Savings won't help GM sell more cars

By Robert Walberg

If there is one thing that Wall Street loves, it is a company that slashes costs and does so ahead of schedule.

So, it wasn't a big surprise to see General Motors' (GM, news, msgs) stock rise on Monday's announcement that nearly 35,000 workers accepted the company's buyout offer.

This number far exceeded company and Wall Street expectations and put GM ahead of schedule in its plan to slash at least 30,000 jobs by 2008. As a result, GM increased its projected cost savings for 2006 by $1 billion to a total of roughly $5 billion.

Of the 35,000 employees that accepted the lump-sum buyout, about 4,600 are leaving immediately, while the remaining 30,400 chose to retire early, but not right now. To reflect the payments to its employees, GM announced that it will take a $3.8 billion charge, with most of that charge coming in the second quarter.

But what is surprising is not the stock movement today and Monday. It's that GM's stock has been on a tear since early April, gaining a whopping 45.7% over this period. By contrast, the S&P 500 is down nearly 3% over the same time frame.

One bright spot in a huge cloud of problems

I can appreciate the fact that the company is reducing its cost structure and doing so at an accelerated pace. That's definitely a short-term positive. But it doesn't come close to countering GM's big negatives, the worst of which are slumping sales and declining market share.

Then there's the bloated product mix, copycat -- not to mention generally dull -- styling, lack of vision, a lousy credit rating, deteriorating financials and an overwhelmed and overmatched management team.

Cutting costs is an important step in putting GM back on the survival track and management deserves credit for its efforts on this front. But this is the only area that management has exhibited any competence for some time now. GM CEO Rick Wagoner's steadfast refusal to reduce the company's product line proves that management still doesn't get it.

Put the Buick to pasture?

Failing to act on closing the tired Buick or Saturn lines now simply means that the company will be forced to undergo another painful restructuring a few years down the road. If management is truly serious about transforming GM into a lean, aggressive competitor, it needs to make the painful decision to trim its product mix.

Management also needs to come up with a better solution to revitalizing sales than offering a new round of costly incentives. GM announced Tuesday it would offer 0% financing for six years.

How about trying new, more attractive product designs and smaller, more energy-efficient cars and trucks? It could then work to fine tune those models over time, like the Japanese car makers do, and maybe, just maybe, GM could reverse its long, steady decline in market share.

Unfortunately, such efforts require a bold, creative and forward-thinking management team and that's not something GM has at the moment. And if there's a negative to yesterday's employee buyout announcement it is that in exceeding expectations, Wagoner and company have probably secured their jobs for at least another few quarters.

Follow the employees and get out now

GM has enjoyed a wave of generally good, or at least better-than-expected, news over the last few months, including a number of analyst upgrades. With last year's horrible numbers to compare against, the news could stay relatively positive for the balance of this year. The stock could even poke its nose above the $30 level for a bit.

However, GM remains a troubled company with many difficult challenges ahead. Maybe that's why so many employees were eager to take whatever the company was offering now for fear that if they hung around a few years longer the deal would be worse.

Instead of applauding GM for reaching its target of job cuts ahead of schedule, analysts should be asking why so many employees were tripping over themselves to get while the getting was good.

As for investors, I suggest they follow the path of the employees and get out while the stock is making new highs. The day of reckoning may have been delayed, but unfortunately it can't be avoided.

At the time of publication, Robert Walberg did not own or control shares of companies mentioned in this column.