Thursday, April 09, 2009
What’s to become of General Motors?
LOOKING AHEAD by Wally Dobelis
Late in March we met up with an old friend, Forrest, who in the 1970s was president of the now defunct Murray Hill Reform Democratic Club, one of the key groups that did away with the Tammany supremacy in NYC. An IT expert, now a Floridian, he had a computer solutions-oriented radio program for some years in Sarasota.
Talk came to General Motors and a solution for American automotive industry, Forrest who drives a 1995 LeBaron which he repairs himself, is also a believer in the need to keep GM and Chrysler alive, and strongly disputes the $73 GM hourly labor rate which I trotted up as a reason for US inability to be competitive in the world automotive market.
My study in 2007 showed the UAW worker hourly cost to be composed of $32 pay, $19 current benefits and $22 legacy benefits for retired workers (30%), while Toyota in the “right to work” American South paid $47 ($32 pay and $15 benefits). Our dispute was the $22 cost of legacy benefits, which Forrest found to be unsupported and a management myth. There was no dispute to the fact that years of excessive benefits, mismanagement and nod-nod wink-wink union labor contracts had sunk such industries as steel (Bethlehem and US Steel) and airlines (Eastern). Forrest had worked in a missile factory where a ridiculous yellow line on the floor marked the boundary which Union A members could not cross, and had to hand work materials over to Union B members. There was also current evidence that UAW contracts have massive featherbedding – we had heard interviews of people who complained of UAW members with no-show and sleep-in-the-stockroom jobs, of sloppy work habits, a massive proof of management neglect.
Our conclusions were similar - US cannot afford to let its automotive industry go asunder, its loss will turn us unto a 2nd class country. Apart of the pay and benefits of 65K GM employees that are UAW members (also 42K at Ford, more at Chrysler), there are some 3 million jobs dependent on the car assembly lines, in parts manufacturing, supplies, dealerships and maintenance, and the collateral industries of feeding, housing, dressing and providing education in factory towns. There are also other scary sequels, such as a GM collapse leading to the Democrats’ loss nationally. The union is well aware of the political consequences, and UAW head Ron Gettelfinger will hold off reducing the $20.4B GM has to pay into UAW’s health care fund for retired employees until banks also restructure GM’s indebtedness. The Ford union has agreed to reduce its hourly rate to $55/hr, from over $60, and to suspend inflation- driven pay increases, performance bonuses, education benefits and similar. They have also accepted partial payment of indebtedness through company stock shares.
The financials are brutal, as current news indicate. GM lost $80B in 2004-08, a reason to fire GM CEO Rick Wagoner. To make money, GM concentrated on SUVs, since small cars generate no profit considering their high labor costs. A new structure of $14-29/hr for new hires was started in 2007, too late. The company owes $63B and cannot pay current balances of some $20B. No new bank loans and investor capital are accessible. Wagoner had success in employee cutting (177K to 92K, planned to go down to 42K by end of 2009), but not in reducing unit costs by cutting hourly rates for established workers – in 2003 hourly employee cost was $18.3B, of which $5.7B was legacy (31%). The total has been reduced to $7.6B in 2008, expected to be $6.5B in 2009, $5.4B in 2010 (legacy down to under $1B, probably through mortality?). In 2014 hourly costs would be $4.8B, and legacy $100K.
Looking at the dramatic employee total pay drop, 2003 to 2008, 58%, without a change in the hourly cost rate, one wonders whether union, management and creditors are not budging because they are betting on the Obama government paying for the entire rescue, $13.4 originally, plus $16B now, and more as time goes on.
Going forward, what is the solution? Chrysler will join with Fiat. GM has agreed to reduce their brands to four, the ever popular Chevrolet, Cadillac, Buick, and GMC. Pontiac, my favorite, Saab, and Saturn, the mismanaged future hope of the industry, will be gone, as well as the ego-trip Hummer, only one seen in Stuyvesant Town, home of rational thinkers. Taking out a brand is costly, in the 1990s the Oldsmobile discontinuance cost over $2B, including legal fees in settling dealership contracts. Further, because of the laudable interchange in using each other’s platforms and components, closing out a brand such as Pontiac will stop the manufacture of not only GM but also of foreign US-built cars that use Pontiac-made parts. However, since neither UAW nor management will take the necessary steps to reduce the unit cost, it looks like GM’s recovery will have to take place via the bankruptcy route. Sorry, America.
Late in March we met up with an old friend, Forrest, who in the 1970s was president of the now defunct Murray Hill Reform Democratic Club, one of the key groups that did away with the Tammany supremacy in NYC. An IT expert, now a Floridian, he had a computer solutions-oriented radio program for some years in Sarasota.
Talk came to General Motors and a solution for American automotive industry, Forrest who drives a 1995 LeBaron which he repairs himself, is also a believer in the need to keep GM and Chrysler alive, and strongly disputes the $73 GM hourly labor rate which I trotted up as a reason for US inability to be competitive in the world automotive market.
My study in 2007 showed the UAW worker hourly cost to be composed of $32 pay, $19 current benefits and $22 legacy benefits for retired workers (30%), while Toyota in the “right to work” American South paid $47 ($32 pay and $15 benefits). Our dispute was the $22 cost of legacy benefits, which Forrest found to be unsupported and a management myth. There was no dispute to the fact that years of excessive benefits, mismanagement and nod-nod wink-wink union labor contracts had sunk such industries as steel (Bethlehem and US Steel) and airlines (Eastern). Forrest had worked in a missile factory where a ridiculous yellow line on the floor marked the boundary which Union A members could not cross, and had to hand work materials over to Union B members. There was also current evidence that UAW contracts have massive featherbedding – we had heard interviews of people who complained of UAW members with no-show and sleep-in-the-stockroom jobs, of sloppy work habits, a massive proof of management neglect.
Our conclusions were similar - US cannot afford to let its automotive industry go asunder, its loss will turn us unto a 2nd class country. Apart of the pay and benefits of 65K GM employees that are UAW members (also 42K at Ford, more at Chrysler), there are some 3 million jobs dependent on the car assembly lines, in parts manufacturing, supplies, dealerships and maintenance, and the collateral industries of feeding, housing, dressing and providing education in factory towns. There are also other scary sequels, such as a GM collapse leading to the Democrats’ loss nationally. The union is well aware of the political consequences, and UAW head Ron Gettelfinger will hold off reducing the $20.4B GM has to pay into UAW’s health care fund for retired employees until banks also restructure GM’s indebtedness. The Ford union has agreed to reduce its hourly rate to $55/hr, from over $60, and to suspend inflation- driven pay increases, performance bonuses, education benefits and similar. They have also accepted partial payment of indebtedness through company stock shares.
The financials are brutal, as current news indicate. GM lost $80B in 2004-08, a reason to fire GM CEO Rick Wagoner. To make money, GM concentrated on SUVs, since small cars generate no profit considering their high labor costs. A new structure of $14-29/hr for new hires was started in 2007, too late. The company owes $63B and cannot pay current balances of some $20B. No new bank loans and investor capital are accessible. Wagoner had success in employee cutting (177K to 92K, planned to go down to 42K by end of 2009), but not in reducing unit costs by cutting hourly rates for established workers – in 2003 hourly employee cost was $18.3B, of which $5.7B was legacy (31%). The total has been reduced to $7.6B in 2008, expected to be $6.5B in 2009, $5.4B in 2010 (legacy down to under $1B, probably through mortality?). In 2014 hourly costs would be $4.8B, and legacy $100K.
Looking at the dramatic employee total pay drop, 2003 to 2008, 58%, without a change in the hourly cost rate, one wonders whether union, management and creditors are not budging because they are betting on the Obama government paying for the entire rescue, $13.4 originally, plus $16B now, and more as time goes on.
Going forward, what is the solution? Chrysler will join with Fiat. GM has agreed to reduce their brands to four, the ever popular Chevrolet, Cadillac, Buick, and GMC. Pontiac, my favorite, Saab, and Saturn, the mismanaged future hope of the industry, will be gone, as well as the ego-trip Hummer, only one seen in Stuyvesant Town, home of rational thinkers. Taking out a brand is costly, in the 1990s the Oldsmobile discontinuance cost over $2B, including legal fees in settling dealership contracts. Further, because of the laudable interchange in using each other’s platforms and components, closing out a brand such as Pontiac will stop the manufacture of not only GM but also of foreign US-built cars that use Pontiac-made parts. However, since neither UAW nor management will take the necessary steps to reduce the unit cost, it looks like GM’s recovery will have to take place via the bankruptcy route. Sorry, America.
# posted by Wally Dobelis @ 6:43 PM 
