GM Makes Cuts: What Is "Nonessential" Spending?

GM (NYSE: GM) management informed the company’s workers this weekend that it would cut all “nonessential” costs because of parts shortages which are a result of the Japanese earthquake. GM has many customers in Japan, so sales there may be a problem as well. GM failed to explain to investors exactly what expenses would be eliminated and what risks those decisions might pose to existing revenue. The No.1 US car company should have been more forthcoming.

For one thing, GM will close a plant in Spain. It also plans to operate only one shift, instead of the current three, at a facility in Germany. The US manufacturer of  light trucks and cars said it could not predict when the interruption of its supply chain would affect inventory, and along with that, sales.

GM almost certainly has contingency plans which take into account lost revenue because of the Japanese disaster. This forecast would include a drop in sales of specific products in the US and EU. Investors and Wall St. will have to guess at those figures, which means their trades in GM’s shares will be done mostly in the dark in the near-term.

GM  may cut expenses, which it should not, because of long-term implications. The firm said it would eliminate travel. If travel is important to company business, shareholders should reasonably ask why it is being curtailed. If it is not essential, why did GM spend money on “nonessential” travel in the first place?

GM may also lower its marketing budget at a time when it could pick up market share from Toyota Motor (NYSE: TM) and Honda Motor (NYSE: HMC). Each has already said that the earthquake will affect production. Toyota and Honda have been the biggest competition for GM in the US over the last decade.

Many  US public companies will announce changes in costs and product availability over the next several weeks. Each will say it cannot forecast how long it will take them to return to business as usual. This will be an excuse to offer only the bare essentials to Wall St. Large corporations have armies of analysts to figure out contingencies. GM now has a battle plan to handle problems in Japan. That plan will never become public.

The priority of transparency, which is already in short supply among big US companies, will be undermined even more as firms deal with the problems caused by the earthquake in Japan. The disaster is a test of the ability of multinationals to manage the unexpected. How the decisions are made will unfortunately not be disclosed.

Douglas A. McIntyre