The Future, if any, for General Motors

George Will with some sobering thoughts on General Motors (GM).

General Motors took an interesting turn on Monday. It is going back into the automobile business.
Granted, GM has always been in that industry, but it has also become the nation’s largest private purchaser of health care. This supposedly secondary role has become primary.
GM has been forced to allow product development, pricing and other decisions to be driven by the need to keep sufficient revenue flowing in so it can flow out in fulfillment of GM’s function as a welfare state. GM provides $5.2 billion in health care annually — more than Harley-Davidson’s revenue — to 1.1 million workers, retirees and dependents. Retirees outnumber current U.S. employees 2.5 to 1. The $4 billion that goes annually to retirees does not go into developing products people want to buy.

For several decades, the government has outsourced social welfare programs on the backs of corporations. The problem is that corporations are far more fragile than its detractors assume. Many of the blue chip names of a generation ago no longer exist.

Shortly before Monday’s announcement that the UAW agreed to trim GM workers’ and retirees’ benefits, Delphi, the auto parts company that GM owned until 1999, sought bankruptcy protection. Under terms of the 1999 separation, GM may be liable for up to $12 billion of Delphi’s pension and health care benefits, which would offset GM’s gains from the UAW concessions.
The bankruptcy of Delphi is another pebble — a big pebble; Delphi has 185,000 employees worldwide, 33,000 of them unionized Americans — in an accelerating avalanche of corporate decisions dismantling “defined-benefits America.” As a result, intergenerational strife, which has long been anticipated, may at last be at hand: Delphi proposes cutting the compensation — pay and benefits — of younger workers from $65 per hour to $20 or less, so it can fulfill the promise to retirees of a fixed percentage of their salaries.
Robert “Steve” Miller, Delphi’s chief executive, minces no words, telling the Wall Street Journal that defined-benefit programs are imprudent anachronisms: “The notion of having all your retirement eggs in one basket — your employer — is a concentration of risk that is simply inadvisable for anyone in today’s fast-moving economy.” He calculates that a competitive American industrial compensation cost is about $20 an hour. And to get to a total compensation cost of $20, including health care, retirement and workers’ compensation, “which is high in the states we are in like New York, Ohio and Michigan,” you have to have a basic hourly wage of $10. Pay at Delphi’s plants in China is roughly $3 an hour.

Daniel Gross at the Slate.com thinks that the UAW deal doesn’t go nearly far enough. As he sees it, GM is corned with no way out.

GM has a pathological need to produce and sell cars—even at a loss—because it needs the revenues. For decades, GM has fought a vicious—and losing—battle against domestic and foreign competitors to maintain its once (and still) leading market share in the all-important North American market. In recent years, GM’s leadership has repeated the mantra that if GM could only retain market share in the short-term, many of its long-term problems will go away.
A company that has high structural costs, pays a healthy dividend, and has made large investments in infrastructure needs to have all its factories running to the fullest extent at all times. A strike, even for a week or two, would prove devastating. It would halt production and screw up the just-in-time delivery system. Some dealers would have fewer cars to sell, or lose out on expected sales. Rivals would rush to capitalize on GM’s woes by offering incentives. And as the last few decades have shown, once GM’s customers go elsewhere, they tend not to return. GM wants a 28 percent market share in North America, but it’s down to 26.1 percent so far this year. A strike would drop that number even lower.

The Federal Reserve is often described as the lender of last resort. I have a feeling that in the near future, the federal government will be the car marker of last resort.

Posted by on October 20th, 2005 at 11:03 pm


The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.