Generous Motors – Bumped

This post was one of the first at TOC. I linked to it yesterday, and on reflection thought it deserved more prominence.

From Paladin, March 27, 2005:

Did you read the good news regarding GM this past week?

Of course we all heard and read plenty of bad news on the subject of GM. The catalyst was the March 16th announcement by GM that it would post a loss of some $850 million in the current quarter. It went on to say that profits for the full year would be much less than previously thought and cash flow for the full year would be negative. The debt rating agencies like Standard and Poor’s reacted swiftly, posting a negative outlook on GM and threatening to reduce its credit rating to “junk” status. The stock market reacted severely, as well, marking the shares down 17% on the week. General Electric Capital poured salt in the wounds on the 21st by canceling a $2,000 million credit facility.

And the reaction in the press has been universally tough. Just about every writer with an editor or a blog has now registered their opinion of how GM has been mismanaged and/or what GM needs to do going forward.

Highly respected news organizations like Barron’s, The New York Sun, The Financial Times of London, and Forbes have weighed-in mightily. Under the heading “The General Motors Mess” Jonathon Laing in Barron’s outlined a draconian seven step plan and suggests that if not accomplished GM “might have no alternative but to enter Chapter 11”. The Sun agrees in a well-reasoned editorial stating “unless GM manages to change its underlying cost structure, it will be forced into bankruptcy”. John Gapper in the Financial Times writes that GM CEO Rick Waggoner has “lead GM to a calamitous state”. And venerable auto industry observer, Jeremy Flint, writing in Forbes under the headline “GM, It’s Worse Than You Thought” states “GM seems to be in a state of organizational chaos.”

Some of the hail of arrows miss the mark or were launched from bows aimed long ago. On MSN Money Peter DeLorenzo re-makes some cogent arguments, but puts the overall blame on GM’s management for cheapening its brands with rebates and incentives. He suggests a reduction in the number of models, nameplates, dealers, and divisions. As good as such advice might be from a marketing standpoint, it ignores the underlying fundamental economic problem. Unless a company has some other sustainable competitive advantage, it must be a cost-leader in order to prosper. And GM is anything but a cost-leader.

Imagine that you run a company which pays its workers a 100 gold coins per week for building cars, but that you are required to pay these same workers 95 gold coins per week for staying home or going fishing. With ground rules such as these, who could blame you if you felt obligated to keep the factories humming by offering incentives to potential buyers. That is the situation that GM finds itself in after tuning over the company to the UAW a decade ago.

But it is even worse. Imagine that you also have to pay retirement benefits and health care costs for two-and-one-half retirees for every worker. And what if the number of these retirees is reflective of days when your company market share was 40%, but that now it is only 25%. And suppose further that the health care costs are rising at astronomical rates. And just to really make it challenging, suppose your foreign competitors have no such demographic and social economic disadvantages. Now are you going to fight for market share, or not? GM can trim its excess brands, dealers, and so forth, but this does nothing to stem the rising costs of supporting all the retirees. The pensions and the cost of medical care, now $1,600 per car, would simply be spread over fewer vehicles sold.

The UAW used its monopoly power to win wages, benefits, and pensions for its members that were beyond what could have been supported in a free market. And who can blame them? The auto companies, for their part, bought peace with the UAW by giving away the store, no doubt influenced by some poor assumptions regarding future medical costs.

Now all are threatened. The companies’ face the threat of bankruptcy. Current worker’s jobs are threatened. And the retiree’s pensions and benefits are at risk of disappearing.

So where is the good news?

All four of the big influential publications mentioned earlier, along with many others, now argue that something needs to be done about the cost disadvantage that U.S. manufacturers are saddled with. Recognition of this underlying economic problem is a necessary first step to fixing it. Perhaps now both the companies and the UAW will summon the political will to solve this long-term problem.

Either something is done to reduce the costs of GM and other UAW manufacturers or everyone loses – and loses big.

3 thoughts on “Generous Motors – Bumped”

  1. *QUOTEThe companies’ face the threat of bankruptcy. Current worker’s jobs are threatened. And the retiree’s pensions and benefits are at risk of disappearing.*ENDQUOTEReminiscent of another debate. There are several place where “US Government” and “entitlement blocs” could be substituted for GM and UAW respectively, without changing anything else.Let’s hope GM and the UAW can solve this problem, and that the Feds can take it as an example; especially the spend-and-spend Republicrats in Congress.

  2. After we finish (actually, not finish, just drop dead mid-sentence after repeating our political mantras to the point of terminal frustration) espousing our particular logic-speaks, one way or another reality will club us (or our corpses), just as it did Lansing-GM-UAW. The problems are so interconnected, that no entity (labor, management, government, shareholders) can construct a solution in isolation. To make private entities (employers) responsible for public good (read, health of individuals who happen to be employees) inevitably leads to either non-competitive circumstances in a world market (or mandatory pulling of the plug at about age 40). To make unions give up their leverage (when employers are arbitrarily violating the very moral contracts they made to provide health insurance to retirees), asks them to have a long term view (anathema to a political entity which the UAW et al is). To permit government to frame such issues as labor-management problems allows them to not have to really come to grips with what the notion of “health, safety, and welfare” means when it comes to its role.And in such circumstances, history would suggest the problem is “solved” on the backs of those who are least able to defend themselves. Being a retiree in Ft. Meyer’s doesn’t sound so great these days, what with the allergy and hacky cough seasons just around the corner. . .JPM

  3. The way for the solution to be constructed is, indeed, not in isolation. It lies in the actions of a market which GM, the UAW, and the Government have subverted. Not that they didn’t have the typical good intentions…A contract is only of value (moral or otherwise) to any parties so long as all parties retain the basic means to fulfill its terms. So the question of “moral” here seems a semantic distinction designed to convince my government that it needs to force me to correct bad decisions made freely and jointly by two other parties. Thanks, anyway, but I didn’t sign that particular contract. I would never have agreed to pay strangers 95% of their normal wage when there was no work for them. It’s bad enough that it has raised the cost of my cars and damaged my local economy. Who do I sue about that?I certainly have no legal, ethical or moral responsibility to GM or to UAW members for guaranteeing their contracts. I suspect the government will hand me my share of the practical results, nonetheless.It is true that labor, management, stockholders and government are in for trouble if the contracts cannot be fulfilled. But, if morality is defined by contracts which are destroying the value of the jobs, the retirement funds of little old lady stockholders, and the tax revenue that supports Government services, maybe we’ve got the definition of “moral” wrong.In fact, permitting the government, GM or the UAW to frame such issues, without consequence, is exactly the problem. They, collectively, created the problem. And while we can hope, as did Paladin, that they’ll summon the will to clean up their own mess, we can doubt it will happen so long as they can all point at us and say “morally, you need to rescue us.” The word for this is “looters.” Its true that in the distorted market that it is hard to see how people will get along without the government’s “largesse”. However, consider an alternate history where individuals had maintained control.