Upside Seen To GM’s Value with Reduced Working Hours, Lower Pension Risk Plans
General Motors Company (NYSE:GM) is in negotiations with the workers representatives which could see the working hours reduced to 31 from 35 in two of its German plants. Europe is a big concern for GM. The region’s overall vehicle sales are declining, GM continues to lose market share and the high operational costs which remain more or less constant irrespective of the vehicles sales, are hurting the profitability. The two German plants, one each in Ruesselsheim and Kaiserslautern, employ a combined total of 15,500 employees. [1] The stock is down 20% from its highs of $27 earlier in February this year.
GM is reeling with overcapacity issues but the strong labor unions won’t allow them to shut the plants and therefore the automaker continues to post losses in Europe. It’s second quarter operational losses ballooned to $361 million from $256 million in the first quarter. Other steps taken up by GM to address its European concerns include appointing restructuring consultant Thomas Sedran as the interim CEO of Opel and forming an alliance with French automaker PSA Peugeot Citroen with which the automakers hope to save $2 billion annually.
Besides reducing its production costs, GM needs to improve the demand of its own cars. Car sales are down 7% in the first half of the year in Europe but GM’s European brands Opel and Vauxhaull have fared even worse with demand being down by 15%. In addition, Opel has been unable to match the technical advancements made by other German car manufacturers. [2] Uncertainty in Europe has made it difficult to ascertain when losses in Europe will bottom out. This has made it difficult for investors to understand the true value of the company.
Reducing Pension Risks
Pension obligations is another big concern for the automaker. After transferring the risk of its $26 billion underfunded pension obligations to Prudential Financial earlier in the year, GM is now in the process of converting its defined-benefit pension obligation plans of salaried employees to a defined contribution plan. The automaker is in talks with the workers’ union and if the move materializes, the salaried employees who retire after 2014 will now receive a lump sum instead of the traditional pension plan. Defined contribution plans, in which the the employees receive a lump sum at the time of retirement carry lower risks when compared to defined benefit pension plans. This is because the employer does not have to guarantee a fixed amount and the lump sum is contingent on the investment returns. [3]
We currently have a Trefis price estimate of $23.60 for General Motors’s stock, which is about 10% higher than the current market price
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Notes:- Opel in talks to reduce hours at 2 German plants, August 16, businessweek.com [↩]
- Restructuring specialist to be interim CEO of GM’s Opel, July 17, 2012, reuters.com [↩]
- GM extends pension, health cuts to salaried employees, August 20, 2012, theglobeandmail.com [↩]