February 6, 2019 — This week, General Motors began the difficult task of laying off more than 4,000 salaried employees as part of a massive restructuring this year that includes the idling of five North American plants, eliminating vehicles and an overall workforce reduction of 14,700 employees.

The moves are designed to save the automaker more than $6 billion a year by 2020.

The public outcry from politicians — including the White House —  and employees continues following the November announcement of the pending restructuring. The issue is thorny for GM because of the nearly $50 billion it received in 2009 from U.S. taxpayers enabling it to survive during the recession. Adding to the issue is that GM is moving forward to build the new Blazer in Mexico, following a $5 billion investment there in recent years.

Critics argue GM is violating the public trust by not protecting American (and Canadian) jobs despite being obligated to do so because of the bailout of a decade ago.

The reality is that GM is “damned if does and damned if it doesn’t.” While politicians and activists decry the moves, the restructuring is resonating with investors as the stock price is up more than $8 a share since the November announcement.

And therein lies the issue. For companies such as GM, it’s an investor’s world today. It goes beyond just trying to keep investors happy. GM is a tempting target for activist investors. If Chairman and CEO Mary Barra doesn’t enact an aggressive restructuring plan, she increases the risk of an activist investor gaining control of the board and wreaking havoc on the company.

Part of the decision is who can do the most damage to the company? Politicians, union members and activists screaming on Twitter, or activist investors who bring financial strength to the fight? Clearly, the answer is activist investors. Once an activist gains control of a company’s board, all bets are off as to what could happen.

It’s not an unfounded concern. Since 2015, GM already has had to beat back two activist attempts.

In 2015, GM avoided a proxy battle for a board seat with activist investor Harry Wilson who was representing four different hedge funds at the time by agreeing to a share repurchase program of $5 billion along with expanding its available cash ceiling to $20 billion.

Two years later, David Einhorn of Greenlight Capital, who owned approximately 3.2% of GM’s shares, attempted to force the automaker into splitting its stock into two separate classes — one for investors interested in higher dividends and the other for investors interested in stronger gains — in other words, more aggressive share repurchases.

GM’s management pushed back calling it a “financial engineering” scheme and arguing it would put the company’s investment-grade status at risk while exposing it to lower credit ratings. More than 90% of GM’s shareholders voted against the proposal at the annual meeting in 2017. Since then, Einhorn has steadily reduced Greenlight’s position in GM.

Other activist firms in recent years have jumped into the automotive space. Paul Singer’s Elliott Management firm, last May forced the Hyundai Motor Group to pull its restructuring plans off the table. The hedge fund continues to play hardball pushing the Korean automaker to repurchase up to $10.6 billion in shares along with adding two new board directors and enacting a strategic review of non-core assets.

Elliott also reduced its holdings last June in CDK Global, one of automotive retail’s leading technology firms following a three-year period in which it convinced the board to implement significant cuts to drive margin growth.

The truth is, Barra is adhering to the public trust by making the tough calls to protect GM’s future. Since assuming the helm at GM in 2014, she has restructured much of GM’s international operations, selling the European Opel brand in 2017 while closing numerous plants around the world.

Despite its U.S. operations generating nearly $1 billion in monthly pre-tax profit, the headwinds are fierce. It’s better to restructure now as the company prepares for an uncertain future that may include a downturn in sales, a changing industry along with increased competition.

The competition today extends beyond other automakers and now includes colossal Silicon Valley entities such as Google or Apple, which are armed with financial war chests that dwarf anything GM can muster. That reality is forcing GM, and other automakers, into investing billions into electric vehicle, mobility-related and autonomous technologies while maintaining and growing existing businesses.

The other pressing challenge for GM is its plant utilization. Manufacturing experts say an automotive plant has to be at 80% utilization to break even. For GM, it’s either feast or famine at its 12 U.S. manufacturing plants. Based on data provided by Wards Intelligence, in 2018 six plants operated well below the 80% mark with five running above 100% and one close to the 80% (See chart below. The data assumes straight-line, two daily shifts operating five days a week. The plants operating above 100% are running more than two shifts.) 

The plant data shows GM has to move aggressively now.

The dynamic driving the decline in plant utilization is the changing customer buying habits, which have moved from cars to SUVs and crossovers.

Three years ago, GM’s Lordstown, OH plant was running three shifts pushing out the popular Cruze. But sales began to drop, forcing the plant to drop to two shifts in January 2017. Fifteen months later, in April of last year, the plant began operating with one shift.

The handwriting was on the wall. Today, the Lordstown plant, which is one of the plants GM will idle this year, is operating below 50% capacity.

The other plants GM is idling this year include:

• Detroit-Hamtramck, MI, which builds the Volt, Impala, Cadillac CT6 and Buick LaCrosse sedans;
• Oshawa, Ontario, which builds the Impala and Cadillac XTS and is the assembly location for the Chevrolet Silverado and GMC Sierra pickups;
• Warren, MI transmission plant;
• Baltimore, MD operations plant.

As part of the restructuring, GM is eliminating several vehicles, including the Chevrolet Cruze and Volt, Buick LaCrosse, Cadillac XTS, and Cadillac CT6.

For now, GM is saying it’s idling these plants, rather than calling them outright closings. Negotiations with the with the United Auto Workers Union (UAW) on a new contract begin this summer. Its current contract limits plant closings to extreme or dire circumstances — which leaves much to interpretation. The UAW clearly will push for GM to reallocate other vehicles to the two assembly plants in the U.S.

Whether the plants ultimately close remains to be seen. Even with the restructuring this year, GM will be left with four U.S. plants operating at 70% or below capacity – three of which will be below 40%, based on Ward’s forecasts. Likely, more tough decisions are in GM’s short term future.

Despite the pending cuts, GM points out it has invested more than $22 billion in the U.S. since the bailout in 2009. But that provides little comfort to the more than 14,000 employees losing their jobs and politicians whose regions will be hit hard by the restructuring.

Meanwhile, GM unveiled its new Silverado this week at its Flint assembly plant and said it will add another 1,000 employees to the plant, with workers from the idled plants getting priority.

The automaker also released its 2018 earnings this morning which beat analyst projections with adjusted earnings of $1.43 per share vs. $1.22 per share estimated and in revenue with $38.4 billion vs. the projected $36.48 billion.

Fiat Chrysler began eliminating its small car production a few years ago as it retooled its plants to expand capacity for Ram and Jeep production. CEO Mike Manley should announce in the next two weeks where FCA will build a new full-size a Jeep Grand Cherokee and a large SUV which is expected to be the Wagoneer. Reports in December have FCA building the Grand Cherokee at Detroit’s long-idled Mack Avenue Engine II plant.

Despite getting rid of its small car lineup, FCA still continues to produce the hot-selling Dodge Charger and Challenger along with the Chrysler 300 in its Brampton, Ontario plant. Four of its six U.S. plants are running above 80%.