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GM Squeezes After Bailout

February 17, 2012
4 min to read


General Motors Co. reported Thursday the largest annual profit in its 103-year history—but the auto maker is acting like a company on the rocks.


It earned $7.59 billion in 2011, a 62 percent increase from a year ago. The bulk of that profit came from GM's large North American unit, where sales rose and customers are paying more for its cars and trucks, reported The Wall Street Journal.

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Yet even as investors celebrated the gain by pushing GM's stock up, company executives talked of the urgent need to slash expenses everywhere and to restructure its long-struggling business in Europe. GM shares gained 9 percent in 4 p.m. New York Stock Exchange trading on Thursday, adding $2.24, to $27.17, a six-month high.


The company, as it rolled out the news, disclosed a series of cost-cutting actions and offered a dire view of Europe's economy this year. Among its moves, it will reduce 2011 bonuses for its 26,000 U.S. salaried workers and freeze their pay for 2012.


"We obviously have a long way to go to get to the objectives we want to get to," Dan Ammann, GM's finance chief, said at the company's headquarters on Thursday.


GM has undergone a remarkable turnaround from 2009, when it needed a $50 billion lifeline from U.S. taxpayers to survive. Today, its car business is growing fast in China and North America, has little debt and $38.8 billion in liquidity. It also will pay scant U.S. taxes for years to come as a condition of the government rescue.


However, an 8 percent fourth quarter earnings drop underscored challenges it faces this year: Growing losses in Europe and thin profit margins in its overall business despite shedding debt and taxes in bankruptcy court.

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On Thursday, Chief Executive Dan Akerson said the company expects sales volumes and revenue to grow in 2012. But when pressed, Mr. Akerson declined to predict whether that means GM will make more money this year.


"It's tough to make predictions," he said. "We know what our challenges are and we are addressing them."


The auto maker lost $747 million in Europe last year. GM initially thought it would be profitable in the region last year, but rescinded its profit forecast last fall amid a regional sales slump triggered by the European debt crisis. Last year's loss in Europe is narrower than in 2010, when GM lost nearly $2 billion in the region.


Mr. Akerson said the troubles in Europe are on the same scale of the 2008 meltdown in the U.S., which resulted in an $80 billion U.S. auto industry bailout and bankruptcies for GM and Chrysler Group LLC.


Executives are working with labor unions to hammer out a restructuring plan for Europe that will cut capacity and reduce costs in the region, officials said on Thursday. GM in recent months has sent several top executives to Europe and is overhauling the unit's management.

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The company is considering closing factories in Bochum, Germany, and Ellesmere Port, England, according to people familiar with the discussions. GM said on Thursday it would stick to labor agreements that prohibit further plant closings through 2014, signaling any closing won't happen immediately.


Mr. Ammann, the finance chief, said GM has enough liquidity to manage further losses in its Opel/Vauxhall operations and doesn't need to seek aid from European governments.


GM is moving to stop cracks from becoming fissures. This week, it disclosed plans to end this year payments to a traditional defined-benefit pension plan for 19,000 salaried workers who still receive them. The move is intended to help reduce its future pension risk. Workers will keep their existing pensions, but future retirement contributions will be made into a 401(k) plan.


Its pension shortfall rose to $24.5 billion at the end of 2011, from $21.4 billion a year earlier mostly because the company has reduced its projection of the future rate of return.


The company also failed to make significant progress on its goal of increasing profit margins. Fourth-quarter profit margin was 2.9 percent of sales, almost unchanged from the 2.8 percent of sales a year earlier. GM executives are working to get margins closer to 10 percent over the next few years. Its margin for the year was 5.5 percent, compared with 5.2 percent in 2010.

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Analysts said the company's lack of comment on its 2012 profit outlook wasn't enough to change their opinion of its shares.


"A lack of guidance leaves GM shares shrouded in the thick fog of macro uncertainty," Morgan Stanley analyst Adam Jonas said in a research note. Still, he said, "We believe investors have little room to feel any different about their 2012 estimate in either direction."


A strengthening stock price could get the U.S. closer to selling its 26.5 percent stake in the company. GM stock would need to exceed $50 a share for the U.S. government to break even on the rescue. But the U.S. Treasury would consider selling its stake once shares top $30, near to the $33 price in GM's 2010 initial public offering, people familiar with the situation said.

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