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With bankruptcy looming, a new GM begins to emerge

(Agencies)
Updated: 2009-05-30 14:41

DETROIT - With an almost certain bankruptcy filing days away, General Motors is beginning its reinvention, planning to retool one factory to make its smallest vehicles ever in the US and rid itself of the biggest.

As GM's board began two days of meetings Friday to make a final decision on the company's fate, its main union overwhelmingly approved dramatic labor cost cuts. Germany's finance minister said a plan was approved for Canadian auto parts maker Magna International Inc. to rescue GM's European Opel unit. And a deal to sell GM's rugged but inefficient Hummer brand also appeared on the horizon.

The moves provided more clues about what a restructured GM might look like ahead of the expected Chapter 11 filing Monday. Taxpayers will eventually own nearly three-quarters of a leaner GM, with a total government commitment of nearly $50 billion.

In this April 27, 2009 file photo, General Motors President and CEO Fritz Henderson listens to a conference call in question regarding the company's viability plan in Detroit. [Agencies]

GM has yet to confirm it will seek bankruptcy protection but scheduled a news conference for Monday in New York.

With the government's backing and nearly $20 billion in US loans so far, the company has made more dramatic changes in just a few days than it has in decades.

"It's been coming to a head for a very long time," said Aaron Bragman, an analyst for the consulting firm IHS Global Insight. "But in just the past few months we've really seen steps being taken to completely and dramatically change the face of American auto manufacturing."

GM said it plans to reopen a shuttered US factory to build subcompact cars. The retooled factory would be able to build 160,000 cars a year and create 1,200 jobs, offsetting some of the 21,000 that will be lost when GM closes 14 factories by the end of next year.

GM's stock tumbled to the lowest price in the company's 100-year history, closing at just 75 cents after trading as low as 74 cents. The government plan for GM revealed Thursday would make the shares virtually worthless.

The United Auto Workers' reluctant but overwhelming ratification of concessions will save GM $1.3 billion per year and bring its labor costs down to those of its Japanese competitors. The new UAW deal freezes wages, ends bonuses and eliminates some noncompetitive work rules.

The changes, plus others that will be worked out in court, will shrink GM and position it to be among the world's most competitive automakers if it can emerge from bankruptcy protection and survive the global auto sales slump, Bragman said.

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"They've eliminated their legacy costs. They've already invested in new product that's coming. They have the ear of the government unlike any time in their history, and the government has said basically 'we are going to help you survive and thrive,'" Bragman said.

GM is banking on more demand for smaller cars previously shunned by Americans. The government decided earlier this month to raise fuel economy standards for the entire US fleet by 2016.

The new standards were one of the biggest factors in GM's announcement to build subcompacts in the US rather than in China, said a person familiar with GM's plans who spoke on condition of anonymity because of the sensitive nature of the plans.

Chrysler LLC, already in bankruptcy protection, is banking on the same thing. It wants to sell all its assets to Fiat Group SpA so the Italian automaker can start building its sophisticated small cars on this side of the ocean.

The strategy is still a big gamble. Americans have opted for bigger cars and trucks, with the exception of last summer, when gas topped $4 per gallon. GM and Chrysler hope people will spend more for better-equipped subcompacts with more luxurious interiors and performance that rivals the best luxury sedans.

Smaller costs after bankruptcy should help the companies make money even though compact cars carry far smaller profit margins than pricey SUVs. But there remains a risk that gas prices will remain low and the cars won't sell, blowing up the automakers' new business models.

The UAW deal moves billions in retiree health care costs off GM's books, giving a union-run retiree health care trust 17.5 percent ownership of a post-bankruptcy GM. The trust will take on health care costs for retirees next year. Higher health care costs alone account for a $1,500-per-car cost gap between GM and Japanese vehicles.

But just cutting labor costs won't be enough to save the company. It also has been working to streamline its engineering and design, as well as standardize many parts so they can go into multiple models.

"They've already made huge progress," said Laurie Harbour-Felax, president of a consulting company that studies competitive cost differences between automakers. "The problem is you can't see that because revenue died, because nobody's buying cars."