Potential pitfalls of GM's cost-cutting drive

DETROIT -- General Motors' plans to end production next year at five North American plants and slash salaried head count by 15 percent will not come without risks and consequences. It will have to navigate political headwinds and not overplay its hand during upcoming union negotiations.

While Wall Street praised the actions as cost-cutting measures that will save the automaker $6 billion by 2020, union and political leaders condemned the moves as shortsighted and a betrayal to its workers and government, which less than a decade ago bailed out the automaker from bankruptcy.

President Donald Trump said he was "not happy" with the decision and spoke "very tough" with GM CEO Mary Barra about the moves.

The UAW vowed to "confront" the decision "through every legal, contractual and collective bargaining avenue," while Canadian union Unifor President Jerry Dias promised "one hell of a fight here in Canada with General Motors."

GM did not announce the closure of the plants -- Oshawa Assembly in Canada, Lordstown Assembly in Ohio and Detroit-Hamtramck Assembly in Michigan -- but said it would not allocate any products. Propulsion plants in Maryland and Michigan also will not be given any product.

Not allocating product doesn't mean the plants will permanently close, but it puts their future and the jobs of roughly 6,700 hourly and salaried factory employees -- 3,800 in the U.S. and 2,900 in Canada -- at risk heading into contract negotiations with the UAW in 2019 and Unifor in 2020.

GM's actions are meant to increase the automaker's profits and strengthen its core business, while it doubles investment in autonomous and battery electric vehicles by 2020 -- a year before the automaker is expected to launch an all-new profitable electric vehicle platform.

"I think these actions demonstrate our continued focus on driving cost efficiencies and supporting the ongoing work to make General Motors more agile, resilient and profitable to position the company for long-term success," Barra told reporters on Monday.

All of the products assembled at the three plants -- the Buick LaCrosse, Cadillac CT6, Cadillac XTS, Chevrolet Impala, Chevrolet Cruze and Chevrolet Volt -- are scheduled to stop being produced for the U.S. by the end of 2019.

However, such future-minded and proactive thinking is a high-risk, potentially high-reward bet.

GM has said it believes self-driving and full-electric vehicles could eventually eclipse profits of its current operations. But the operations remain unprofitable.

Autonomous vehicles remain in testing and face a litany of safety and regulatory hurdles, while full battery-electric vehicles represent roughly 1 percent of U.S. sales this year, according to IHS Markit.

"This is the part that scares me across the industry, everyone focusing so much on new mobility -- it's such a long-term play," said Joe Langley, IHS Markit associate director.

Langley said the announced elimination of the passenger cars wasn't surprising, but the immediacy of canceling the cars "so quickly is a new phenomenon."

GM could use the announced plans as leverage during upcoming contract negotiations -- beginning next year with the UAW.

Barra declined to discuss whether the plants could reopen as part of negotiations, citing the company is "unallocating them today." She later told analysts that the company is "committed to working with GM's unions," however it will be a balancing act for GM to not overplay its hand.

The U.S. plant closures must be negotiated with the UAW, which could refuse to agree to a collective bargaining agreement and strike the automaker's plants nationally -- ceasing production of highly profitable truck and SUV plants that are subsidizing costs of autonomous and electrified vehicles.

"We did not bail General Motors out so we could watch them hoard profits, shut down plants and devastate communities and take advantage of low wage workers in Mexico or wherever they see," said GM-UAW Vice President Terry Dittes in a video statement to members.

Kristin Dziczek, vice president of industry, labor and economics at the Center for Automotive Research, said GM announcing the ending of production could be a wake-up call for rank-and-file members.

"These are real stakes in front of the bargaining team next year for the negotiations," she said. "It might actually help the membership focus on jobs and survival more than getting more, more and more in terms of raises, benefits and bonuses."

GM has the poorest plant utilization rates in the U.S. Its assembly plants represented about 1 million of the 3.2 million units of underutilized capacity through October, according to Dziczek.

GM, according to its contract with Unifor, must give a year notice regarding a plant closure. That has not occurred; however, it is expected.

GM also said Monday it will close two unidentified assembly plants outside of North America by the end of next year.

The salaried work force restructuring includes cutting 15 percent of its 54,000 salaried employees in North America -- more than 8,000 including cutting global executives by 25 percent.

Up until Monday, GM was steadfast in saying it saw opportunity in surrendered passenger car segments, which crosstown rivals Ford Motor Co. and Fiat Chrysler Automobiles previously announced plans to primarily exit.

But doing so also leaves automakers vulnerable to shifts in consumer preference back to passenger cars.

Barra on Monday said the company is not opposed to seeking partnerships in passenger cars but had nothing to announce at this time.

"We're going to continue to explore all opportunities that allow us to be more efficient with our investments, more efficient with our capital," she said.

One potential partner could be Honda Motor Co., which already has r&d relationships with GM for fuel cell and autonomous vehicles.

GM expects the actions announced Monday to contribute $6 billion in cash savings by 2020 -- $4.5 billion in cost reductions and $1.5 billion in lower capital expenditures.

GM expects to record pre-tax charges of $3 billion to $3.8 billion related to the announced actions, including $2 billion of employee-related and other cash-based expenses and $1.8 billion in non-cash accelerated asset write-downs and pension charges. The majority of these charges will be incurred in the fourth quarter and first quarter of 2019, with some additional costs incurred through the remainder of 2019.

Barra said the actions are not a result of "anything specific on the horizon." They are meant to be proactive steps to ensure GM for the future.

She said: "I hope you see that this management team is committed to acting with a sense of urgency to make sure that we transform this company to win not only today but in the future."