General Motors Corp. (GM) yesterday (Tuesday) announced a series of cost-saving measures aimed at fighting waning domestic sales fueled by a weak U.S. economy and the soaring cost of fuel.

“We are responding aggressively to the challenges of today’s U.S. auto market,” GM Chairman and Chief Executive Officer Rick Wagoner said in a General Motors company statement announcing the cuts.

“We will continue to take the steps necessary to align our business structure with the lower vehicle sales volumes and shifts in sales mix,” he added, “We remain committed to bringing to market great products that target changing consumer preferences for more fuel-efficient vehicles.”

The struggling GM is being forced to make sweeping changes as it continues to lose market share to its Japanese-based competitor, Toyota Motor Corp. (ADR: TM). The measures announced yesterday are the latest in a string of desperate moves by GM to try to maintain its slim lead on Toyota, its closest global rival.

The most recent changes include eliminating an unspecified number of salaried positions, mainly through natural attrition and offers of early retirement. GM will also discontinue healthcare benefits for older retirees, pursue the sales of some of its brands, and eliminate its quarterly dividend.

All told, GM predicts the measures will generate an additional $15 billion in capital by the end of 2009.

“Today’s actions, combined with those of the past several years, position us not only to survive this tough period in the U.S., but to come out of it as a lean, strong and successful company,” Wagoner said.

Wall Street analysts saw bolstering GM’s capital position as a top priority, but a full-recovery for the automotive giant is tied to the U.S. economy.

“We have to see better demand for automobiles, for cars and trucks, in order for the liquidity crisis to be put to bed,” Tim Ghriskey, chief investment officer at Solaris Asset Management in New York, told Reuters. “They’re burning through about $3 billion in cash a quarter. The cash drain has to stop at some point or GM has larger problems.”

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Plagued by plummeting U.S. sales and $4-a-gallon gasoline, General Motors Corp. (GM) may sell its four-foot-tall Chevrolet Beat in U.S. markets, sources told Bloomberg News. 

The subcompact three-door hatchback was unveiled at last year’s New York International Car Show, though GM said it would be produced overseas and wouldn’t immediately be sold in the United States.

However, both U.S. production and sales are possible, the sources said.

U.S. government fuel efficiency mandates are also playing a role. By 2020, automakers are required to reduce fuel use by 40%.

GM at least knows drivers around the world are excited about the Beat compared to two other prototypes it unveiled. Votes of an online poll on GM’s Web site overwhelmingly preferred the Beat, which received 1.8 million votes worldwide.

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"The people have spoken. The vote count tripled all previous GM online consumer surveys, telling us the Beat resonated with customers all around the world," said Ed Peper, Chevrolet general manager. "Chevrolet was overwhelmed by the positive reaction to each of the ‘triplets,’ but the Beat was the clear winner."

Though not a hybrid, the Beat can get as much as 40 miles a gallon. GM – whose autoline is heavy on trucks, SUVs, and the Hummer – hopes that number will sing to U.S. drivers, who are hampered by record gasoline costs.

"This is a very big change for GM," John Wolkonowicz, an analyst at Global Insight Inc. in Lexington, Mass., told Bloomberg. "They have no choice. There’s never been as rapid a shift in consumer demand in the history of the auto industry."

Demand isn’t just shifting away from gas-guzzlers, but U.S. carmakers in general.

For the past 76 years, GM has been the world’s biggest automaker. But Toyota Motor Corp. (ADR: TM) almost stole that title, selling only about 3,000 cars (9.366 million total) less than GM’s 9.369 million. 

Though the Beat would be a pioneer in the U.S. market, it’s up against an army of established subcompacts overseas. On top of that, Tata Motor Ltd.’s (ADR: TTM) forthcoming $2,500 Nano is generating huge buzz. 

The trend is playing out tragically for GM, as Chairman and Chief Executive Rick Wagoner announced in June that the company will close four truck and SUV plants. The maneuver will cut its North American truck capacity by 700,000 vehicles and is expected to save the company $1 billion.

"From the start of our North American turnaround plan in 2005, I’ve said that our goal is not just to return GM to profitability, but to structure GM globally for sustained profitability and growth," Wagoner said in a statement. "Since the first of this year, however, U.S. economic and market conditions have become significantly more difficult. Higher gasoline prices are changing consumer behavior, and they are significantly affecting the U.S. auto industry sales mix."

As far as the company’s Hummer brand is concerned, Wagoner said GM is "considering all options from a complete revamp to a partial or complete sale of the brand."

GM Stock: Bargain or Junk?

Bloomberg cleverly pointed out that GM’s current market value is smaller than that of Mattel, Inc. (MAT), maker of Matchbox cars.

Specifically (and fittingly to such comparison), GM is only one-tenth the size of what it was in 2000.

Worse for investors, GM’s stock price is trading at its lowest price since 1954, Reuters reported.

Year-to-date, GM has been the worst performing stock on the Dow Jones Industrial Average Index, falling nearly 60%.

The damage has actually lifted the value of its 25-cent quarterly dividend, but that’s about the extent of the good news.

Citigroup Inc. (C) analyst Itay Michaeli said last week in an investor’s note that he doesn’t think GM or rival Ford Motor Co.’s (F) stocks are standing on solid enough ground to pivot for a rebound.

"We remain cautious on the shares of Ford and General Motors in spite of recent share price declines," Michaeli said, Reuters reported. 

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By Jason Simpkins
Associate Editor

It has taken three straight years of declining profit for General Motors Corp. (GM) to realize it is no longer on the cutting edge of the world’s automotive market.

To its credit, GM has shifted its turnaround into high gear, painstakingly reshaping what was once regarded as an American business icon. But even with the changes put in motion, it may be too late to catch rival Toyota Motor Corp. (ADR: TM).

General Motors announced yesterday (Tuesday) that it would cut jobs, costs, and possibly sell off its Hummer brand, all in an effort to reduce its exposure to sluggish truck and SUV sales, and respond to a “structural change” in the automotive industry.

That change is, of course, the rising cost of fuel.

The price of crude oil accounts for more than 55% of the retail price of gasoline, according to the federal Energy Information Administration, and as the price of oil has more than doubled in the past year, gasoline has followed suit by breaking the $4-a-gallon mark and causing motorists to cringe.

“Since the first of this year, however, U.S. economic and market conditions have become significantly more difficult,” Rick Wagoner, GM chairman and CEO said in a statement. “Higher gasoline prices are changing consumer behavior, and they are significantly affecting the U.S. auto industry sales mix.”

During the first four months of this year, sales of pickups dropped 16.8%, SUVs dropped 9.9% and luxury vehicles fell 12.9%, according to Autodata Corp. Sales of small cars, on the other hand, rose 7.5%. This rebalancing of the “industry sales mix” has swung the pendulum of popularity away from large gas guzzling SUVs back to fuel efficient compacts, and yes, hybrids.

Sales of hybrid cars surged 25% during the first four months of 2008 compared with the same period last year. And the trend only grew stronger in May when sales jumped 58%, outpacing a gain of 18% in April, the Los Angelas Times reported.

While GM’s response to this shift has been thoroughly detailed by Wagoner, change has come slowly.

Wagoner said yesterday that GM would close four truck plants, cutting its North American truck capacity by 700,000 vehicles. The maneuver is expected to save the company $1 billion.

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And as far as the company’s Hummer brand is concerned, Wagoner said GM is “considering all options from a complete revamp to a partial or complete sale of the brand.”

However, these changes may have come a tad too late to fend off Toyota, which has pulled nearly even with GM in terms of global vehicle sales and continues to increase its share of the U.S. market.

“Unfortunately, it’s just a sign that once again they’re behind the curve,” Peter Jankovskis, a chief investment officer with OakBrook Investments, told Reuters. “If they were looking to sell the Hummer brand, the more sensible thing would have been to do it three years ago. They’re not going to get anything for it. Just in terms of timing, it’s a very poor example.”

Indeed, GM has already made its bed over the past decade, ignoring smaller hybrids in favor of mainstream success with the popular H2 and Cadillac Escalade. But in that time Toyota was building for the future and assembling a fleet of fuel-efficient hybrids.

The Beast of the East

While GM is struggling to catch a rapidly emerging trend Toyota is at the forefront. Toyota – the world leader in hybrid sales – sold about 429,400 hybrid vehicles in 2007, an increase of 37% from 2006.

In fact, the company announced just last month that sales of its Prius hybrid car topped 1 million units worldwide since its launch just over a decade ago. The Prius, the world’s first mass-produced gasoline-electric hybrid car, first went on sale in Japan in late 1997, and since then, more than 1,028,000 cars have been sold Toyota said.

In addition to the Prius, Toyota’s Camry and Highlander are also regarded as some of the best hybrids on the market today. And the latest addition to Toyota’s hybrid family is the company’s A-BAT, a concept truck that debuted at the 2008 North American International Auto Show in Detroit.

Roughly the size of Toyota’s smallest SUV, the RAV4, the crossover is intended to combine fuel economy with the versatility of an SUV.

“This is classic Toyota,” Erich Merkle, of automotive forecasting firm IRN, told BusinessWeek. “They’re positioning themselves ahead of the curve, preparing products for a generation of consumers that is still coming up.”

And as Toyota continues to find success on the frontier of a changing market, GM is losing ground even in its own backyard.

A decade ago, GM executives wore pins with the number 29, signifying their determination to hold 29% of the U.S. market share, the Wall Street Journal reported. But by 2006, the bar had been lowered to 24%, and the goalpost continues to move.

In April, GM’s share of the U.S. market hit a record low 20.5% according to Autodata Corp., and most analysts suspect it may have dropped below 20% for the first time ever in the month of May.

Meanwhile, Toyota’s U.S. market share hit a record high 17.4% in April, which means May’s sales totals could put Toyota within two or three percentage points of actually passing GM in its home market. Such an achievement would be a watershed moment for Toyota, on par with passing GM as the global automotive sales leader.

With the wind clearly at Toyota’s back, GM seems to be on the verge of accepting the inevitable.

“I would rather be a highly profitable, great shareholder value, great reputation, growing No. 2 than a struggling No. 1,” GM Vice Chairman and Product Chief Bob Lutz told reporters after a speech at the Automotive News World Congress. “I would almost say that being No. 2 for awhile – if it happens, and it well may [for] they are in a lot of areas that are growing faster than we are – [well], it may be a powerful motivator for GM employees.”

Toyota seems to have the edge in terms of both global trends and the U.S. market, but one final battleground remains. And that’s China.

A Race Around the World

Auto sales in China climbed 18% in the first four months of the year, Xinhua reported. And auto sales in China are expected to exceed 10 million units this year, which would represent full-year sales growth of 14%, according to the China Association of Automobile Manufacturers (CAAM).

GM has already been quick to boast of its success in the world’s fastest growing market, proudly announcing that it was the first automaker to sell 1 million vehicles in China in a single year.

“From day one, GM and our partners have been committed to continually rolling out new and upgraded models with specific engineering done in China for China to satisfy the needs of Chinese vehicle buyers across the country,” GM’s Wagoner said.

The partners Wagoner mentioned are a big reason why GM was the first to hit the 1-million-car milestone. GM’s flagship joint venture in China, Shanghai General Motors Co. Ltd., sold 500,308 vehicles in 2007, a 22% increase from a year ago, Shanghai Securities News reported. 

According to Kevin Wale, president of GM’s China unit, the company won’t be tapping the brakes on its China-focused investments anytime soon. He recently told Bloomberg News that GM would spend about $1 billion a year on production and sales in China over the next five years. Wale estimates that China’s total automotive demand will rise to 9.5 million to 10 million vehicles in 2008. 

“GM’s main hope is put in Asia-Pacific within which China is the most important part,” Ashvin Chotai, an analyst with Global Insight Inc., told Bloomberg. “Even with this $1 billion a year, it’ll be tough to remain No. 1 in China.  With China becoming the most important strategic market in the world, it’s crucial to have their investment to stay in the race.”

Toyota isn’t about to take GM’s progress in China lying down either. Earlier this year the company announced plans to set up a new automobile plant in China’s Jilin province – its eighth production plant in the country. Operations are expected to start in 2010, and the plant’s production could be as high as 100,000 vehicles a year.

Toyota is also opening its first research-and-development center in China next year. Based near Shanghai, and is expected to build more R&D sites in Tianjin (China’s third largest urban area near Beijing) and Guangzhou (China’s third-largest metropolitan area about 75 miles north of Hong Kong). 

Most recently, Toyota announced it would spend $214.6 million to boost production capacity at a facility in Tianjin by 50% to 150,000 vehicles a year.

Whichever company manages to pull ahead in China will likely cement itself as the world’s automotive leader for decades to come. The stakes are definitely high as GM, founded in 1908, has been the annual global industry sales leader for 77 years. But it looks as though it will soon be passing the torch on to Toyota, at least for a while.

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General Motors Corp. (GM), the world’s largest automaker, will invest as much as $5 billion in China over the next five years.

Detroit- based GM has fallen on hard times in its home market recently, but business in emerging markets has shown promise.  With its status as an industry leader on the line, the company understands that the Chinese marketplace is its best opportunity to re- invent itself and lay a whole new foundation for the future. 

GM’s restructuring efforts date back to 2005 when it first announced its "Four Point Turnaround Plan." The plan included healthcare cost reductions, adjustments to the company’s product line, and 30,000 job cuts. The plan had some success but lost traction last month when the company announced its largest quarterly loss.

Over the course of its restructuring effort, GM accumulated a number of deferred tax credits. Unfortunately, the company’s auditors determined that a weak financial position meant GM would not be able to claim those credits and had to account for their value. As a result, GM took a $38.6 billion deferred tax charge.

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GM was also devastated by losses related to its financing arm. GM owns 49% of General Motors Acceptance Corp., which was previously the company’s life preserver. But in the third quarter, GMAC contributed a $757 million loss, most all of which could be attributed to mortgage write- offs.

Even without the near $39 billion bombshell, GM said it lost $1.6 billion, $2.80 a share, in the third quarter – more than ten times the loss initially forecast by industry analysts. That’s partly because GM also reported a net loss of $247 million from its North American automotive operations, an area in which analysts expected the company to turn a small profit. In 2006, the company lost $660 billion in North America. So, it’s no surprise that GM is ramping up its foreign operations.

Globally, GM’s automotive operations earned $122 million in the third quarter. Total revenue reached a record high $43.1 billion. According the New York Times, sales of cars and trucks increased 4% worldwide in the third quarter, to a record 2.39 million.

In the first nine months of 2007, GM sold 7.05 million vehicles, enough to pull even with Toyota Motor Corporation (TM), which had held the title of world’s largest automaker for the first half of the year. Over that same nine- month period, GM posted a net income of $481 million in the Asia Pacific region and $754 million in Latin America.

Gaining Ground in the Fastest Moving Auto- Market

With North American profits running in the red, a shift in business towards emerging markets looks to be the company’s best play. To that end, carving out a niche in China, the world’s fastest growing major auto- market, is absolutely vital.

It appears the company understands what it needs to do. GM is currently building a $250 million research and development center in Shanghai. The new building will also serve as the company’s China office and Asia- Pacific headquarters.

And, as Kevin Wale, president of the company’s China unit, told Bloomberg News, GM will also spend about  $1 billion a year on production and sales in China over the next five years.

Wale also said China’s total automotive demand will rise to 9.5 – 10 million vehicles next year, and that GM expects to sell more than 1 million cars in the region in 2008, a 150- fold increase in sales from a decade ago. 

"GM’s main hope is put in Asia Pacific, within which China is the most important part," Ashvin Chotai, an analyst with Global Insight Inc. told Bloomberg.  "Even with this $1 billion a year, it’ll be tough to remain No. 1 in China. With China becoming the most important strategic market in the world, it’s crucial to have their investment to stay in the race."

The China Association of Automobile Manufacturers estimates 2007 will total between 8 – 8.5 million vehicles, which means Wale’s 2008 estimate could be right on target. And it seems as though every major carmaker is competing to get a piece of China’s automotive market share.

Volkswagen (VLKAY) has set a 2007 target of 900,000 units, and Toyota expects to sell more than 450,000 vehicles this year. Toyota also started construction on a plant in Guangzhou in June that will make Camry sedans and Yaris compacts.

Still, GM is currently the China market leader, and with a preponderance of domestic troubles it will no doubt be looking to increase its role in the global marketplace.

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