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General Motors Corporation (NYSE:GM)

Business Update Call

June 3, 2008 10:15 am ET

Executives

Fritz Henderson - Vice Chairman, Chief Operating Officer

Randy Arickx - Executive Director Investor Relations

Analysts

Brian Johnson - Lehman Brothers

John Murphy - Merrill Lynch

Chris Ceraso - Credit Suisse

Himanshu Patel - JPMorgan

Rod Lache - Deutsche Bank

Media

Jamie LaReau - Automotive News

Mark [Feeline] - Detroit’s Free Press

Joseph Szczesny - Oakland Press

David Welch - BusinessWeek

Operator

Ladies and gentlemen thank you for standing by. Welcome to the GM Business Update conference call. During the presentation all participants will be in a listen-only mode.

(Operator Instructions)

I would now like to turn the conference over to Mr. Randy Arickx, Executive Director of Investor Relations and Financial Communications. Please go ahead, Sir.

Randy Arickx

Thank you very much. Good morning everyone. Thanks for joining us as we recap the key announcements we made in conjunction with this year’s annual meeting this morning. I’d like to first direct your attention to the Legend regarding forward-looking statements and risk factors on the first page of the chart set. As always, the content of our call this morning will be governed by that language.

I would also like to highlight that GM is broadcasting this call live via the Internet and that the financial press is participating as well.

Our call today is scheduled to last about an hour. This morning Fritz Henderson, President and Chief Operating Officer will provide opening remarks that will briefly outline announcements made earlier this morning at a press conference hosted by President and Chief Executive Officer Rick Wagoner.

After the presentation portion of the call we will have a Q&A session with both security analysts and then followed by the media. Now let me turn the call over to Fritz Henderson.

Fritz Henderson

Thanks Randy. Good morning. I really want to talk about three things on page 2 that summarizes my agenda for this morning, discuss briefly the industry conditions, recap the actions announced today and then look forward.

Page 3. The U.S. industry is going through changes probably as quickly as we have ever seen before. The industry itself in terms of aggregate demand is experiencing some significant headwinds due to both economic weakness as well as high oil prices. Oil prices have doubled over the last 12 months in terms of dollars per barrel. Our industry outlook for aggregate demand in the U.S. was recently revised downward to the mid to high $15 million range versus $16.5 million in 2007. Recall that when we talk about industry volumes we talk about total industry volumes so that mid to high $15 million would include about $300,000 of mediums and heavy’s which you would need to subtract if you were trying to compare with other people’s outlook for light vehicle volume.

We have recently revised our outlook downward. High fuel prices in particular are driving dramatic shifts in mix away from trucks to cars and crossovers, which the shift has actually accelerated as gasoline has approached or in many areas of the country exceeded $4 per gallon. Standing back, the conclusion we have reached is that we would be well-served and it would be more prudent to plan our business around today’s elevated levels of fuel prices going forward. You don’t plan a business based upon a point estimate of fuel prices but you need to think about where they might go and where the factors that are driving fuel prices, whether it is aggregate demand, global economic growth, tightness of supply and/or tightness of production and refining capacity. In any of that our conclusion was we would be better served planning our business around today’s prices and then if you look at a frequency distribution around where prices might go in the future our view is the bias would be upward as opposed to downward.

We’ll have to see what happens but that is the basis on which we are planning our capacity and product portfolio going forward.

Page 4 is a chart that outlines the U.S. industry retail mix. These are retail sales. These are not fleet. These are at retail what is happening with top line being passenger cars, the bottom line being crossovers, truck crossovers and the middle line being truck traditional or body upgrade vehicles. This chart has preliminary data for May so therefore it is an estimate. We will know the industry later today and tomorrow so we would update the chart. But it gives you some sense of what we’re looking at in terms of the months of April and May.

What we have seen and as the chart shows is a very marked change since even September 2006 in the traditional mix of body and frame trucks. You’ve seen that really accelerate from the fourth quarter of last year until April and May of this year. Where the customer has gone, you’ve seen is a pretty steady upward march in crossovers. A little bit of down take in the last 2-3 months but in our view this trend in terms of crossovers will continue. We might see smaller crossovers, mid crossovers, large crossovers but you are seeing different types of vehicles coming into this segment. But you are also seeing marked increase in passenger car penetration in the industry.

That middle line is what drove the actions that we have taken today in terms of what we needed to do to adjust our production capacity in traditional trucks.

Page 5 outlines what we announced today. First we did announce that we would add shifts to key car plants to support increasing demand for cars. In our Orient assembly plant which builds the Chevrolet Malibu and the Pontiac G6 as well as our Lordstown assembly plant which builds the Chevrolet Cobalt and pop Pontiac G5. Demand for those products has been strong and so we felt it was warranted for us to add third shift capacity there.

We also announced today the tough action to cease production at four of our truck plants with specific timing driven by market demand. So let me kind of go through them one at a time. First, Toluca, Mexico which builds medium duty trucks would likely end production by the end of this year. Oshawa Truck which builds full-sized pickup trucks in extended cab, crew cab designation and body style production would cease by the end of 2009 likely or it depends upon where the market is. That is our expectation as of today when we would cease production there. Moraine, Ohio which builds our mid-utility, our Chevrolet Trailblazer, GMC Envoy, Saab 9-7 would be expected to end current production in 2010 or sooner again if market conditions warrant. Finally, Jamesville, Wisconsin which builds the traditional body and frame full-size utility’s, Tahoe’s, Suburban's and Yukon’s would be expected to cease production in 2010. Again, if market conditions warrant. The Jamesville, Wisconsin plant also builds medium duty trucks and that production would expect to end in 2009.

In addition to these actions we’ll obviously look at the related power train and standing capacity for opportunities to consolidate those going forward.

The next page…in conjunction with these shift reductions as well as the other shifts that these announcements combined with the shift reductions we have already announced we would expect to reduce truck capacity by over 700,000 units and we would reduce total North American capacity to 3.7 million units by 2010. We expect these actions and prior shift reductions together will result in additional structural cost savings of over $1 billion in North America on a running rate basis by 2010 and that is in addition to the $9 billion of structural costs that was reduced in 2005 and 2007 on a running rate basis and the further $5 billion that we have previously announced in terms of the impact of the labor agreements by 2010 or 2011 timeframe. So in total when you add all the actions up approximately $15 billion of structural cost savings in North America. I also point out that some portion of those cost savings actually land in our corporate sector particularly as it relates to legacy costs.

Product Program Action. A series of other actions were announced today. Before I do that I thought I’d talk about our recent activities. 11 of our last 13 new or major U.S. launches have been passenger cars or crossovers. The reception by the markets for vehicles like the Chevrolet Malibu, like the Buick Enclave and the GMC Acadia has been encouraging. We need to build on that going forward. Eighteen of our next nineteen new U.S. launches will be passenger cars or crossovers so while we understand we have a much decidedly tougher market to deal with we think that the products we have in the pipeline that we will be bringing into the market will be well suited for this type of environment.

The Board of Directors last night approved an all knew next generation Chevrolet compact car program. It is the first U.S. application of GM’s global architecture strategy for this compact car architecture. The vehicle itself will carry as a key power train the 1.4 liter engine. I’ll talk about that in a moment. That 1.4 liter engine in a manual transmission configuration will be expected to deliver 9 mpg improvement compared to the current entry. We target this to be a segment leading fuel economy play for Chevrolet in the compact segment.

We plan to produce the product at Lordstown, Ohio in mid-2010 subject to final negotiations with state and local authorities. We actually had to agree to and sign a competitive operating agreement with the local unit in Lordstown and we’re encouraged by what we are seeing there in our ability to build this product there competitively in our Lordstown plant.

The next generation Chevrolet Aveo was also recently improved also based upon a global architecture. This product which will be smaller than the compact car will also deliver segment leading fuel economy. We would expect that car to be available for sale in the U.S. by the second half of 2010.

The next chart…the Board also approved the production of the Chevrolet Volt. The funding was approved last night. We have concluded based upon the actual amount of the technical work that has been done to date that the technical goals of the Volt are achievable. Generally within the timeframes previously outlined. We remain very focused as a management team on the target of having the delivery of these vehicles to the showrooms by the end of 2010. Preliminary planning for Volt production would be at our Detroit Hamtramck assembly plant subject to successful conclusion of negotiations with state and local governments.

Power trains. I already mentioned the power train for the compact vehicle. We will put a module of this power train into our operations in North America. The Board approved installation of this family into a U.S. plant. Configurations could be between 1.0-1.4 liters and would serve as the mainstream engine for that compact car. We tentatively plan to produce this engine in Flint, Michigan. Again, subject to the satisfactory conclusion to negotiations with state and local authorities.

These actions from a power train perspective follow a number of actions we have recently taken to improve fuel economy and respond to issues in terms of energy costs and supply and emissions. For example we will introduce ten new variants of our 6-speed transmission both in rear-wheel and front-wheel configuration in the U.S. by 2010. We announced alliances with two leading cellulosic ethanol startup companies. We will expand our hybrids to eight vehicles by the end of 2008 and to 20 by 2012. Project driveway, the fuel cell Equinox vehicles are being delivered. We delivered 81 of the 100 so far and I had the benefit of actually being able to deliver two of them myself. So we are excited about the technology as well.

Beyond capacity and product, one further announcement we made today is with respect to the Hummer brand. We did announce that we will be undertaking a strategic review of the Hummer brand. Given the industry mix shift and the evolving GM product portfolio all options are going to be on the table which would range, for example, from a full revamp of the Hummer portfolio which would be targeted to be a much smaller vehicle. Two, including the potential sale of all our portions of the brand. So all options are on the table at this point with respect to the Hummer brand.

To sum it up, page eleven shows our key business priorities remain unchanged. Executing great products, building strong brands and distribution channels, executing cost reduction initiatives. The announcements you heard about today were exclusively focused on our North American business. We also understand the tremendous opportunities that we have outside of North America in terms of growth, emerging markets and continuing to be an engine for profits and cash flows. We’re well positioned in many of those emerging markets and we will fully participate if not over participate in the growth of those markets going forward.

We understand the importance of advanced propulsion leadership for GM in the future. Part of the announcement today, for example, on the Volt is it is all about establishing an actual production program for our extended range electric vehicles and moving on in terms of go for production.

Finally, running the business globally. What you see today particularly in the product side with the announcement of vehicle programs and architectures which are being executed on a global basis. These are the U.S. applications of those architectures and the applications of the new family of engines in North America which heretofore have not been built in North America but again a global engine.

The fully operating actions in North America really focus on continuing to restructure the business to address market conditions. We need to align production and inventory with demand, utilize the attrition program we announced and approximately 19,000 people are expected to participate in the attrition program, the announcement was made I believe last week or the week before. In order for us to continue to reduce our structural costs and we need to leverage our launches…each and every one of these product launches needs to play a part not only in terms of our market performance but re-establishing our brand strength in the key passenger car/crossover segments in the U.S. and in fact the North American market.

Thank you very much for your time. I now have some time for questions.

Question-and-Answer Session

Operator

Ladies and gentlemen we will now proceed with the analyst portion of the question-and-answer session.

(Operator Instructions)

Your first question comes from the line of Brian Johnson - Lehman Brothers.

Brian Johnson - Lehman Brothers

Around the mix shift, first where when you…from mid CUV to mid SUV we have been used to a pattern of really seeing a substitution there but really the numbers you are showing today seem to have the CUV category flat. Do you see any trends there in terms of SUV buyers not turning to CUV’s but turning to cars instead?

Fritz Henderson

The last couple of months we have seen even increased passenger car penetration, Brian. I think our longer term view is what we’ll see is additional entries into crossover vehicles, even to smaller and smaller packages. We think that crossovers will continue to be attractive and will continue to grow and that the leveling or even slight erosion we have seen over the last 2-3 months is temporary. What we think is the consumers have a job to be done. They have certain space. They have certain desires in terms of what they want to do with their family and I think what we’re going to see is even further innovation in the crossover vehicles. I think that is going to be coming not only from a GM perspective but other manufactures over the next several years.

Brian Johnson - Lehman Brothers

In terms of the [inaudible] between the smaller CUV’s and also the smaller cars, are you planning to get that variable contribution up and is the bigger lever going to be cost reductions, and if so how much, off of global platforms versus narrowing say the pricing gap improving ATP relative to the transplant brands?

Fritz Henderson

The cost side we clearly know what we need to do. When you move from a full sized utility or full sized pickup into products that have lower average transaction prices and lower contribution margins per vehicle, it even emphasizes further the need to tighten your structural costs down so we’re going to do that. We have to. In terms of how do we actually generate more contribution margins from a different mix of the portfolio I would point to the Enclave and the Acadia as kind of a case study? Even the Malibu as a case study. What we have been able to do with these vehicles is we have achieved significantly higher average transaction prices than we had planned. Malibu, for example, is up I think $4,000 on terms of an ATP price versus the prior vehicle and the Enclave and the Acadia have been well above what we expected as with the CTS actually.

So its about getting better transaction prices as we improve our vehicles. We need to do that across the board. That means, for example, if you look at a compact segment if we position ourselves squarely against the leading players in those segments as we have with the Malibu and deliver frankly a great car to the segment and price for it. We have been able to do that with our future vehicles as well. So we need obviously to produce more margins per car in compact, mid size and all of the different segments. We can’t afford to give away price relative to the competition in these segments anymore. There’s just no room to do that. Then finally you’ve got almost unrelenting materials cost pressure from commodities whether it is steel, non ferrous metals or precious metals, and so the level of inflation we see in the cost structure in not just GM but any OEM has been much higher than we’ve seen in the past. This either drives further the need to ensure that we get full price for these vehicles as we launch them into these segments.

Brian Johnson - Lehman Brothers

Does that imply less fleet sales for the redesigned Cobalt and Aveo’s?

Fritz Henderson

I think I have said before we think we are approximately in equilibrium in terms of our daily rental sales and fleet sales. I still think that is the case. I think you’ll see less fleet sales visa vie today’s Cobalt in this next generation compact car but you’re still going to see some daily rental sales. You’re going to see us focusing on getting to an equilibrium level so that the business we do is profitable, albeit less profitable but still profitable, and it doesn’t detract from the retail attractiveness of the vehicle. That is what I define equilibrium as.

Operator

The next question comes from the line of John Murphy - Merrill Lynch.

John Murphy - Merrill Lynch

Three quick ones. First, address the structural costs. Things cost quite a bit here. I’m just wondering if you can talk a bit on what you are doing on the variable cost side of the equation and how you are leveraging your global scale there. That is sort of the first question. Second on your head count reduction, you’ve gone pretty far here. You’re probably down in the mid 50’s on hourly North American…it seems like you’re getting pretty low. I was just wondering how you are going to deal with hiring the tier two workers and where we’ll see that mix go in the near term. Then third, just on capacity I just wanted to make sure you are measuring that on two shifts, straight time. It sounds as though it is a little bit higher than what we thought but there might be a slight difference in definition there.

Fritz Henderson

Let me do the last one first. It is two shifts, straight time. So, what we’ve done is with the announcements we made in 2005 would take us from 5.2 to 4.2 with some changes we made and actually the product we are building and the plant we are getting ready to inaugurate in Mexico is actually 4.2 to 4.4 and then we have 700,000 units coming out with this announcement in terms of ceasing production which would take us to 3.7. That is two shifts, straight time.

On the second question, hiring, I think we’re going to handle hiring on a plant-by-plant basis. We will look at hiring into the second tier if it is a non-core job. We have a job to do in the plants in terms of not only 19,000 people will take the attrition plan approximately. We have some of the people that are being affected by these announcements very well might choose to move. We’ll have to make room for them. The operating team is pretty good at actually managing the manpower across GM so that we get the people in the right spots. We will do some second tier hiring and it will be done on a plant-by-plant basis and at this point I don’t really have the visibility into how many that might be. I think the other thing we need to be cognizant of is just market demand. We’re going to make sure we hire in where we have real need.

The first question on the materials costs and variable costs, we have these global architectures that we are developing are being sourced on a global basis. They have global footprints with the suppliers. We think they have been optimized in terms of both content technology and costs. We are quite excited about the potential for these global architectures not only in terms of engineering savings and capital efficiency but these are quite profound changes in how we source these vehicle programs. When we source a compact vehicle we source now for 1.5-2 million units of total compact volume. Now we don’t necessarily do that with all one supplier in one location obviously but as you plan your sourcing it gives you substantial ability to not only get to the best of buyers in the best cost locations but to kind of optimize freight and logistics and duties with your suppliers as you think about this in total. So we are excited about it.

I say that with some caution though because we will do all this but we do face some pretty substantial cost pressures whether it is steel or non-ferrous or precious metals. This is in part allows us to actually attenuate a part of that impact but we certainly think that by executing these global architectures we can have a very competitive material cost on a medium or long-term basis.

John Murphy - Merrill Lynch

If we were to hold all else on these variable costs as you leverage these global platforms, I mean the magnitude of these cost savings I would imagine would be close to the magnitude of the cost savings you are executing on the structural side. Is that a fair characterization? Or is that too aggressive? It’s tough to hold raw materials equal…

Fritz Henderson

That’s the problem. We’d like to hold raw materials equal but the reality has intruded on that. So I can’t really say that. I would say materials cost is our largest cost element, no question. So therefore to the extent we are able to generate real savings it has got huge impacts on our contribution margins. I think the short answer, John, is we have got to do both in order to be able to win.

Operator

The next question comes from the line of Chris Ceraso - Credit Suisse.

Chris Ceraso - Credit Suisse

If we think about the announcement, four truck plants closing, structural costs coming down by $1 billion, I want to talk about the contribution effect. We have learned over the last couple of weeks that you lose about $8,000 if you don’t build a truck because of the axle strike, for example. If we think about that going forward what is the contribution effect of losing 700,000 trucks, taking into account the fact that you are going to close the plants and get rid of the people? It is not a net billion favorable, right?

Fritz Henderson

Clearly as we reduce our production, these are our most profitable vehicles particularly the full-size units. Pickups as well are highly profitable. Full-sized units are even more profitable. I mean it clearly puts pressure on the revenue and the contribution margin side which to come back to Brian’s question we need to produce more profitability per car out of our crossovers and passenger cars because we’re clearly going to be under pressure as a result of losing volume in our highest profit segments. Which is why we have to do both. It even puts more pressure on us in terms of managing structural costs.

Chris Ceraso - Credit Suisse

Can you explain a little bit how you envision the new compact car being positioned in the market relative say to the Cobalt and the Aveo?

Fritz Henderson

First of all it is a different segment from the Aveo. That is right off the bat. The car itself I’m not going to tell our competitors where we’re going to go with it but we certainly see the vehicle being derived from our global compact architecture. You have some sense of what GM is capable of doing on a global basis in the compact segment because you have seen the vehicles we’ve done around the globe. You’re going to see more of it. This is the first U.S. application of it. Stay tuned in terms of seeing what the foreign applications of it are. I think the vehicle will be very well positioned. Versus the segment leaders today the Cobalt basically prices at the entry part of that segment. That is not where we really want to be. That is where we were with the old Malibu that is not where we are with today’s Malibu. So what we want to do is position ourselves with the next generation compact car squarely in the middle to the upper segment of the compact vehicle segment, all on what we have done with the Malibu. That is exactly what we want to do with the car and I would say the 1.4 liter turbo application is about giving us the ability to really achieve segment related fuel economy. Obviously we are talking about a vehicle which will launch in 2010 so we’ll have to see what our competitors do between here and there.

We do anticipate they are going to improve, so it is not as if we are assuming they are going to stand still. But we have to understand that our competitors are going to be moving too. Nonetheless, we think this is going to be a very well positioned vehicle for us and therefore allows us to get better price points and be able to produce better margins from the cars all on what we did with Malibu versus the prior Malibu.

Chris Ceraso - Credit Suisse

It sounds like something more like the Astra than the Cobalt.

Fritz Henderson

Stay tuned.

Chris Ceraso - Credit Suisse

There were some headlines that came across that I didn’t see in your slides and you didn’t comment about on the call today but comments about the second half recovery or potential thereof in the U.S. market and also comments about your views on GM’s liquidity and the potential to raise capital.

Fritz Henderson

I’d say a coupe of things. First I was asked about what is our view of the economy in the second half. What I said was we do anticipate some improvement in the economy in the second half. I’m just not sure it’s going to transform into an improvement in the auto market. We certainly see the impacts of both fiscal and monetary stimulus that will come in the second half but candidly we have reduced our forecast for inventory volumes just recently to the mid to high 15’s. Total, not actually out of line with what many consensus estimates are for lights of 15.3 or 15.4. I would say our view is coming into the year we thought the first half would be decidedly weaker. The second half we’d see a rebound in vehicle sales. Today we are certainly much more temperate about that. We think that the auto market is going to be tougher in the second half than we saw maybe 6 months ago or 4 months ago when we entered the year. That’s what I said.

In terms of liquidity what I talked about was pretty much exactly what I reviewed in our 10Q. It didn’t really change at all from what we’ve said in that regard.

Operator

The next question comes from the line of Himanshu Patel – JPMorgan.

Himanshu Patel - JPMorgan

The question on mix, I understand the mix away from frame-based trucks happened pretty fast. Can you talk about the profitability of the car franchise? Are ASP’s starting to accelerate there? I’m just wondering are we seeing now kind of a second phase of the mix shift where the type of customers that are trading down are fairly affluent, upper middle class Americans who as they go down into the passenger car side while they may want more fuel economy they probably want these vehicles fairly well specified where you kind of have a business model that may start looking a lot more like the passenger car side in Europe?

Fritz Henderson

That’s what we’re seeing. I would say you have some economic impact, mind you, which is affecting consumers where they might look at a used versus a new car. They might look at some base vehicles in certain segments. But what we are seeing in the broader trend is the consumers looking for fuel efficient packages. They still want the technology and features they had before. So you are seeing…we do see whether it was the CTS or whether it was the Malibu, we are seeing better average transaction prices for those vehicles. Clearly it helps when you get them right. If you don’t get them right you aren’t going to participate in that but if you get them right you’re going to be able to attract that kind of consumer.

Himanshu Patel - JPMorgan

The capacity cut was about 12%. The attrition program looked like it resulted in about a 25% head count cut. What is the disconnect there? Was it just excess heads you had to start off with?

Fritz Henderson

We’ve been continuing to streamline. About 19,000 people were pretty much in line with what our expectations were. Part of it is you have to balance your level of skilled trades versus in-direct versus production employees. I would say we do think we’re going to have to do some new hiring. It will be on a limited basis and it will be kind of site-by-site. We have to absorb the people that might be impacted. These announcements, by the way, go out into 2009 and 2010 so some of these people might choose to move. Think of this as we have a pretty significant operating challenge we have in terms of managing manpower but we think we’re up to it. I just think this is an opportunity for us to get even more efficient. That is how I’d put it.

The man capacity clearly is being reduced more than the technical capacity.

Himanshu Patel - JPMorgan

The $1 billion savings number, can you clarify what is behind that arithmetic? Is that just the savings from the heads at these plants or does that also include non-cash savings from asset write downs?

Fritz Henderson

No, I wouldn’t really include any non-cash savings from asset write downs. What we would typically do if we were to accelerate end of production or ceasing production of a product is we would accelerate amortization of tooling typically. These plants themselves are actually, many of them are fairly old, so the plant infrastructure itself would be I don’t want to say completely depreciated but highly depreciated in those plants. Typically then we would accelerate their amortization. The cost savings we are talking about here is largely manpower and cash related structural cost savings from running the plant.

Himanshu Patel - JPMorgan

Lastly, you mentioned investments in two cellulosic ethanol JV’s and you also mentioned the Volt. I’m just wondering, we have been in this alternative power train debate a couple of years now. Have you guys refined your views now as to which one of these alternative power trains sort of has better commercial feasibility whether it is taking a traditional gas engine and making it more efficient, or going down the path of diesels or electric vehicles or bio fuels? I mean, it sounds as if you are kind of honing in on the debate a little bit more now. Any color you could shed on that?

Fritz Henderson

I would say we still are placing a lot of bets. If I were to say what is the most cost effective to the consumer way to displace petroleum in the near to medium term there is without any doubt, no doubt whatsoever, it has to do with the application of E85 ethanol. The technology is there. There are vehicles on the road. We know how to do it. It is cost effective. The issue obviously is when you are in the midst of a food for fuel debate it is tough to cut through it which is why even if we disagree with the science we are going to put that aside and we certainly believe that second generation bio fuels is the way to go because it basically takes the argument off the table. We are very interested in where that is going. There is a tremendous amount of venture capital moving into that area which actually sometimes you kind of watch where the smart money is going and you realize that we want to have good visibility into that. We see a small investment for us but we are very interested in the application of second generation bio fuels in our vehicles. It is cost effective. It displaces petroleum. It can be done. The infrastructure itself while needing to be developed is not an impossible task. It can be done. So we certainly strongly believe in E85 and applications of ethanol.

When I look at the Volt it is about basically putting a stake in the ground and saying we think the technical challenges we saw when the program was first envisioned we believe now we have technical feasibility. So it means now is the time to go into production. It doesn’t mean all the problems are solved. It just means we certainly have enough confidence to say we think we can move forward in an expeditious fashion and target the end of 2010. So we’re going to marshal the corporation’s resources to get that done.

We are still…when you ask are we honing our strategy, I think what you are seeing is we are actually bringing more near term by announcing production programs and doing what we think we need to do, accelerating getting to market, I wouldn’t necessarily say we are closing options though. Because we are basically executing the strategy. We have one element of the strategy is improving the fuel efficiency of our existing internal combustion engines so the announcement of installation of a 1-1.4 liter engine family in the United States…we don’t know when we in our history have ever done that actually.

So this will be a fantastic engine for our vehicles. We do think we need to improve internal combustion engines to speed up the transmissions. Then move into hybrids. We have a lot of hybrids being launched. We have the Volt. Then finally in terms of fuel cells Project Driveway 81 out of 100 are being delivered and we are very much committed to the technology in terms of the fuel cells as being a further route to displace petroleum and take the vehicles out of the petroleum equation.

That said in order to be a leader we don’t think we can foreclose any options but we still think we need to do them all.

Operator

The next question comes from the line of Rod Lache - Deutsche Bank.

Rod Lache - Deutsche Bank

Three things. First of all can you just share some thoughts on capital spending going forward? Obviously a smaller footprint but you’ve got some requirements for changing over power trains. Secondly, in this new fuel price scenario can you share some thoughts on what the incremental content is to enhance fuel economy? There was a comment in your K about $100 billion by 2020 but can you bring that in a little bit? Thirdly, in the new fuel price scenario what do you see as the ongoing to mid-level T900 type of vehicles?

Fritz Henderson

Let me talk about the third question because it relates to the first. Full-sized pickup, full-sized utility body and frame vehicles. We certainly are seeing a profound change in those segments. As we look at it we talk about tacity today. We have recently launched our vehicles. We launched the utilities in 2006, the pickups in 06-07. What we’re going to need to assess and frankly are assessing is what is our game plan going forward with respect to the product and the concept of the product going forward. We have a little bit of time to do that. It turns out, this is no surprise to you, that trucks and the utilities are big drivers of capEx. Not necessarily in 2008 and 2009 but certainly as you get out later into 2009 and 2010 it is quite a big driver of our capital spending historically. So we have said on a global basis about $8 billion of capital spending. We are still spending against that this year.

Our first quarter spending was up significantly versus the prior year. Now at least a part of that, a big part of that, is fueling our global growth. But my view is we have a job to do to conceptualize the next generation of these vehicles which will then drive into future capital spending. My view is we’ll have less capital being spent in these vehicles at least in some part because we’re actually affecting less plants obviously. But the question is what do we want to do with them over time and I would say stay tuned.

Obviously a big driver of capital spending in North America has historically been timing and the extent of full-size truck and full-size utility programs and that is something we need to look at certainly in light of today’s fuel prices. So we certainly see aggregate demand for those vehicles being significantly lower obviously we wouldn’t have done what we announced today.

The impact of fuel prices on material costs, your second question, and the $100 billion is a number that we talk about by 2020 in terms of the type of content we can see in our vehicles in order to respond to café. I think what we’re seeing is the consumer is actually moving in advance café today. The consumer is actually…we’ve always said we think the consumer needs to be a key part of the equation in terms of us being part of the fuel economy and comply with the law. We’re seeing exactly that today.

So we’re going to be applying technology. I would say you apply a 1.4 liter turbo in a compact car clearly there is an on cost to that if for no other reason than because of the turbo charge. Nonetheless, relative to some alternatives you have it is a relatively cost effective way to deal with it and I would also say over time high fuel prices the consumer’s willingness and ability to pay for the higher fuel economy they are going to be more willing to do it because the price of fuel is higher.

So I do think that while very painful in the short-term in terms of the impact of higher gas prices, over time that means the consumer is going to value fuel economy even more and therefore the technology we have applied, which has a cost, will be more recoverable.

Rod Lache - Deutsche Bank

So what you were saying I guess if you were projecting out a 20 million unit market by 2020 we are sort of figuring it $5,000 incremental content…that is going to be pulled forward but you can charge more for that content basically?

Fritz Henderson

Yes. Rough numbers but I think that is the concept because I think what you are seeing is the consumer is going to demand and want better and better fuel economy in their existing vehicles and these technologies all have cost. To the extent that fuel prices are higher that cost there is more value to the consumer and so we should be able to price for it.

Rod Lache - Deutsche Bank

Just to clarify your comment on the T900’s, it looks like you’ll still have maybe 1 million units of capacity after these closures. At least straight time capacity. Is that sort of the number you are working against in this new environment for what demand for those kinds of vehicles would be?

Fritz Henderson

Yes that is not a bad estimate actually. I mean you could look at technical capacity, flexibility, but two shift capacity you are not that far off actually in terms of where we would be. To the extent that the customers really move heavily back into those segments we can always add third shifts and there is a lot of things we can do to stretch for more than that. But by taking 700,000 units out of the capacity for these segments it is really about right-sizing for where we see the consumers at $130 per barrel oil.

Operator

That does conclude the question-and-answer session for analysts. We will now proceed with the media portion.

(Operator Instructions)

Our first question comes from the line of Jamie LaReau - Automotive News.

Jamie LaReau - Automotive News

I just had a question regarding the new compact vehicle for Chevrolet. Is this going to replace the Cobalt? Will it run side-by-side with the Cobalt? What is the plan there?

Fritz Henderson

Replace the Cobalt.

Jamie LaReau - Automotive News

So when will the Cobalt go away?

Fritz Henderson

We plan to launch this vehicle in 2010. So we would basically make the change then.

Jamie LaReau - Automotive News

What is the product plan for the Tahoe and the Yukon? Will those products continue? Will you shift more towards a hybrid emphasis with two modes?

Fritz Henderson

I would say with respect to Tahoe’s Rod had the question before about what are we doing with body and frame full-size architecture. We have just recently launched those vehicles in 2006 and the pickups in 2007. We have a lot of options available to us in terms of going forward and what we want to do. The good news is we have recently launched them so we have a little bit of time to assess that. We will have more hybrids in those technologies. We will have likely in pickups lighter duty diesel applications. There are a lot of things you can do with the vehicles but at this point I don’t have anything I would announce on what our game plan is.

Operator

The next question comes from the line of Mark [Feeline] with Detroit’s Free Press.

Mark [Feeline] - Detroit’s Free Press

Going back to Lordstown the global compact architecture that will be used is that the next generation of the Delta architecture?

Fritz Henderson

Customers don’t buy Greek letters. So in the end it is our compact architecture. So that is little b, I’d just as soon not get into internal Greek naming.

Mark [Feeline] - Detroit’s Free Press

But it helps us keep straight between other vehicles with similar like gamma.

Fritz Henderson

Well it’s going to be bigger than the Aveo. The car will be bigger than the Aveo. It will be one category up from the Aveo for sure.

Mark [Feeline] - Detroit’s Free Press

The production of approval from the Board from the Volt, what level of capacity did they approve spending for?

Fritz Henderson

We are not going to announce that today. I would say what we are planning to do on the technology is we would have a relatively slow ramp up because we want to make sure we expect to get into the market by the end of 2010. That is our near-term goal. Then begin to ramp up the production in 2011 and 2012 and bring our suppliers with us. So, with the technology Mark what we have got is a series of generations and a series of technological upgrades that we’ll be making. We just kind of stepped back and say this is the technology we are focused on getting a vehicle into production as we speak. But we are learning about how we can actually lower the cost of that technology also as we speak.

So we can’t necessarily get those changes into the vehicle we want to launch in 2010 but what we can do is plan generations and releases in those vehicles in 2011 and 2012 so we have teams that are actually working on…think of them as rolling releases. Basically some generations of the technology that we can bring in over the course of T+1, T+2, T+3 years that will allow us to lower the cost of the vehicle over time. We’d very much like to do that. Like the application of any new technology it is about cycles of learning and reducing the cost of the technology as you go.

Operator

The next question comes from the line of Joseph Szczesny with the Oakland Press.

Joseph Szczesny - Oakland Press

I had a question about, and I know this isn’t quite your forte but caps. How much more is GM liable or going to have to end up for how much longer are you going to have to continue to support ResCap?

Fritz Henderson

Joe it just so happens that I do know something about ResCap. So let me see if I can help you. GM has not put any money into rice cap. Nor do we have any obligations or liabilities. I’m talking about General Motors Corporation. GMAC has provided some capital into ResCap. If you look at what is going on at risk cap today whether it is a bond exchange, credit facility upgrades, credit facility re-structuring that is affecting both GMAC and risk cap. A lot of things are going on. You’ve got…we would expect the results of the bank refinancing to be known this month, June, and the bond exchange at ResCap interim results in, those were in about two weeks ago, and we would expect the final results to be known shortly for ResCap. All of these things are important in terms of managing ResCap’s capital structure, maturity structure (I’m talking about debt maturity structure), and finally the business itself is all about reducing risks, streamlining the operation. We have been exiting a lot of product lines within ResCap to try to reduce the risk of the business longer term.

GM is a shareholder of GMAC and we are very supportive of what GMAC has done to reduce the risk of ResCap. The lending business on a global basis it doesn’t get any easier. It has continued to be tough so the actions that have been taken to reduce the risk of the business are exactly what is necessary.

Joseph Szczesny - Oakland Press

But this is sort of like a bad penny. It just keeps turning up again and again. Do you have any limit on your liability? How much more liability has GMAC passed back to GM?

Fritz Henderson

So you keep talking about liability. If you look at what GM has done we put $1 billion back into GMAC as the result of the purchase price adjustment from the November 2006 closing. We have also capitalized a part of our preferred stock. We did that last year. We think that GMAC is adequately capitalized. Now obviously the situation is pretty challenging but if you talk about explicit liability or obligation to General Motors you are just wrong. What we’re doing is as a shareholder making sure that GMAC is pursuing the right plan. We and Cerberus are shareholders in GMAC and I think we have taken prudent action to make sure GMAC is properly capitalized. But you are trying to link the thing back to General Motors and it’s just not there.

Joseph Szczesny - Oakland Press

But you do have a fiduciary responsibility for GMAC, don’t you?

Fritz Henderson

We’re a shareholder.

Joseph Szczesny - Oakland Press

Okay.

Operator

The next question comes from the line of David Welch – BusinessWeek.

David Welch - BusinessWeek

Where are you guys right now given all the cuts you made on the structural costs as a percentage of revenue measure?

Fritz Henderson

That is something we will update kind of on a quarterly basis. With revenue in decline, which we had for example in the first quarter and the second quarter, obviously put a lot of pressure on you. That’s something that would be more better updated on an annual basis and when we finish up this year we will update you. But I’d say this is one where the actions we are taking are clearly necessary to keep us on a glide path to 25% by 2010 and 23% by 2012. I caution that is a global number. So our growth outside of North America has been a contributor to our improvement in this regard. But that is something that I’ll come back to you with some more specifics on an annual basis. I don’t have anything to update today.

David Welch - BusinessWeek

As the market shifts here in North America and more of your sales will be in lower average transaction prices, lower revenue per vehicle, would you have to go even lower than the 25% and 23% that you have set for those years to make up for the fact that your contribution margin on some of these vehicles will probably be less than full-size SUV’s and pickups?

Fritz Henderson

We purposely set these goals as a percentage of revenue with the thought that if the vehicle demand went to smaller vehicles or vehicles of less price that we would have to be more lean in terms of our structural costs. In other words, you put a set of your structural goals in aggregate. We set them in as a percentage of sales to make sure we were pretty tough on ourselves. So, I think by virtue of setting these as a percentage of sales if we achieve 25-23% we think we will be benchmark leveled and it would allow us to be successful even with a leaner product mix.

Clearly the lower price of a vehicle, let’s say the Malibu, even though we’re getting $4,000 more than the older Malibu it is still in the low $20’s versus a Tahoe in the high $30’s or low $40’s. So it puts pressure on us to keep our thoughts in line and to take more aggressive action but that is why we chose the goal.

So coming back 25-23% we think would be benchmark level.

David Welch - BusinessWeek

So it is still adequate for you given what is happening with mix in the announcements today?

Fritz Henderson

Yes.

David Welch - BusinessWeek

Just, not to beat a dead horse here, but as a follow-up to Joe’s question, I’m not saying you have necessarily some sort of liability to either ResCap or to Delphi where you do have some liabilities there. I guess the bottom line here is have we seen the last of the sort of special costs or special cash contributions to these two entities going forward? Can we kind of look at your financial results every quarter as this is what is happening with GM’s operations and your own restructuring as opposed to these other entities?

Fritz Henderson

Let me deal with GMAC and Delphi separately if you don’t mind. In terms of GMAC I don’t have anything to add from what I said to Joe. The cash part of it from a GM perspective now we did what we were obligated to do in 2006. We capitalized the product deferred. We have not actually injected cash beyond that. We did agree as part of GMAC’s overall capital structure to take part in basically 49% of $750 million of participation in the GMAC facility to ResCap which is part and parcel to the bank restructuring and the bank refinancing in the buy restructuring.

I would say that summarizes the cash part. The accounting part, which I think is what your question was, we impaired a portion of our investment in GMAC in the first quarter attributable to its investment in ResCap. The value of a mortgage business I should say in today’s market is still an open question. I wish I knew where the bottom was. I just don’t know. I don’t know anybody who does. So it will be something we’ll have to continue to monitor our carrying value in GMAC. So I can’t say that all the charges are behind us. I can’t say that today. We did what we thought we needed to do at the first quarter. We took a look at the carrying value of the business and concluded it was impaired and other than temporary and we took a valuation loss as a result, not cash but nevertheless it did reflect lower carried value and we’ll need to do that every quarter given the uncertainties of the mortgage market.

On Delphi we have been updating our net liability and net recoveries and this is one where I won’t be able to conclusively answer your question until Delphi emerges from bankruptcy and we have a final deal. That is about the best way I can put it. We think we have been prudent every step of the way but nonetheless the markets have been difficult and Delphi has not been able to emerge. As long as Delphi is not able to emerge there is going to be inherent uncertainty in terms of what our net charge is.

David Welch - BusinessWeek

So there could be future earnings or cash issues coming out of Delphi. That is very open-ended it seems.

Fritz Henderson

It is open-ended. If I think about the Delphi restructuring there are three parts of it. One was the labor part of it. We pretty much know how that works. The second is the GM support for Delphi. That agreement, by the way, is also done. Could it be reopened? You can never rule it out but we don’t see it today. The third part is Delphi’s plan of reorganization for them to emerge. That piece is still wide open.

David Welch - BusinessWeek

It seems like if there is going to be something with ResCap it would be more in the kind of non-cash hit to earnings as opposed to having to blow more cash to give them some money to re-capitalize.

Fritz Henderson

Yes. I mean, I don’t mean to be overly technical here but it is really important because GMAC is the shareholder of ResCap. GM is the shareholder of GMAC. We try to be as clear as possible as to what GM’s responsibilities are and then as a shareholder of GMAC along with Cerberus and then what GMAC’s responsibilities or obligations and/or undertakings are with respect to ResCap. I would say GMAC has provided support to ResCap whether it is direct equity support or even selected credit facilities. GMAC has provided support to ResCap. But GM’s obligations have been as a shareholder of GMAC.

David Welch - BusinessWeek

You’re not legally obligated to give them anything but it seems to be like this child who has graduated from college but keeps coming back with his hand out.

Fritz Henderson

I think Joe described it as a bad penny. My view is the U.S. housing market and actually the global housing market is really tough David. So the ResCap business we have a good team of people there. We work very well with the leadership team of GMAC and ResCap. We and Cerberus have worked together. But let’s face it…it has been just a major challenge. The first quarter of this year the impact of the international business at ResCap was really very negative. The U.S. business actually while not good performed in line with our expectations but international was really tough. I’ve been asked a number of times to call the bottom of the housing market. I can’t do it. Because in fact the housing market is still difficult and we’re still facing a number of challenges there.

Operator

Mr. Arickx there are no further questions at this time. I will turn the call back to you. Please continue with your presentation or closing remarks.

Randy Arickx

Thank you operator. Thank you everyone for your time this morning.

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