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Jonn Devine, GM's CFO, is described as a visionary thinker and a risk-adverse manager.
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IT IS ONE of the world's top three bond issuers. In terms of assets, it's among America's largest banks and makes most of its money from mortgages. It has 340,000 employees worldwide and vast purchasing power. It is second to only the government as the largest purchaser of Viagra in the US and is the world's biggest buyer of golf balls. Yet neither banking, executive sports or performance-enhancing pharmaceuticals are its main line of business and it isn't a conglomerate. It likes to think of itself as the world's biggest automotive company.
There are many baffling things about General Motors but the fact that it buys so much Viagra to pass on at subsidized rates to its employees under its healthcare scheme is surely not run-of-the-mill corporate practice. "People seem really very happy to work there," says one analyst.
We can see why. What with the Viagra flood, one of the best employee pension schemes in the industry and more golf balls than you can shake a five iron at, it sounds like a great place to work.
But GM's pension and healthcare burden, legacies of a time before merciless competition eroded its market share and left it with vast overcapacity, have also become big threats to profitability and the balance sheet.
GM's $19 billion under-funded pension liability, a product of low interest rates and poor returns on investment, was one reason why Moody's decided to downgrade the company from A3 to Baa1 last year and put it on negative outlook. The shortfall at the end of 2002 was the highest for a decade, prompting GM's finance team, led by CFO John Devine, to take drastic action.
Filling the hole
In the space of a year, GM has managed to plug the deficit. It ended 2003 with $300 million in surplus in its US hourly and salaried pension plans. But this wasn't funded by profits. GM only ended up making consolidated net income of $3.8 billion in 2003. It is debt issues and asset sales that did most of the job, and the balance sheet is feeling the strain.
On top of that, the company now concedes that addressing its intimidating $60 billion healthcare bill is a top priority for 2004. It is also facing negative net pricing, loss of market share, profitability and fierce competition in its US automotive business.
With no dramatic upturn in profitability likely soon, GM still has its back to the wall. It supports about 2.5 pensioners for every employee. The number of GM pensioners that are members of the all-powerful United Automotive Workers union is more than twice Ford's. GM has 228,550 retired members and 63,480 surviving spouses, compared with Ford's 77,460 retired members and 24,220 surviving spouses.
While GM's foreign competitors are adding to their pension liabilities all the time they are expanding US capacity, GM is trying to decrease its own burden. But the gap between GM and foreign rivals in particular isn't going to go away in a hurry. In fact, the pension burden is not going to go away while retired workers are still alive. "There's a very slow ramp-down when it comes to our US hourly and salaried pension costs," says Devine. "When people leave their roles they retire, they live for a long time, bless them. Their spouses live even longer."
GM also has twice Ford's healthcare liabilities. Because of high US healthcare inflation its VEBA healthcare plan for pensioners has liabilities of $60 billion and only $10 billion set aside to meet them.
Healthcare is not a legally enforceable liability like pensions, but it has to go on the balance sheet and so rating agencies take note of it.
GM injected $5.7 billion into its VEBA trust last year. But with national healthcare inflation predicted to rise to 8.5%, the company's retirees healthcare costs will be even higher in 2004 – up to $4.6 billion from $4.3 billion last year. Devine points out that this will be over $1,000 of healthcare cost per vehicle produced in 2004. "Our healthcare costs are still going up, we need more help [from the government] and we need to help ourselves," he says.
On the bright side, Devine says the rise in healthcare expense has particularly come from prescription drugs, something that the federal government has tackled with recent legislation and which GM will no longer subsidize to the same extent following the latest round of UAW negotiations. According to analysts, scaling back subsidies on brand name drugs - including all that Viagra - could save billions.
The company is now considering diverting more operating cash into its VEBA fund, although how and when this will be done hasn't been decided yet. A relatively small cash injection is only the tip of the iceberg, though. "It will take several initiatives over the next few years to address this," Devine says wearily.
GM's employee expenses
($bn)
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Source: Company reports and DrKW Debt research
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A visionary straight talker
Devine is not scared of tackling a problem head-on. Formerly a product professional at Ford, he's described as a visionary thinker who is nevertheless a straight talker and risk-averse manager. The day he left his job as CFO of Ford in October 1999 after 32 years at the firm, the share price slumped. "For Rick Wagoner [GM's chairman since last May] to hire Devine was a great move," says someone who knows him well. "He knows the business but he also knows how to make money."
It was he who decided GM should tackle up-front the negative market sentiment surrounding the pension problem by launching last year's multi-tranche, multi-currency, straight debt and equity-linked $17.6 billion bond for GM and GMAC.
Devine, with GMAC chairman Eric Feldstein, hosted 45 conference calls with investors in two-and-a-half days. It was unusual for a CFO to get so involved in a bond issue; that Devine did showed its strategic importance. It also showed he was willing to put his credibility on the line.