.

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