The Wall Street Journal-20080213-Huge Loss Dents GM-s Hopes for a Turnaround

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Huge Loss Dents GM's Hopes for a Turnaround

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In a fresh sign that its turnaround plan is sputtering, General Motors Corp. yesterday reported a $722 million fourth-quarter loss, to end the year a staggering $38.7 billion in the red -- believed to be the largest annual loss ever by an auto maker.

In the past three years the company has lost nearly $50 billion, more than all the profit it made in the preceding decade.

GM's latest quarterly loss came even though the company is showing signs of progress in certain areas. New models like the redesigned Chevrolet Malibu and growth overseas lifted the company's automotive revenue. Fixed costs in 2007 were $9 billion lower than in 2005.

But those improvements are being wiped out by other factors such as a softer U.S. car market and higher material costs.

GM used more expensive materials for interiors and other components when improving many of its vehicles. With the U.S. economy slowing and damping auto sales, the company hasn't been able to completely offset the higher costs with increased prices.

GM's pickup trucks are also selling with larger rebates than GM had expected, squeezing margins on a big source of profit. It has had to offer large rebates on pickups in part because high gas prices are pushing customers into more fuel-efficient cars -- but also because Toyota Motor Corp. is selling its trucks with hefty incentives.

U.S. auto sales are "operating well below trend and below what we thought in 2005 when we conceived the [turnaround] plan," GM Chief Financial Officer Frederick "Fritz" Henderson said in an interview.

He noted GM's key North American unit's performance was hurt because it slowed production in order to lower dealer inventories and reduce low-margin sales to rental fleets. But he acknowledged GM still must "demonstrate an ability to win in the U.S. market, even if the market is tougher."

GM expects U.S. auto sales to improve in the second half of the year, but the U.S. economy still casts a cloud on the outlook for the company.

In 4 p.m. composite trading on the New York Stock Exchange yesterday, GM's shares were down 52 cents, or 1.9%, to $26.60.

Mr. Henderson stopped short of predicting a profit by the beginning of the next decade. He said GM expects $4 billion to $5 billion in additional reductions in fixed costs by 2011, mainly related to lower- wage workers it is now allowed to hire under its new contract inked in September with the United Auto Workers.

At the same time it revealed the earnings, GM announced a new round of early retirement and buyout offers for all 74,000 members of the UAW at GM facilities in the U.S., with the hope that many of them will exit the company by July. It didn't disclose any target number. About 46,000 are eligible for early retirement. GM could replace the departed workers with new hires at lower wages. For every worker replaced by a new hire, GM saves nearly $50 an hour in benefits and wages.

GM's fourth-quarter loss amounted to $1.28 per share. The loss included a $1.6 billion tax benefit related to changes in some continuing operations as well as $1.17 billion in charges related to Delphi Corp., GM's former parts division, which is in bankruptcy-court protection.

A year ago, the auto maker reported fourth-quarter income of $950 million, or $1.68 a share, and appeared to be making progress in its recovery.

Meanwhile, GM's full-year 2007 loss of $38.7 billion in large part reflects a huge loss in the third quarter because it removed from its balance sheet certain tax credits it could only keep if it expected to become profitable soon.

Chief Executive Rick Wagoner, 55 years old, now faces a monumental task in trying to turn GM around. After losses began piling up in 2005, Mr. Wagoner had to fight to keep his job when billionaire investor Kirk Kerkorian bought a stake in the company and placed a trusted adviser on GM's board. Mr. Kerkorian eventually gave up and sold his stake.

But as Mr. Wagoner heads into 2008, most analysts expect the company to lose money for a fourth year in a row. Most forecast U.S. auto sales this year at about 15.5 million to 16 million, which would be the lowest in a decade. GM may also have to take further Delphi- related charges.

Some new vehicles, such as the well-received Malibu sedan and Buick Enclave crossover, are selling at higher prices than the vehicles they have replaced. But they aren't as profitable as the big sport-utility vehicles that drove GM's earnings in the late 1990s and the early part of this decade. SUV sales have fallen sharply as a result of the rise in gas prices.

Although total revenue declined to $47.1 billion from $50.8 billion because lender GMAC LLC is no longer a wholly owned subsidiary, GM's fourth-quarter automotive revenue rose to 7%, to $46.7 billion.

But the North American operations in the latest quarter reported a slight drop in revenue and a loss of $1.25 billion, not including a gain from the sale of its Allison transmission business.

GM is also struggling in other regions, as its loss widened in Europe and profit declined in Asia. Only Latin America, Africa and the Middle East reported an increase in profit.

GM's auto operations burned $2.4 billion in cash in 2007, a $2 billion improvement compared with the end of 2006. The cash burn is expected to continue in 2008 at about the same pace.