General Motors (NYSE: GM) announced a major restructuring in North America on Monday. Among other moves, GM will idle five factories and cut 15% of its salaried workforce in an effort to boost its annual cash flow by $6 billion starting in 2020 while increasing its spending on electric vehicles and self-driving technologies.
GM has been restructuring its operations around the world for several years as part of CEO Mary Barra’s plan to boost profits and margins while investing aggressively in new technologies. But until now, its North American operations had been largely untouched since the restructuring that followed GM’s 2009 bankruptcy.
Here’s what we know about the plan.
General Motors’ factory in Oshawa, Ontario, is one of five GM factories in North America that will be idled in 2019. Image source: General Motors.
What’s happening: GM is cutting sedans, and more
GM said that five of its North American factories will be “unallocated” after 2019, a term meaning that the factories will have no products to build. (GM used the term “unallocated” because it’s not yet clear whether all of the factories will close. The answer will likely depend on the outcome of negotiations between GM and union leaders.)
The factories affected:
Lordstown Complex, in Ohio, builds the compact Chevrolet Cruze sedan.
Oshawa Assembly, in Ontario, builds the Cadillac XTS and Chevrolet Impala sedans, as well as some versions of the outgoing (2018 model year) Chevrolet Silverado and GMC Sierra pickups.
Detroit-Hamtramck Assembly, which straddles the border between Detroit and the city of Hamtramck in Michigan, is one of GM’s most advanced and flexible factories. It builds the Impala, the related Buick LaCrosse sedan, the plug-in hybrid Chevrolet Volt, and Cadillac’s flagship CT6 luxury sedan.
Baltimore Operations, in Maryland, builds transmissions for GM’s heavy-duty pickup trucks.
Warren Transmission Operations, in Warren, Michigan, builds transmissions for several GM vehicles as well as the electric drive units for the Volt, the Chevrolet Malibu Hybrid, and a Buick hybrid sold in China.
The five factories employ a total of about 6,300 workers. All five are currently “underutilized,” meaning that they are running on a single shift of workers, or are expected to be underutilized soon. (An auto factory is considered to be running at full capacity when it has two shifts of workers, each working five days a week.)
The strong hint is that the Chevrolet Volt, Cruze, and Impala, the Buick LaCrosse, and the Cadillac XTS and CT6 will be dropped from GM’s lineup in North America. If so, it will be a significant reduction in GM’s sedan offerings, though not as drastic as the sedan cuts that rival Ford Motor Company (NYSE: F) announced earlier this year .
GM will cut 15% of its salaried workforce in North America, or about 8,100 jobs, including 25% of its executives in the region.
Two GM factories outside of North America will be closed by the end of 2019. (These closures are in addition to the closure of GM’s factory in Gunsan, Korea, announced earlier this year .)
GM is making organizational changes to lower new-product development times and costs. Among them: Its vehicle and propulsion engineering teams, currently separate, will be merged.
GM will continue to reduce the number of separate vehicle architectures it uses to underpin its products. It now expects that “more than 75%” of its global sales volume will come from just five architectures in a few years. (The implications: quicker product-development times and lower costs as more parts are shared among models.)
Over the next two years, GM will double the resources it has allocated to electric and autonomous vehicle programs.
The Cadillac CT6 sedan is one of GM’s most highly regarded products. But sedan sales have slumped, and it may be discontinued after next year. Image source: General Motors.
Spending $2 billion now to make $6 billion later
GM said that it will take one-time charges totaling between $3.0 billion and $3.8 billion to cover the costs of the restructuring, most of which will be taken in the fourth quarter of 2018 and the first quarter of 2019. As much as $2 billion of that will be cash expenses related to things like severance payments; the remainder will be noncash accounting charges related to asset writedowns and pension-plan changes.
GM expects that the benefits of the restructuring will repay that $2 billion in less than a year, CFO Dhyvia Suryadevara said during a conference call on Monday. The idled plants will lead to cost savings of about $4.5 billion by 2020. On top of that, the streamlined product-development processes and new architectures will save about $1.5 billion per year in capital expenditures by 2020.
Suryadevara said that the changes will also lower GM’s “breakeven point,” the level of annual sales at which it swings from profits to losses in a recession. (She promised to provide specifics at GM’s annual investor briefing in January.)
The upshot: big cuts but bigger savings
There are a lot of implications to this plan, a lot of hints about GM’s future intentions, and we’ll explore them in the coming days. (For starters, it’s more evidence that GM is really, really serious about transitioning to electric vehicles.) But here’s the bottom line for GM investors: As a result of this restructuring, GM expects its annual adjusted automotive free cash flow to improve from about $4 billion this year to roughly $10 billion by the end of 2020.
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