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GM Posts Record Loss |
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Monday, 11 February 2008 |
In spite of near record worldwide sales and a reduction in overall labor expenses, GM posted the largest ever annual loss reported in the United States auto industry. The $38.7 billion dollar loss signals a low probability of GM turning a profit before 2010, even though GM recently signed a cost cutting labor contract and is getting ready to release new vehicles that are expected to be popular. The weak U.S. economy is hitting GM hard, taking away any gains that the auto giant has made in the last year.
In the wake of the record-setting announcement, GM offered buyouts to every one of its 74,000union workers in hopes of replacing them with workers who would accept lower wages. The new buyout is expected to cut more than 16,000 workers that are currently making an average of $28 an hour. Newer workers will be paid half that amount. About 98 per cent of GM workers will be eligible for the buyouy. Rick Wagoner, GM Chairman and CEO said that the company expanded aggressively into emerging markets such as Asia and Latin America and also restructured to cut costs, but it wasn't enough to stave off the tidal wave of red ink.
The automaker did manage to hold off a challenge by Toyota to remain the world's largest car manufacturer by less than 3000 cars and was profitable in every area outside of the United States and Canada, but it was hit hard by continuing losses in the U.S., including trouble in the U.S. mortagage market that hit GMAC Financial Services.
“We're pleased with the positive improvement trend in our automotive results, especially given the challenging conditions in important markets like the U.S. and Germany, but we have more work to do to achieve acceptable profitability and positive cash flow," Wagoner said in a statement.
Another possible reason for the record breaking loss is GM's sudden refusal to sell cars to daily dental companies. Such sales are usually done at a reduced price and are very low profit.
Increased earnings aren't expected until 2010 when workforce reduction strategies go into full effect and the cost of providing health care to retired workers will be transferred to a new trust run by the United Auto Workers Union.
"We need to get all the structural costs down," Chief Financial Officer Fritz Henderson said. "We need to step on the gas in terms of how we're performing in the market as well."
GM shares fell 1.9 percent,or 52 cents, to close at $26.60. A $39 billion dollar charge third quarter charge for unused tax credit is partially to blame for the staggering loss. The company;s previous annual loss record occurred in 1992 after a major change in health care accounting. Profits were also hit hard by the loss of $2.3 billion because of the ResCap mortgage division, which is partly owned by GM.
If the tax charge and other financial losses were taken off the bottom line, the loss dwindles to $23 million compared to a net income of $2.2 billion in 2006, which would have easily beat Wall Streets expectations.
The company posted profits in the rest of the world, including $1.3 billion in profit in Latin America, the Middle East and Africa.
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