April 24, 2009 at 12:22 pm

General Motors cuts to slash surplus

Production cutbacks likely to sink Delphi, bankrupt other suppliers

In deciding to dramatically slash production this summer, General Motors Corp. is bracing for possible liquidation of bankrupt parts supplier Delphi Corp. and the resulting inability to build vehicles from a shortage of parts, industry experts said Thursday.

GM's decision to idle 13 factories in the U.S. and Mexico for up to nine additional weeks -- a move impacting about 40 percent of the automaker's assembly plants -- might force other suppliers into filing for bankruptcy protection as work dries up.

More than 22,000 workers will be affected by the closures.

The move by GM, subsisting on $13.4 billion in federal loans, is a bid to slash costs quicker and deeper to qualify for up to $16.6 billion in additional aid. The cuts were viewed as a hedge by GM if it is unable to complete a restructuring by June 1 and is forced into filing Chapter 11 bankruptcy, industry analysts said.

"Despite their protestations, if GM files bankruptcy, then the demand for their vehicles is probably going to plummet anyway," said auto analyst Aaron Bragman of IHS Global Insight. "This kills several birds with one stone."

The cuts also will rob GM of much-needed cash because automakers book revenue when vehicles leave the factory, not when they are sold to consumers.

Four Michigan auto factories will be hit by the production cuts, which are expected to trim a surplus of vehicles stacking up on retail lots and cut the costs dealers pay for carrying unsold vehicles for long periods of time, said Troy Clarke, president of GM's North America operations. At the end of March, GM had a 113-day supply of light vehicles and 123-day supply of light trucks.

"We're moving our restructuring deeper and faster in recognition of getting our business to a viable state as quickly as possible," Clarke told reporters Thursday.

He said he could not recall GM ever idling this many plants for this amount of time.

The struggling automaker, which was originally expected to detail the production cuts today, also is making the cuts because negotiations with Troy-based Delphi to end a prolonged bankruptcy case have been unsuccessful.

"While GM has proposed a potential solution that would allow for the successful and rapid resolution of Delphi's bankruptcy case, its lenders have rejected this proposal," GM said in a statement. "Without the successful resolution of this dispute, it is General Motors' view that Delphi or its lenders could force GM into an uncontrolled shutdown, with severe negative consequences for the U.S. automotive industry."

GM's announcement was clearly aimed at putting pressure on the lenders, said David Cole, chairman of the Center for Automotive Research in Ann Arbor.

"If Delphi can't get a deal, clearly liquidation is an option," Cole said.

But GM has enough vehicles on hand that it could likely shift its production of key parts to other suppliers -- and buy back some plants in liquidation -- to avoid a major impact on production, Cole added.

Clarke said the production cut decision was GM's, but executives briefed members of President Barack Obama's autos task force, which is overseeing the restructuring of GM and Chrysler LLC, which has received $4 billion in federal aid.

"President Obama understands that GM will have to make difficult decisions during this restructuring process as it works to find a path to viability," said White House spokeswoman Amy Brundage. "He is committed to standing behind GM during this process to achieve a strong, viable auto industry in the long term."

While the shutdowns are staggered, at the peak in early June, about 40 percent of GM's assembly plants will be shut down, Clarke said.

In all, GM is cutting 190,000 vehicles out of production.

The production cut is the second major shutdown in recent months.

In the first quarter, GM reduced about 30 percent of its North American capacity in response to the worst industrywide sales market in 26 years. Those GM production cuts hit 20 assembly plants in the United States, Canada and Mexico.

GM's sales are down 49 percent in the first quarter of this year, more than the industry average decline of 38 percent.

David Shepardson contributed. rsnell@detnews.com">rsnell@detnews.com (313) 222-2028