Forbes: Saving General Motors

[Perian]

From the 03/14/05 issue of Forbes magazine:

Let's say we reduce the share of benefits paid by employers and increase the share paid by the government. Can Detroit win public support for this?
General Motors, Ford Motors and Chrysler (which I believe will someday be spun off and become American again) will survive and--someday--prosper. Not next week, but someday they will be strong again. Even GM, even after $2 billion paid for the incredibly wasteful Fiat payoff. In the meantime, however, we have a lot of people wondering out loud whether the Detroit companies, General Motors in particular, can survive. So it's reasonable to ask if the American government would allow its largest manufacturer, the employer of hundreds of thousands of people, to fold. That could start a recession all by itself.

Remember when Chrysler faltered? The Carter Democrats fashioned a loan guarantee program, which the Reagan Administration then put into effect. The Reaganites made one last-minute change, demanding stock warrants; those paid off, with a $311 million profit to the U.S. Treasury.

Chrysler was at the edge and didn't have nearly the resources of General Motors. But it did have a charismatic leader, Lee Iacocca, who turned Chrysler into a fighting tiger and won the heart of America.

If the nation was willing to save Chrysler, wouldn't it be willing to help GM? Especially since some of the problems aren't exactly GM's fault. Such as:

GM has been in business a long time, meaning it has lots of old workers and retirees, which means doctor bills and pensions. If it had started 15 years ago, it wouldn't have this problem. GM has an $86 billion pension fund. Imagine if just half of that could be spent on developing new cars or engines. Toyota has only a handful of U.S. pensioners, and its fund doesn't drain the company.

As for doctor bills, GM spends more than $5 billion a year now for 1.1 million workers, retirees and dependents. That's $2,000 a car that could be profit but isn't. I think it's why GM brings out new cars with four-speed automatic transmissions when others offer five-speeds. The development money goes to chiropractors.

You could blame all the Detroit carmakers for being too generous with pensions and medical benefits. They were. But I was a labor writer when those contracts were written, and the unions won the public to their side back then. I still remember the UAW pension slogan: "Too old to work. Too young to die."

Next you've got those special tax-free deals that states signed to woo foreign manufacturers--ten years without local taxes on new plants, while the Detroit automakers pay millions of dollars in local taxes on their old plants.

And then there's the currency game that Japan and Korea have been running for years, keeping their currencies undervalued against the dollar to hold their car prices down. The recently falling dollar has corrected this problem to some degree, especially in Europe. But the correction is coming slowly. The weak dollar forces a European exporter like Mercedes to postpone exporting small, low-price cars to the U.S., and all the European exporters are trying to hold down price increases, which crimp profit margins, cutting into money that would go to product development. But it takes years to see the effect.

Yes, you may blame management in Detroit, too. Too many executives didn't care about cars or trucks or even know much about them. They didn't even like the business, their dealers or their customers. They signed the giveaway union contracts that are so ruinous today.

But even if all the blame went to Detroit's managers, would we just kiss off an industry? Remember, this country is still a wonderful place to build cars. Foreign manufacturers are expanding here all the time.

So what's to be done? Some things to think about:

Persuade Asian central banks to raise the value of their currencies against the dollar. Could we--should we--do it?

Raise tariffs. Should we? Could we, without risking retaliation?

Reduce promised worker and retiree benefits. Or reduce the share of benefits paid by employers and increase the share paid by the government. Can Detroit win public support for this shift of burdens?

All this would take enormous will and leadership, scarce commodities today. It would take sympathy from the public and Congress, even scarcer. Too many Americans still hate Detroit for car troubles or dealer mistreatment going back decades. There's little sympathy for saving the high-paying jobs of Detroit's autoworkers. And many states now have foreign auto plants--Alabama, Mississippi, South Carolina, Kentucky, Tennessee and six more. That's a lot of senators with some interest in defending foreign manufacturers.

As I say, I expect Detroit to survive. But it's time we started looking to ways to level the playing field.

Jerry Flint, a former Forbes Senior Editor, has covered the automobile industry since 1958. Visit his homepage at www.forbes.com/flint.

[AdmiralViscen]

I'm glad that article is out there for people to read, but it's not enough. The media needs to get behind the Big 3 in the same way that it got behind foreign manufacturers.

[Globalist]

Glad to hear that business press starts reacting to GM's concerns regarding manufacturing competitiveness. More drumbeat at Washington DC, and hopefully similar articles in WSJ, BusinessWeek, Fortune, etc will follow to help build momentum.

[JVal14]

GM has been in business a long time, meaning it has lots of old workers and retirees, which means doctor bills and pensions. If it had started 15 years ago, it wouldn't have this problem. GM has an $86 billion pension fund. Imagine if just half of that could be spent on developing new cars or engines. Toyota has only a handful of U.S. pensioners, and its fund doesn't drain the company.

GM must have a had a ridiculous benefits package back in the old days. Why is it that other long standing American companies (i.e. GE, Johnson & Johnson, FORD) don't have problems like this? I'm all for goos wages and benefits, but some time the unions get a little out of hand. Why do you think American companies take their factories to Mexico and Southeast Asia? And I think if GM is going to recover, it will be on it's own. Unless it's on the brink of implosion, the government won't step in. And it can do it on it's own, but it has to recover long lost loyalty with products that aren't just equal to the foreign cars, but superior and cheaper. Crappy deal, but it has none the less.

[mgescuro]

Originally Posted by JVal14

GM must have a had a ridiculous benefits package back in the old days. Why is it that other long standing American companies (i.e. GE, Johnson & Johnson, FORD) don't have problems like this? I'm all for goos wages and benefits, but some time the unions get a little out of hand. Why do you think American companies take their factories to Mexico and Southeast Asia? And I think if GM is going to recover, it will be on it's own. Unless it's on the brink of implosion, the government won't step in. And it can do it on it's own, but it has to recover long lost loyalty with products that aren't just equal to the foreign cars, but superior and cheaper. Crappy deal, but it has none the less.

GE is a part services and part manufacturing company. And they have routinely spun off or sold off different divisions over the course of the years; therefore, they no longer own those pension obligations.

J&J is pharmaceuticals. I don't believe they have the same degree of union infiltration as an automaker. J&J's personnel woul dbe highly educated with advanced degrees for the most part.

Ford? They never reached the scale of employment that GM had. But theyir obligations are large... just not as large as GM.

The problem with GM is that they were the largest employer in the world. People were buying their cars, everyone was happy. But now with increased competition, GM cars are no longer in demand and they have excess production capacity. Unfortunately, according to UAW contracts, since about 1982 or so, people who are laid off go into a job bank for "easy recall" once the demand picks up again. Problem is, the demand hasn't picked up, and these people are still in there waiting in the wings... getting paid. Also having the largest workforce in the world means that they will also have the largest retirees in teh world. Big drawback, especially when the union demanded that GM still use their workers instead of automating the plants.

So the combination of decreasing demand, increasing costs, union shenanigans, longer lifespans, bad contract negotiations is killing GM slowly... very slowly.

GM can't control the widespread product portfolio, so it is consolidating cars, eliminating brand redundancies... which also generally results in lower sales... but GM still has to pay its workers.... retired or active.
Sucks, don't it??

I don't believe there's a whole lot of sympathy for those over-paid autoworkers. The foreign makes are doing just fine, paying the people a lower wage, and the people are happier because they are treated well and don't have the union breathing down their necks.

[Globalist]

Originally Posted by JVal14

GM must have a had a ridiculous benefits package back in the old days. Why is it that other long standing American companies (i.e. GE, Johnson & Johnson, FORD) don't have problems like this? I'm all for goos wages and benefits, but some time the unions get a little out of hand. Why do you think American companies take their factories to Mexico and Southeast Asia? And I think if GM is going to recover, it will be on it's own. Unless it's on the brink of implosion, the government won't step in. And it can do it on it's own, but it has to recover long lost loyalty with products that aren't just equal to the foreign cars, but superior and cheaper. Crappy deal, but it has none the less.

GE and GM are fundamentally different. GM is limited (or limited itself) to the cyclical low-margin automotive business with a strong finance unit (GMAC), and GE is like a well diversified portfolio. It offers so many products and services--bulbs, appliances, plastics, aircraft engines, locomotives, energy equipment, finance services, etc. So GE is less vulnerable than GM to economic cycles. And that's why Wall Street loves GE--Its market capitalization is $372 Bil compared to GM's $21 Bil.

In the past, GM tried a diversified business model but it didn't work. It was more a distraction than anything else. So GM now is B2B--Back to Basics, by refocusing on its core expertise--making vehicles. And it is struggling with decades of legacy costs and culture that won't disappear overnight. Otherwise, the company is leaner than ever--325,000 employees making almost 9 Mil vehicles worldwide. That's one of the best, if not the best, productivity (vehicle/employee) number in the industry. And I think GM is working on improving other profitability and operations ratios while improving its vehicle quality and wrestling to keep its market share. It's wild out there :-)

[tgagneguam]

I was watching (for the third time) an interesting portrait of Wal Mart on MSN last evening/early this morning, and it got me to thinking. While I am definitely not suggesting that GM treat its workers the way that WalMart appears to treat its workers, I often wonder how well GM would be doing if some of the same mentality pervaded GM as it does as WalMart.

Say what you want, but WalMart is phenomenally focused on cutting out waste and managing its inventories in realtime. And this effort to cut waste starts right at the top. When president and chairman Lee Scott travels with his colleague, CEO David Glass, they don't do the GM thing and have each exec housed separately in an expensive Marriott Hotel room (one of GM's board members is a Marriott). Not so at WalMart; Lee Scott and David Glass find $49/night rooms and bunk together! Amazing. They're the heads of the largest public corporation on the planet, with 2004 sales and revenue of $256+ billion and profits of $9+ billion. That type of mentality, for better or worse, needs to pervade GM on some level.

I'm not saying that sharing rooms is what would do much to help GM. The problems that GM face are orders of magnitude more complicated than that. But that's the mentality that I think is missing at GM; I think they could do much more to manage finite resources. And while I'm a proponent of fair wages for factory workers, I don't think that just sticking it to the folks on the shop floor is going to help GM in the longrun.

[Globalist]

Originally Posted by tgagneguam

I'm not saying that sharing rooms is what would do much to help GM. The problems that GM face are orders of magnitude more complicated than that. But that's the mentality that I think is missing at GM; I think they could do much more to manage finite resources. And while I'm a proponent of fair wages for factory workers, I don't think that just sticking it to the folks on the shop floor is going to help GM in the longrun.

I agree with you, a lot could be learn from Wall-Mart's business model, and its wages.

For Wall-Mart's executive to stay in Motels is one thing, but to lead by example and take a $12.44 Mil salary (That's Mr. H. Lee Scott, Jr salary) is another. I think it's a PR stuff. Wall-Mart is under pressure for its low wages and one way to keep troop's morale is to show top executives sharing a motel room.

[Cortazzo]

I don't really feel the situation is as dire as everyone makes it out to be. Yes, Ford and GM are losing signficant amounts of market share, but at least in Fords case, its because a lot of their old models are being phased out and they aren't selling as many cars to rental fleets, this is good for the bottom line. GM and Ford are making solid profits in Asia right now, Ford has a profitable venture in Russia, and GM is doing very well in China. The easy money they are making there should be able to support parts of their global networks.

For Ford, Jaguar is really the largest burden right now, once they correct that situation, they should start to make real and sustainable profits in their automobile division. But in order to really make money, they should take a page from Nissan's book. Base all of your cars on three platforms in the US, a small call platform, a midsize front drive and a midsize/large rear drive. For trucks, you can consolidate to two platforms, a light duty platform for everything f150 and smaller, and a heavy duty one for the big trucks. Have 3 main engines, a 4,6, and 8 in various degrees of tune.

I believe once all of the old 90's era products are phased out for good (old ranger platform, gm's 3800 and 4-speed, etc etc etc) their factories can take advantage of their flexible production systems and start building lots of derivatives for little money.

[dav305z]

I'm interested in why he thinks Chrysler will someday spin off. That would be great. As for his thesis, that the government should help fund some of the pensions, I definitely agree. The Japanese car companies have prospered in part due to assistance from their government, so why shouldn't we do it?
If anyone thinks the cost would be too great, think of the damage that would be caused if GM went out of business or even filed Chapter 11 to get out of the Union contracts. The time to step in is now.

[JVal14]

I would never suggest short changing workers, who are the lifeblood of any company (I work in Human Resources after all); in fact I don't shop at Wal Mart because they short-change their workers. And while I think blowing company money on traveling Suits is tremendously stupid and wasteful, out of control cost-cutting can be detrimental as well. And I think that GM has more of a problem with that than they do with overspending. Didn't they cut their energy expenditure by 10% over the last few years? Maybe they're blowing cash elsewhere in the company that I don't know about.

[uujjj]

Originally Posted by Globalist

GM is limited (or limited itself) to the cyclical low-margin automotive business with a strong finance unit (GMAC)

The profits made by GMAC can't really be distinguished from the automotive profits. GM's accountants move as much profit as they can from automotive to finance to minimize the amount GM pays out in profit-sharing agreements.

[Globalist]

Originally Posted by uujjj

The profits made by GMAC can't really be distinguished from the automotive profits. GM's accountants move as much profit as they can from automotive to finance to minimize the amount GM pays out in profit-sharing agreements.

I am sorry for the misunderstanding. I didn't meant GMAC limited the automotive business. Please read it as having a strong finance unit (GMAC) combined with a low margin automotive business.

[oachalon]

i have heard that gm is thinking about filing a chapter 11 because that would get rid of the 5-6 billion dollars they have to pay a year and that when they come out of the chapter 11 they would be a stronger company.

[spudglo08]

WalMart isn't all that great.Alot of people have lost their jobs b/c of walmart.Companies have went bankrupt because of walmart.I saw a documentry on WalMart on PBS.It was called is WalMart good for America.GM shouldnt be compared to walmart.GM employees get trated better than WalMarts.