General Motors Corp. announced today it plans to cut 25,000 jobs in the United States over the next three years by closing various assembly and component plants, a move brought on by both a cooling of the American love affair with the mighty SUV and rapidly spiking health care costs.
Rick Wagoner, chairman and chief executive of GM, told a packed annual shareholder's meeting in Wilmington, Del., this morning that the undisclosed plant closings will save the world's largest automaker an estimated $2.5 billion a year once completed. He said the job losses were prompted by a "sudden downturn in performance" in the U.S. market.
Wagoner said GM North America, which is the largest division of the company, lost $1.3 billion in the first quarter of this year, while other GM divisions fared better. The Asia-Pacific division is growing and GM Europe is turning around, he said, after the company recently negotiated a plan with European unions to reduce employment by 12,000 over two years, 10,000 of those in Germany, Wagoner said.
"What happened?" Wagoner asked stockholders at the meeting, according to his prepared speech posted on the company's Web site. "The answer is pretty direct. We have a high structural, or fixed, cost basis and so when we lose revenue, it drops quickly to the bottom line. And last quarter, we lost revenue, due to lower retail sales."
Attendance at the meeting was much larger than usual as several hundred stockholders turned out to question GM's strategy to turn itself around. During the formal business of the meeting, according to Dow Jones newswires, some shareholders criticized Wagoner and GM's board of directors with some calling for their ouster.
GM shares shot up 2.3 percent on the layoff announcement to $31.11 on the New York Stock Exchange, making it one of the big gainers in a good morning for the Dow. Investors welcomed the cuts, according to wire service reports, saying they would help the ailing U.S. carmaker better compete with foreign car manufacturers. GM's stock had lost about half its value since last year's shareholders meeting. Shares in other automobile and auto-parts companies also rose on the heels of GM's advance.
Standard & Poor's last month slashed GM's bond ratings to junk status after releasing a grim report on the business outlook for the company, once a proud symbol of U.S. industry.
S&P said in its report that the biggest single cause of the company's problems is the cooling of the American appetite for the SUV. Sales of big sports utility vehicles gave the company much of its profits and allowed it to stave off overseas competition during the past decade.
Higher gas prices and fickle consumer habits are turning the market against the large gas-guzzling sport utility vehicle, the S&P report said. Sales of GM's SUVs have plummeted in recent months.
The company predicts that when older SUV models are replaced with new ones later this year, sales will rise. Wagoner told the meeting that GM is "clarifying and focusing" the role of each of the company's eight brands. He said that might mean fewer Buick and Pontiac models in the future.
Rising health care costs are also a big part of the company's problem, Wagoner said at the Delaware meeting.
He said "continuing double digit U.S. inflation in health care costs is swamping" the company's progress.
Wagoner said rising health care costs were a "critical national competitiveness issue for the United States, affecting our entire economy's long-term strength." He said the costs put U.S. companies at a "significant disadvantage" against foreign-based competitors. He said heath care costs add $1,500 to the cost of each GM vehicle.