Pension 'crisis' pushes GM closer to brink

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The Independent Online

General Motors, the world's biggest car maker, moved a step closer to Chapter 11 bankruptcy protection yesterday after reporting its biggest loss for 13 years and warning it could not give financial projections for the year because of the "crisis" over its spiralling healthcare costs.

General Motors, the world's biggest car maker, moved a step closer to Chapter 11 bankruptcy protection yesterday after reporting its biggest loss for 13 years and warning it could not give financial projections for the year because of the "crisis" over its spiralling healthcare costs.

Reporting a $1.1bn (£574m) loss for the first quarter of the year, the company, the biggest provider of private health care in the US due to its large current and historic workforce, said yesterday the healthcare bill would rise by $1bn this year to a projected $5.6bn. GM said the issue had to be dealt with if it was to return to profits. John Devine, chief financial officer, said: "Health care is a real drain on our profitability and cash and a big dent on the balance sheet. The issue is making us increasingly non-competitive."

The loss, compared with a profit of $1.2bn last year, was its worst since 1992 when GM was last on the brink of bankruptcy. In additon it faces having its $300bn of debts downgraded to junk status.

The Detroit-based company warned last month that it was heading for a loss in the first three months of the year due mainly to disappointing sales in its key North American market.

It further unsettled investors by refusing to give guidance for the rest of the year due to the multiple uncertainties it faces, sending its shares down 3 per cent to $25.35 in New York.

GM's warnings on health care costs, which reached $5bn last year, have become increasingly apocalyptic as it has begun negotiations with unions to try to reach an agreement on reducing benefits. The subtext is that if the unions refuse and GM is driven into bankruptcy, employees could end up seeing their pensions and healthcare costs wiped out.

A host of other difficulties also face GM, which owns some of America's most famous automotive brands, including Cadillac, Chevrolet, and Pontiac.

Mr Devine acknowledged that "the number one focus" is the need for GM to improve its range of cars and trucks, which have been losing market share especially in the US to lower-cost Asian competitors. It lost $1.3bn in North America, compared to a $401m profit a year before. It reflected a 1 per cent decline, to 25.2 per cent, in GM's share of the car market there.

There has been "a very significant deterioration" in the mix of products sold in the US, where GM and other manufacturers have been hit by the decline in sales of highly profitable sports utility vehicles, Mr Devine said. Ford, GM's rival, is expected to detail similar problems when it reports results today.

GM and Ford have been struggling with the fact that their manufacturing capacity is higher than their share of the new car market. While both have sliced out thousands of jobs and closed manufacturing plants, Wall Street is looking for more cuts.

Mr Devine acknowledged further job cuts were likely, but he insisted GM would not drop one of its brands.

The company has cut its production as a result of the decline in its share of new car sales in America. Mr Devine said GM had managed in the first quarter to reduce its stock of unsold new cars by 100,000. He added: "Further reductions are expected by the end of the second quarter."

Europe, which had been one of GM's most difficult regions and where it is cutting 12,000 jobs, has improved, he said. Pricing pressure in the region, where it owns the Vauxhall, Opel and Saab brands, remained "very tough".

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