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Tickers in this Article: GMGMQ, F, TM, NSANY, HMC
Recently, General Motors (OTC:GMGMQ) announced that it plans to reduce its workforce by an additional 4,000 salaried jobs. This move will shrink the workforce by approximately 15%; it will also trim executive or white collar jobs by about 35%. The automaker will offer generous buyout packages to employees who choose to leave voluntarily. Some buyout packages offered to United Auto Workers employees have been valued at nearly $115,000, in addition to a $25,000 voucher for a vehicle purchase. Those who retire voluntarily will be eligible for enhanced benefits and those not eligible for retirement will receive up to six months of pay; up to a year of pay will be offered to executives. (For more on severance packages, see The Layoff Payoff: A Severance Package.)

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Problem With the Buyout Package
While it seems like GM is doing its best to cushion the blow for employees, there is a major disadvantage to offering voluntary buyout packages: Rational workers who believe they have the skills and experience to land a job elsewhere will be more inclined to accept the generous buyout packages. Meanwhile, workers who believe they would not be able to find other work with their skill sets tend to stay. This way of reducing the workforce will leave GM with a relatively less skilled (and probably less experienced) workforce, and may eventually make it harder for the company to reestablish itself once it emerges from bankruptcy. I'm not much of an academic, but this looks eerily like reverse survivorship bias - the winners depart and the losers stay.

Car Quality
Domestic car companies have been struggling for a long time to reach car quality levels that are on par with Japanese cars. Japanese goods are well-known for their quality because ultimately, the culture promotes discipline and workers show greater dedication to their craft. This is why Toyota Motor Corp (NYSE:TM) still holds the top position in a recent benchmark survey on new-vehicle car quality. GM, on the other hand, may have problems maintaining its current quality levels - not to mention creating innovative products - with the as experienced employees leave the company.

The bright spot for the domestic car industry was Ford (NYSE:F), which significantly closed the gap on Toyota, taking the quality title in four categories. Although Ford reported a $1.4 billion loss in the first quarter, if any domestic car company is going to thrive after the recession, it's going to be Ford. The company has revamped auto lineups and increased its focus on quality; it is also providing buyer incentives, which helped it outsell Toyota in May, reporting sales of 155,620 vehicles compared to Toyota's 152,583.

The Bottom Line
The so-called GM reinvention may or may not work, but the key is that the company will be significantly smaller and I believe car quality may deteriorate. Look to companies like Ford (speculatively), Nissan (Nasdaq:NSANY), Honda (NYSE:HMC) and others to fill in the demand gap from GM's collapse. (Read Analyzing Auto Stocks to learn about factors to consider before investing in this industry.)

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