GM: Possible pitfalls could derail rebound
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Sharon Terlep / The Detroit News

General Motors Corp.'s already fragile turnaround could be derailed by
any number of threats looming in 2008, from more strikes at parts
suppliers to a further meltdown of the housing market, according to the
automaker's annual report filed Thursday.

In a lengthy inventory of potential pitfalls for the year ahead, a
listing required each year by federal regulators, GM names many of the
same risks that kept the automaker in red ink for 2007: a slumping U.S.
auto market, turmoil at finance firm GMAC and the soaring costs of
health care and materials used to build cars and trucks.

But this year, GM also must begin anteing up cash to set up a massive
health care trust for hourly retirees. The automaker has to come up with
$34 billion over several years to contribute to the fund, created as
part of last year's labor pact with the United Auto Workers. GM's
ability to spend in other areas of the business will be affected if it
can't secure financing under favorable terms.

GM's worries are no surprise, but they come at a time when concern is
mounting on Wall Street about the automaker's ability to forge a
turnaround in the weakening U.S. economy. The landmark labor deal GM
struck last year with the UAW promises relief -- as much as $5 billion a
year -- but much of that savings won't start until the retiree health
care fund kicks in around 2010.

The retiree fund, called a Voluntary Employees Beneficiary Association,
or VEBA, was a central part of the four-year labor deals between the UAW
and Detroit's Big Three automakers, designed to help them better compete
with leaner foreign-based competitors. GM, along with Ford Motor Co. and
Chrysler LLC, will offload retiree obligations to the union in the form
of the trust.

GM said it will have to pay the union up to $34 billion to take over $47
billion in retiree obligations.

"Despite significant cost reduction programs that have occurred at GM's
North American operations, negative cash flows at GM are expected to
increase in 2008," Fitch Ratings analyst Brian Bertsch wrote this week
in affirming its negative outlook on GM. The agency said its rating
could be cut if GM continues to burn cash in its home market or if
operations outside the United States become less profitable.

"Projected cost savings from the 2007 UAW agreement will be insufficient
to reverse consolidated negative cash flows through 2009 without revenue
stabilization. Given weak economic conditions, this is not projected to
occur in 2008."

GM, in its report, said further production cuts will be necessary if the
slumping economy or competition from rivals cuts deeper into its U.S.
sales. GM slashed production about 10 percent in 2007.

Despite cutting billions from its costs over the past few years, the No.
1 U.S. automaker hasn't been profitable for a full year since 2004. GM
lost a record $38.7 billion last year after posting a massive tax write
down last fall.

Among GM's key concerns:

• Work stoppages or financial problems at parts suppliers, especially if
they interfere with production of high-margin vehicles like trucks and
SUVs. GM already has had to shut down one truck plant because of the
UAW's strike against American Axle and Manufacturing Inc.

• Competition from rivals introducing key new models this year. GM's
product cadence will slow down this year after a number of successful,
high-profile new vehicles in 2006 and 2007.

• Further losses at GMAC, of which GM owns 49 percent, due to the
national mortgage crisis.