GM Restructuring Just The Beginning

Things certainly haven't been easy for automakers lately, especially American automakers. However, as necessity is the mother of innovation, many auto companies could be on the forefront of a new era. On Tuesday, General Motors (NYSE:GM) announced that it would, "lay off salaried workers, cut truck production, suspend its dividend and borrow $2 billion to $3 billion to weather a severe downturn in the U.S. market."

Overall, General Motors' moves of late will help pull together $15 billion to buoy the company during the present dismal times.

Capping the Cash Drain
When you're hemorrhaging cash, you have to plug the hole. General Motors is trying to do exactly that - right now - with the latest round of firings and cost cuts. Looking at the details of the plan, the company could reduce costs by 20% by slashing some of its 32,000 salaried jobs. What's more, the company could also potentially sell some overseas assets to further create a cash positive situation.

One area of cost-cutting which will likely spur negative headlines is the company's potential plans to ax white collar health-care coverage for retirees over the age of 65. To compensate, the company wants to use its overfunded pension plan to help fill some of the holes for those affected.

In all, efforts to cut costs could save $1.5 to $7 billion, over half a billion dollars of which could come from the elimination of the present 25 cent dividend. (To learn of several telling factors that can help you avoid losses, read Is Your Dividend At Risk?)

The Road Ahead
Looking forward, the overall car business just isn't what it used to be. In 2007, new vehicle sales topped 16 million units; however, for 2008 and 2009, that number could be reduced to 14 million. Fact is, consumers are reluctant to spend money on big-ticket items with the economy struggling and the gas prices through the roof. Case in point, General Motors has stated that it will cut truck production by 300,000 units by the end of next year. (Feeling overwhelmed by rising oil prices? check out Getting A Grip On The Cost Of Gas.)

At the end of the day, General Motors simply must make bold changes in the current market to halt it's current $3 billion per-quarter cash outlay. When you realize that General Motors has lost $54 billion in the past three years, the picture is even more gruesome.

With all of the aforementioned in mind, General Motors will likely close four North American Truck plants, while also putting the kibosh on executive bonuses. The company could even possibly sell the Hummer SUV brand too. As the company rolls forward in the days to come, investors can expect new cars to surface, most likely with an emphasis on smaller, more gas-efficient branding.

June Sales Slump
When you examine the June New Vehicle Sales numbers, it's easy to see why compact models will likely take hold in the months to come. According to AutoData, on a year-over-year basis, Honda Motor (NYSE:HMC), Mazda Motor of America, Kia, Mercedes-Benz USA and Subaru were the only companies reporting positive unit sales. It's important to note that all of the aforementioned have only seen single digit growth year over year. Versus the numbers from last year, General Motors numbers are down 16.1%, Ford (NYSE:F) sold 14% less units, Chrysler LLC new car sales were off 22% and Tata's (Nasdaq:TTM) Jaguar witnessed a 20.5% decline.

Parting Thoughts
Virtually every automotive company is struggling in the present environment, but those who specialize in smaller models are seemingly faring better. There's more change ahead for auto companies and the end of 2008 and 2009 could hold mega-mergers. However, much like General Motors' restructuring, proactive cost cutting is the best solution to current cumbersome conditions.

For further reading, be sure to check out our related article Cashing In On Corporate Restructuring.