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Dismal outlook for General Motors

General Motors is having a “dismal” time, says Bloomberg.com. Huge sacrifices have been made this week in an effort to stem the firm’s losses.

General Motors is having a "dismal" time, says Bloomberg.com. Huge sacrifices have been made this week in an effort to stem the firm's losses.

The cost-cutting started with the chairman himself, Rick Wagoner. He is to take a 50% pay cut and forgo his annual bonus along with the three vice-chairmen, who will each take a 30% pay cut. What's more, GM has halved its dividend for the first time in 13 years. And the group plans to cap contributions to its employee healthcare scheme at 2006 levels from the start of 2007, which will cut its annual healthcare expenses by $900m.

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But as painful as these sacrifices may appear, they "are not significant enough to make much of a dent in GM's automotive problems in North America", says Lex in the FT. The world's largest automaker lost £4.8bn in the final quarter of last year alone thanks to rising labour costs and falling US sales, not to mention its massive healthcare and pension costs. These led to the company being forced to announce the closure of 12 manufacturing plants in North America and the loss of 30,000 jobs back in November.

Wagoner, who last year earned $2.2m in salary as well as a $2.5m bonus during 2004, told The Guardian that such cuts are the "right step". "We are confronting dramatic change in our industry and in the global competitive environment and that requires us to look for additional ways to reduce financial risk and improve our competitiveness in the long term," he added. So how will the dividend cut help? Well, it will save around $565m cash annually. But that will have to be set against operating cash flow for the year, which if you take out GM's finance arm, GMAC, was a colossal negative $5.9bn, points out Lex. Furthermore, if GM was to suffer a "nightmare scenario", such as a strike, production would be seriously disrupted, which could "burn through billions of dollars in a matter of months".

Most analysts, who "largely expected" the announcements, will view GM's sacrifices as "a means of mollifying the unions", says The Guardian. Indeed, this is the best thing about the dividend cut, notes Lex. It will be much harder, however, to gain acceptance from the workers for changes in pensions and healthcare benefits. Then there is real concern for GM's ability to recapture the public's imagination with its new products not to mention the fear that it will eventually be forced to file for bankruptcy.

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