Health-Care, Job Cuts at GM Bad News for Suppliers
Oct. 19, 2005--A deal struck Monday by General Motors and the United Auto Workers to slash health-care costs after the U.S. automaker posted $1.6 billion in quarterly losses has small and mid-size auto parts suppliers worried about the future, industry analysts said.
"It means suppliers are going to continue to be hammered," said John Henke, head of Planning Perspectives, an industry consulting firm that gauges supplier-automaker relations.
The tentative agreement would cut GM's employee health-care costs by about $3 billion a year before taxes, according to a company statement. At the same time, it will reduce retiree health-care liabilities by some $15 billion. Together, the cuts will save the company an estimated $1 billion a year.
Earlier, GM announced third quarter losses of $1.6 billion at its North American operations, extending its longest losing streak in 13 years.
In response it expects to close more assembly and component plants and cut some 25,000 jobs, targeting $5 billion in structural cost reductions for 2006, the statement said.
"While this sounds like a large number, we recognize that it only goes part of the way," said GM Chief Executive Rick Wagoner.
It's the other part that has smaller suppliers worried, said Henke, who also teaches marketing at the University of Oakland in Rochester, Mich.
Monday's announcement comes just weeks after GM unveiled an $85-billion plan to cut material costs, based on lower purchasing prices for individual parts, rather than overall supplier performance.
The company has already set a purchasing reduction target of $2 billion for 2006 "despite higher commodity prices and troubled supplier situations," the company statement said.
Only about 30 of GM's 2,500 parts suppliers are large-scale global companies with more than $1 billion in sales, Henke said. The rest are small and mid-size domestic manufacturers.
Many fear the latest round of cost-cutting measures, like those in the past, will favor larger suppliers, while the ongoing drive for lower costs is forcing them to sell parts at a loss or move offshore into cheaper labor markets.
GM spokesman Tom Wick has said smaller suppliers aren't being asked to relocate, but that "if a supplier chooses to go to a low-cost county, that's their prerogative."
Henke said most smaller suppliers are already cutting costs well below sustainable levels. Now, with GM posting sizeable losses, "they have even more reason to worry," he said.
"If GM's shares are going down, its suppliers are going to be getting less and less revenue," Henke said. "It's inconceivable to me how anyone can gain from this."
In a Planning Perspectives survey conducted last May, suppliers accused GM of being "five times more focused on cost than quality." Just over half said they would "prefer not to do business" with the company.