GM (GM): The Exhaustion Of Cutting

GM chief Rick Wagoner is prepared to work 24 hours a day to continue cutting costs in the US. Even if he has to take them to zero, he will get the firm’s North American operations to a profit.

According to The New York Times "in a presentation to analysts, G.M. said that it planned to reduce its annual labor costs in the United States by about $5 billion by 2011."

The General is betting on two things to get back to full strength. The first is that falling costs in the US will meet better sales in 2009 and beyond. That makes for leverage against revenue and that makes for big operating margins. It does not take into account what happens of car sales in the US stay at or below 16 million vehicles a year. It also begs the question of what happens if Toyota (TM), Honda (HMC) & Company keep taking market share from the group formerly known at the Big Three.

Wagoner is also assuming that overseas sales will lift his company overall. He looks to a day, not so many years from now, when 75% of GM’s revenue comes from outside the US. That may work, but the company will have to contend with the rush of Ford (F), the Japanese, and big European car companies who all want to breath the same oxygen in the developing markets of China, India, and Russia. There are local car companies in those regions as well. They may not be willing to show the white flag and surrender their sales willingly.

Wagoner has done a great deal to help GM. But, he is only holding a pair of twos. That may not keep his rivals out of the game.

Douglas A. McIntyre