U.S. News

GM Will Boost Capital Spending to Revitalize Product Line

Associated Press

General Motors, facing stiff competition from Toyota and other foreign rivals, said Thursday it plans to boost capital spending by as much as $1 billion a year as it attempts to revitalize its product line while drastically cutting costs.

GM Chairman and Chief Executive Rick Wagoner said the world's largest automaker will increase its global capital spending to between $8.5 billion and $9 billion in 2007 and 2008, up from less than $8 billion 2005 and 2006.

Executives for Detroit-based GM did not release specific financial guidance during Thursday's presentation to automotive analysts in Dearborn, Michigan, but Wagoner touted the progress made by the automaker during 2006 and offered an optimistic view of its future.

"GM's North America turnaround plan moved faster and further than people expected a year ago," Wagoner said. "To be direct, 2006 needed to be a huge year for us -- and it was."

But at least one analyst was less positive about the plan. Citigroup's Jon Rogers reiterated his "Sell" rating for the stock, saying that with the exception of the increase in capital spending, GM's outlook was in line with his expectations.

"Despite a beneficial new product cadence of higher-profit trucks and cost savings, GM's cash burn remains our concern," Rogers wrote in a note to investors.

GM has seen its U.S. market share deteriorate in recent months, as high fuel prices have driven consumers away from its sport utility vehicles and light trucks, forcing the automaker to cut production.

Meanwhile, Toyota has capitalized on its passenger car portfolio's reputation for good mileage and raised its market share by two percentage points in 2006.

In December, Toyota gave a production target of 9.42 million vehicles for 2007, which could put it ahead of GM as the world's largest automaker. Wagoner has not revealed the company's 2007 production targets, but he said GM has the capacity to build more than 9.42 million cars worldwide.

And he has made it clear GM would not give up its title without a fight. "I like being No. 1, and I think our people take pride in it," he told a small group of reporters last week at GM's headquarters. "It's not something we're going to sit back and let somebody else pass us by."

On Thursday, Wagoner pointed to improvements in the automaker's third-quarter financial results and strong liquidity, with over $20 billion in cash on hand at the end of the third quarter. Wagoner also said the automaker slashed $9 billion in expenses at an annual rate by the end of 2006.

GM had previously said it wanted to achieve $6 billion in structural cost reductions at an annual rate, also known as a running-rate basis, by the end of the year. Wagoner said GM cut its global automotive structural costs to between 29% and 30% of global revenue in 2006 from 34 percent of revenue in 2005, and expects to post further improvements in 2007.

Last year, GM increased its target for reducing annual costs in North America to $9 billion from $8 billion as it closed plants and offered buyouts or early retirement offers to all of its hourly workers. In June, it said about 35,000 hourly workers took the offers.

Fourth-quarter and full-year 2006 results are expected to be released around the end of January. Analysts polled by Thomson Financial expect a fourth-quarter profit of $1.14 per share on $42.52 billion in revenue.