gm 2005 Annual Report Letter to Stockholders


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gm 2005 Annual Report Letter to Stockholders

  1. 1. General Motors Corporation 41
  2. 2. FRITZ HENDERSON BOB LUTZ RICK WAGONER JOHN DEVINE Vice Chairman and Vice Chairman, Global Chairman and Vice Chairman Chief Financial Officer Product Development Chief Executive Officer 2 General Motors Corporation
  3. 3. DEAR STOCKHOLDERS: 2005 was one of the most difficult years in General Motors’ SECOND HIGHEST SALES IN GM’S HISTORY 98-year history. Outside North America, it was a relatively good year. It was the year in which GM’s two fundamental weaknesses in the Global industry vehicle sales set another record, and we’re fore- U.S. market were fully exposed: our huge legacy cost burden, and our casting a record again this year – almost 66 million units, which would inability to adjust structural costs in line with falling revenue. be up about 1 million units from last year. GM had its second highest The challenges we cited in this space a year ago – global over- sales volume globally last year, with nearly 9.2 million vehicles sold. capacity, falling prices, rising health-care costs, higher fuel prices, GM scored three significant “firsts” last year: More than half of global competition – intensified and significantly weakened our GM’s sales globally came outside the United States; in the Asia business. The result was a loss of $3.4 billion, excluding special Pacific region, GM sold more than 1 million vehicles; and GM, along items, and a reported loss of $10.6 billion, on revenues of with our joint venture partner, became the No. 1 car manufacturer in $192.6 billion. China, the world’s fastest-growing market. Obviously, that is unsustainable. Though we are confident that GM Our success in China is evidence that where the playing field is has time and sufficient cash to see itself through a turnaround, I want even, GM can compete aggressively with the best and win. you to know that we are working diligently to get things moving in the GM also experienced significant growth in our Latin America, right direction – quickly. Africa and the Middle East region, with sales up 20 percent on Essentially, we are changing our business model to deal with the strength of our Chevrolet brand. GM set sales records in Chile, the larger phenomenon of globalization and the competition it has Ecuador, Venezuela, South Africa and the Middle East as we marked brought to the U.S. economy. We already have made some significant the eighth consecutive year of sales leadership in the region. moves to improve our competitiveness in the long term. We need to In the tough European market, our turnaround remained on track. do more – and we will. GM Europe cut its losses significantly based on good consumer acceptance of our new vehicles and strong progress on our cost- FINANCIAL REPORTING restructuring initiatives. We expect continued improvement in 2006 We also have a renewed commitment to excellence and transparency as we launch an all-new Opel Corsa and continue to expand the in our financial reporting. The recent discovery of prior-year account- Chevrolet brand. ing errors has been extremely disappointing and embarrassing to But most of the news about GM last year was focused on our all of us. North American operations, as we dealt with a dramatically changing Credibility is paramount, for GM as a company and for me per- competitive environment. sonally. While I will not offer excuses, I do apologize on behalf of our We addressed softer demand and our growing inventory in the management team, and assure you that we will strive to deserve your first half with production cuts and our successful campaign that trust. The fact is that errors were made, and we can’t change that. offered consumers the same prices that GM employees pay. Fuel What we have done is disclose our mistakes and work as diligently prices increased sharply through the year, reducing demand for some as we can to fix them. of our highest-profit trucks, and tilting our sales mix more toward We are moving aggressively to strengthen our internal accounting lower-margin cars. The devastation of Hurricane Katrina also had an resources. Going forward, we will do our best to re-establish the impact, both on fuel prices nationally and on vehicle sales. ground that we have lost, as we restore GM’s reputation for financial With our inventories now at manageable levels and several accuracy and transparency. high-volume cars and trucks being launched this year, we expect our General Motors Corporation 3
  4. 4. FINANCIAL HIGHLIGHTS (Dollars in millions, except per share amounts) Years ended December 31, 2005 2004 2003 Total net sales and revenues $192,604 $193,517 $185,837 Worldwide production (units in thousands) 9,051 9,098 8,246 Income (loss) from continuing operations $«(10,458) $÷÷2,804 $÷÷2,899 (Loss) from discontinued operations – – $÷÷÷(219) Gain on sale of discontinued operations – – $÷÷1,179 Cumulative effect of accounting change (109) – – Net income (loss) $«(10,567) $÷÷2,804 $÷÷3,859 Net profit margin from continuing operations (5.4) % 1.4% 1.6% Diluted earnings (loss) per share attributable to $1-2/3 par value common stock Continuing operations $÷«(18.50) $÷÷÷4.94 $÷÷÷5.09 Net income $÷«(18.69) $÷÷÷4.94 $÷÷÷7.20 Income adjusted to exclude Hughes Electronics and special items (1) Income (loss) $÷«(3,354) $÷÷3,629 $÷÷3,234 Diluted earnings (loss) per share attributable to $1-2/3 par value common stock $÷÷«(5.93) $÷÷÷6.40 $÷÷÷5.69 Book value per share of $1-2/3 par value common stock $÷÷25.81 $÷÷48.41 $÷÷44.31 Number of $1-2/3 par value common stock shares outstanding as of December 31 (in millions) 565 565 562 (1) A reconciliation of adjusted amounts to amounts determined in accordance with accounting principles generally accepted in the United States may be found at, Earnings Releases, Financial Highlights. Net Sales Income (Loss) from Net Profit Margin from Earnings (Loss) per Share and Revenues Continuing Operations Continuing Operations from Continuing Operations billions billions percent dollars $192.6 $193.5 $185.8 $2.8 $2.9 1.4% 1.6% $4.94 $5.09 05 04 03 $(10.5) (5.4)% $(18.50) 05 04 03 05 04 03 05 04 03 4 General Motors Corporation
  5. 5. results in GM North America to improve. But while significant progress in the world has that kind of health-care obligation. Today we has been made, we continue to focus on addressing the challenge compete mostly against foreign-owned companies whose govern- of our long-term, structural issues in the United States. ments cover much of their employee and retiree health-care and pension costs. GM’S LEGACY CHALLENGE The weight of history on our results has been significant. OUR NORTH AMERICA TURNAROUND PLAN GM has been in business for nearly a century, and in the last four In 2005, we laid out and began to aggressively implement a four-point decades, our business has undergone tremendous structural change. turnaround plan aimed at strengthening our competitive position and Vastly improved productivity, greater reliance on suppliers, and large achieving strong business results for years to come. The four elements growth in the number of competitors in our largest market have all of our plan are: had an impact. But while GM today is a far leaner, more productive automaker, we still carry a significant financial burden of the past. ● Keep raising the bar in the execution of great cars and trucks. Consider that in 1962, we employed 605,000 people around the ● Revitalize our sales and marketing strategy. world. Of those, 464,000 were in the United States, where we sold ● Significantly improve our cost competitiveness. 4.2 million cars and trucks. With only two major competitors, GM ● Address our health-care and pension legacy cost burden. reached a record U.S. market share of 51 percent. Fast-forward to 2005: GM employed 335,000 employees world- The last two points of the plan led to some difficult and painful wide. Of those, 141,000 were in the United States, where we sold decisions that involved sacrifice from virtually everyone with a stake 4.5 million cars and trucks. While last year we competed against in GM’s future: 11 major automakers from around the world, GM still led the market with a 26 percent share. ● We announced plans to cease production at 12 U.S. plants Over those 43 years, new technologies and downsizing resulted in by 2008, and reduce our manufacturing workforce by 30,000 a much leaner GM, producing more vehicles with far fewer employees. positions. But the growth of our retiree population exploded in those decades, ● By working together with the leadership of the United Auto leaving GM today with the financial weight of outsized “legacy costs” Workers, we reached an historic agreement that is expected for health care and pensions. to reduce our retiree health-care obligations by about The chart below illustrates the scope of this obligation. $15 billion. ● GM and the UAW, along with our former parts-making subsidiary, 1962 2005 Delphi Corp., reached an agreement to reduce significantly the U.S. Employees 464,000 141,000 number of hourly employees in the United States through an Hourly Pension Plan* 31,351 337,588 accelerated attrition program. Salaried Pension Plan* 8,885 115,762 ● We announced that GM will cap the company’s contribution Total Health Plan Recipients** 1,360,000 1,075,000 to salaried retiree health-care costs at the end of this year, reducing that obligation by almost $5 billion. Stated another way, for every active GM employee in the United ● We announced plans to significantly modify pension benefits States last year, GM supported 3.2 retirees and surviving spouses. for our salaried and executive employees, to further reduce Back in 1962, the employee/retiree ratio was reverse: GM had GM’s financial risk and cost. 11.5 active employees for every retiree or surviving spouse in our ● We voluntarily reduced salaries of our top executives – including pension plans. 50 percent for me. Our Board of Directors also reduced their GM’s health-care bill in 2005 – for every U.S. employee, dependant, compensation by 50 percent. retiree and surviving spouse – totaled $5.3 billion. No other company ● We reduced our dividend by 50 percent. * Number of U.S. retirees and surviving spouses who received pension plan benefits **Est. number of U.S. employees, dependents, retirees and surviving spouses covered by health benefits General Motors Corporation 5
  6. 6. Combined with our target to reduce net material costs by $1 billion, At the same time, we are absolutely committed to trend-setting these actions are expected to result in annual cost reductions totaling design for all of our brands around the world. $7 billion on a running rate basis by the end of this year, with $4 bil- The evidence of that commitment is already on the road: The lion of that reduction to be realized during this calendar year. That’s a Pontiac Solstice (on the cover), Opel Astra, HUMMER H3, Chevy HHR, huge move – and it’s needed. Saturn SKY, Buick Lucerne and Cadillac Escalade are all great examples It is important to note here that these cost reductions will not of our design talent. The Chevy Camaro and Saab Aero X concept cars affect our aggressive product development plans. We continue to have been among the hits of this year’s auto show circuit. invest heavily in new cars and trucks, recognizing that only success- Even some of our toughest critics now acknowledge the excellent ful new products will put GM back on a path toward sustained craftsmanship, features, innovations and design built into our newest profitability and growth. cars and trucks. Our challenge is to get that word out to consumers The plant actions are designed to reduce GM North America’s who may not have considered a GM brand in the past. assembly capacity by about 1 million units by the end of 2008, in We’re also continuing to make significant progress in quality. addition to the previously implemented reduction of 1 million units In last year’s well-respected J.D. Power Initial Quality Study, the top between 2002 and 2005. This should bring GM to 100 percent or three auto assembly plants in North America were GM plants. Buick more capacity utilization by 2008. and Cadillac both placed among the study’s top five brands, ahead In addition, GM’s U.S. salaried workforce (including contract staff) of such well-known brands as Honda, Acura, Nissan, Infiniti, has been reduced 33 percent since 2000, or an average annual rate Mercedes-Benz and, yes, Toyota. of about 7 percent. We expect to continue to reduce our salaried staff- We won’t be satisfied until all our brands are high on that list. ing levels at approximately this rate in 2006, bringing our cumulative But there is no disputing that the quality of GM’s cars and trucks has reduction to 38 percent from 2000 levels. improved significantly over the past decade. There’s more work to be done to reduce costs in the months ahead – with our union partners, our employees and our suppliers. But, clearly, GM TECHNOLOGY & FUEL EFFICIENCY we are addressing the global cost-competitiveness challenge. We continue to put significant resources into technology, particularly in improving fuel efficiency. This is an area where we have a good GROWING GLOBAL REVENUE story to tell: As important as our cost-reduction efforts are, we know that’s only half of the equation to return GM to profitability. We’re also gaining traction ● GM offers more products in the United States with an EPA on the other half of the equation: growing revenue around the world. highway rating of 30 miles or more per gallon of fuel than Despite our financial challenges, we actually increased our capital any other automaker. expenditures by about $1 billion to a total of $8 billion last year. Nearly ● GM is a leader in flexible-fuel vehicle production and sales, all of that was invested in new products. We plan to maintain a heavy with more than 1.5 million flex-fuel vehicles already on the road. commitment to spending on new products and technologies this year. We have nine models that are E85-capable, which allows these We also continue to make progress toward our goal of globally vehicles to run on ethanol fuel. And, we have plans to add more integrating our product development, engineering, manufacturing than 400,000 E85-capable vehicles to our fleet in 2006. and planning organizations. In doing so, we are starting to realize ● In addition to our very successful GM Hybrid Bus, which improves the economies of scale that a company the size of GM should. fuel economy by as much as 60 percent, we introduced a light We are leveraging all the skills of our design and engineering staff hybrid system on our full-size pickup trucks two years ago, which to provide more and better products to support each of our brands, we’ll offer in all 50 states this year. while basing them on significantly fewer global vehicle architectures. ● We’ll introduce a highly efficient, low-cost hybrid system on Our integrated product development approach also is designed to the Saturn VUE Green Line – a hybrid SUV that will cost less reduce product lifecycles, increase productivity and improve quality. than $23,000. 6 General Motors Corporation
  7. 7. ● Next year, we’ll offer our next-generation, two-mode hybrid system with the goal of strengthening its credit rating and renewing its access on our large sport utilities, starting with the Chevy Tahoe and to low-cost financing. If this occurs, we would plan to retain GMAC’s GMC Yukon. This is a sophisticated hybrid powertrain derived strategic support of our automotive business by retaining a significant from the system we use in our transit buses. We are developing interest in GMAC, and implementing a long-term operating agreement it in partnership with DaimlerChrysler and BMW, and we’re con- to continue to provide these services to GM dealers and customers. vinced it will become the industry standard for hybrids. With our GM also was involved in important discussions with Delphi Corp. partners sharing development costs and spreading them over a and the United Auto Workers on issues surrounding Delphi’s Chapter 11 larger volume of products, we expect significant savings. restructuring. We are pursuing an agreement in the best interests of GM and its stockholders, and that enables Delphi to continue as an While these are great solutions to help reduce emissions and important supplier to GM. improve fuel economy over the near-term, we continue to commit significant resources in the development of hydrogen fuel cells. We THE CHALLENGES AHEAD realize that there’s no shortage of skeptics of hydrogen propulsion. We recognize that our stockholders have shared the pain as GM has But we’ve been working hard at perfecting this technology for years, struggled over the past year. We appreciate your patience and advice, and we’re making significant progress toward our goal of manufactur- and we are committed to making your investment in General Motors ing a commercially viable fuel-cell vehicle. a profitable one. Another example of GM innovation is OnStar, the in-vehicle safety, Transforming GM to compete in this new global economy is a security and information service that no other automaker has been daunting task. But it also provides us with an opportunity to lead this able to match. OnStar continues to add to its long list of services great company into a new era of growth and success in providing the that delight GM owners, such as OnStar Vehicle Diagnostics, which world with innovation in transportation. Our leadership team and our runs regular diagnostic checks on your car or truck and sends you employees around the world are energized by this challenge. an e-mail with the results. By taking the necessary measures today to reduce our cost structure and grow our revenue, we are doing exactly what is needed REVITALIZING SALES AND MARKETING to position GM for success. Outside North America, we are well-posi- Another key element of our plan to grow revenue is revitalizing our sales tioned to take advantage of our industry’s future growth opportunities. and marketing strategy. We’re putting great emphasis on building and I am confident that we’ll emerge from these challenging times differentiating each of our automotive brands around the world, and stronger, smarter, and a better global competitor. accelerating our drive for consistent, world-class distribution networks. In the U.S. market, we’re renewing our focus on major metropolitan We will succeed. markets, like Miami, Los Angeles and New York, where we have under- performed in recent years. Earlier this year, we announced an unprecedented reduction in sticker prices in the United States – an average of $1,300 per vehicle, Rick Wagoner affecting most of our cars and trucks. It was the biggest step yet in Chairman and Chief Executive Officer our strategy of fewer incentives and lower prices every day. Detroit, Michigan The lower prices have given consumers a compelling reason to try our new vehicles, and it’s working. PENDING ISSUES As this report was going to print, GM was exploring the possible sale of a controlling interest in our financial services subsidiary, GMAC, General Motors Corporation 7