Finance

General Motors’ layoffs ensure its leadership in Auto 2.0, analyst says

Published

6 years ago

November 27, 2018

Ethel Jiang

General Motors CEO Mary Barra Ruben Sprich/Reuters

General Motors on Monday announced plans to halt production at seven factories globally and to reduce the size of its workforce by 15%.
The Trump administration blasted GM’s plans to shut down plants and lay off workers.
GM’s restructuring plan is necessary to ensure it will be a winner in Auto 2.0, said Morgan Stanley.
Watch General Motors trade live.

General Motors‘ plan to significantly shrink capacity and its headcount is a smart decision for the company’s long-term sustainability, Morgan Stanley says.

“Many investors pitch GM as a winner in Auto 2.0.,” Adam Jonas, an analyst at Morgan Stanley, said in a note sent out to clients on Monday.

“We believe today’s(Monday’s) move is meant to finance such a move in a sustainable way through the cycle.”

The automaker on Monday announced plans to shut down seven plants globally in 2019, including three assembly plants in North America, two US transmission plants, and two additional, unnamed assembly plants outside the US. GM also said it will slash its salaried employee headcount by 15% next year, including a 25% cut in its white-collar staff.

The moves are intended to shift resources to investing in electric and autonomous vehicles and to prepare for a downturn in the auto market, the automaker said.

GM’s restructuring proposal was blasted by the Trump administration. Larry Kudlow, President Donald Trump’s top economic adviser, said Tuesday that the administration felt “disappointment maybe even spilling over into anger” over the announcement.

Trump himself made a similar comment on Tuesday and threatened to slash GM’s subsidies if a new plant in Ohio was not opened shortly to replace the one that slated to close.

“Very disappointed with General Motors and their CEO, Mary Barra, for closing plants in Ohio, Michigan and Maryland,” Trump tweeted Tuesday. The US saved General Motors, and this is the THANKS we get! We are now looking at cutting all @GM subsidies, including for electric cars.”

Government pushback would be the highest up-front cost of restructuring for GM, according to Jonas. But he noted that GM management’s actions are both necessary and preemptive.

“The ‘unallocated’ products are lines that were not popular, were out of favor with the market, had a high fleet component, and were generally losing money without a clearly visible path to sustainable profitability,” he said.

GM is targeting $6 billion of cash run-rate savings by the end of 2020 after these adjustments.

“We look for essentially 100% of any savings to be reinvested in remaining products,” Jonas said. “We see these steps as necessary to ensuring the long-term sustainability and independence of GM as a leader in Auto 2.0 and a significant employer of US labor.”

Jonas has a price target of $44 for GM shares — 20% above where they were trading Tuesday.

GM was down 12.5% this year.