General Motors (NYSE:GM) has made a major move to cut expenditures by eliminating the pension plan for 42,000 of its white-collar workers. The New York Times estimates that the plan would reduce General Motors's $134 billion in pension obligations by $26 billion.
This will help the company save money in the long run, but not as much as you think. The planned reduction doesn't cover the pensions for unionized autoworkers, which make up most of GM's pension obligations. That means General Motors still has $108 billion in pension obligations that it has to cover.
Under the terms of the plan announced last week, the company will give retired monthly workers a choice of a one-time cash payment or a group annuity contract from Prudential Insurance (NYSE:PRU). That deal will reportedly cost GM between $3.5 and $4.5 billion of its own money. The New York Times also estimates that General Motors will lose around $200 million a year in non-cash profits because of the accounting rules that govern this kind deal.
Interestingly enough, this news didn't impress Wall Street very much; General Motors shares fell to a 52-week low on Monday, June 4, the first day of trading after the deal was announced. The reason for the fall was that investors probably don't think GM is doing enough to fix its pension problem. Business Week noted that as of December 2011, the company had global pension obligations of $134 billion, but only $109 billion in cash to cover those obligations.
If these estimates are true, General Motors still faces a $1 billion shortfall in its pension fund. That means the company will have to take revenues from somewhere else in order to cover pensions. That will translate into lower earnings per share and lower stock values.
The new deal will cut GM's U.S. pension obligations to around $10 billion, which still leaves it with the biggest pension obligations of any other member of the S&P 500. These obligations still exceed the $9.19 billion profit that GM earned in 2011. These figures didn't impress the big credit ratings agencies either. They didn't upgrade General Motors after this announcement.
Wall Street still down on GM; Ford stock value could also be hurt by pension woes
Expect to see General Motors shares keep dropping in value for the foreseeable future, even if its sales improve. If General Motors wants its stock values to go up, it will have to get even more aggressive about reducing pension liabilities. That means it'll have to sit down with its top union; the United Auto Workers (UAW), and ask for more cuts. The UAW is not likely to agree to benefit cuts without some other concessions, such as a major increase in salaries.
GM isn't the only car company facing these kinds of liabilities. Ford (NYSE:F) is considering offering its white-collar retirees a similar deal. The details of Ford's plan are not known so it's impossible to say how it will affect that company's stock value. Media reports indicate that Ford's revised pension deal will be made public in August.
That means a similar drop in Ford shares could be coming in August when Ford makes its buyout offer public. The market will probably react to that deal like it has to the GM one, and Ford's shares will fall.
General Motors initiates cutbacks in Brazil
U.S. pensions are not the only expense that General Motors is trying to reduce. Reuters reported that the company is offering buyouts to workers in Brazil because of a drop in auto sales in that country. The company didn't say how many workers it was trying to buy out.
Auto production in Brazil is about 10% lower than it was in the same period last year because of weak demand. Reuters reported that the dealers' inventories in the country are at their highest levels since 2008, although auto sales in the Brazil did rise by 11.5% in April. Observers have blamed Brazilian banks, which have been tightening.
General Motors is not the only company cutting staff and production in Brazil. Daimler AG (DAI) will reportedly cut 1,500 jobs at its Mercedes Benz truck factory in Brazil. Tata Motors Limited (NYSE:TTM) has put plans for a new Land Rover factory in Brazil on hold because of the weak economy there.
This news will not help GM's stock values because the company has been betting that developing markets like Brazil will help it make up for losses in Europe and lost market share in the U.S. Expect GM's stock values to keep decling if more and more bad news from developing markets keeps crossing the wires.
GM accused of inflating sales figures in Germany
General Motors' troubles are not confined to the United States. Its Opel division has been accused of inflating sales figures in Germany. Reuters reports that a German auto industry analyst, Ferdinand Dudenhoeffer, of the Centre Automotive Research Group ((NASDAQ:CAR)) accused the company of registering unsold cars, then selling them as used cars.
If Herr Dudenhoeffer's accusations are true, Opel's share of the German auto market in the first quarter of 2012 would have been just 5.8%, not the 7.9% that has been reported elsewhere.
If this news is true, it could seriously damage GM's stock because the Opel-Vauxhall division, which sells cars in Europe, is the company's biggest money loser. Fortunately for GM, these allegations haven't reached the American media yet, but they will sooner or later.
When asked about the allegations by a Reuters reporter, the company's German sales, Chief Imelda Labbe, made a point of trying to gloss them over. She talked about the company's plans to get 10% of German market share instead. She also claimed that many of GM's competitors also artificially inflate sales figures by re-registering unsold cars.
General Motors is making aggressive efforts to turn Opel around in spite of the dismal sales. It is planning to introduce Germany's subcompact SUV, the Mokka, in October and something called the Adam Lifestyle minicar next year. The company also has plans for a new convertible in Germany.
GM's stock could see a slight boost from Germany in late June. The company is planning to announce a new restructuring plan for its biggest European operation on June 28. The German press is speculating that the plan will include the closure of an Opel manufacturing plant in Bochum, Germany. The closure of a money losing plant could show investors that GM is serious about cutting costs and boosting stock values.
General Motors has had a very hard time competing with Volkswagen (VOW.DE) and Toyota (NYSE:TM) in the German market. Analysts note that Germans seem to dislike its cars because they are seen as working class vehicles. Even recent increases in quality and European Car of the Year awards have not convinced German buyers that Opel's quality has improved.
Opel does seem to have one success story - sales for its Zaifira Tourer MPV van have doubled Opel's share of the German van market. Interestingly enough, this vehicle is built at the Bochum plant, which is rumored to be now closed as part of the reorganization.
If General Motors cannot fix the problems, and fast, it faces huge losses in Europe and a decline in stock value. There is one Opel-related move that could help GM's stock value significantly. It could sell Opel, but the only problem with that is that it may not be able to find a buyer for the troubled division.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.