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| GM's Plan: Subsidize Our 48-Year-Old Retirees |
| 2009-02-19 |
| GM's new restructuring plan seeks another $16.6 billion in government aid -- for now. Chrysler wants an additional $5 billion. The $30 billion that GM has either received or requested since December doesn't count the $8 billion it wants to develop fuel-efficient cars, and another $6 billion it's soliciting from foreign governments. For these taxpayer subsidies, the government could buy hundreds of thousands of GM cars a month and give them to deserving citizens. Make mine a Corvette, please. Before deciding what to do with Detroit's demands, uh, requests, government officials first need to confront a fundamental question: How could so many smart people produce such a disastrous result? Make no mistake, there have been many bright minds in the American auto industry over the years -- at the auto makers, the United Auto Workers union, and the components companies. Most of them saw today's troubles coming for years, even decades. "I frankly don't see how we're going to meet the foreign competition," said Henry Ford II, then chairman and CEO of Ford Motor Co., on May 13, 1971, right after the annual shareholders' meeting. "We've only seen the beginning," he predicted. Regarding American's increasing preference for small cars, Henry II declared: "Mini car, mini profits." That was a couple years before Detroit agreed to let auto workers retire with full pension and benefits after 30 years on the job, regardless of their age. In practice, that meant a worker could start at age 18, retire at 48, and spend more years collecting a pension and free health care than he or she actually spent working. It wasn't long before even union officials realized they had created a monster. This is nothing new, Civil Service employees get this benefit all the time, especially Police and Firefighters workers. Plus, here in California many Police and Firefighters get disability in addition to retirement. In 1977, UAW Vice President Irving Bluestone said he was "flabbergasted" that so many workers were retiring at age 55 or younger. "We were aware that the trend to early retirement was escalating . . . but we were surprised at the escalation in 1976," Mr. Bluestone declared. "It is astounding." None of this is ancient history. The 30-and-out retirement program persists -- a sacred part of the inflated cost structure that makes it unprofitable for Detroit to make small cars in America. Another example: Every Detroit factory still has dozens of union committeemen -- the bargaining committee, shop committee, health and safety committee, recreation committee, etc. -- who actually are paid by the car companies. This is a "legacy cost" that the nonunion Japanese, German and Korean car factories in America don't have to carry. The union, though, shouldn't bear the entire blame for Detroit's disaster. It wasn't the UAW that pushed GM into the home-mortgage market where it has incurred billions in losses over the last couple of years. Nor can the UAW be blamed for Saturn and Saab, two brands that never made money, as GM executives have recently acknowledged. What they haven't explained is why their company would keep these money-losers around for nearly 20 years. So why were these problems allowed to fester, when smart people recognized them all along? The answer is that the solutions were painful, requiring not just brains but considerable amounts of courage. UAW officials weren't brave enough to risk re-election defeat by agreeing to curtail the 30-and-out plan. Detroit executives weren't about to take on the union and risk a strike that could cost them billions. GM likewise felt hamstrung on Saturn and Saab by state dealer-franchise laws, especially after they spent $1.3 billion to shut down Oldsmobile a few years ago. Perhaps the best analogy, and one that Washington will understand, is Social Security. Everybody in Congress and the White House has known for years that it's a ticking time bomb, thanks to actuarial trends and inadequate funding. But when President George W. Bush tried to reform the system early in his second term, he was handed a crippling defeat. Which brings us back to the restructuring plans proposed by GM and Chrysler, the two companies currently getting government welfare. Missing from both are concessions from the UAW to reduce the cost of health care for retirees. Ironically, union retirees over age 65 continue to receive generous, company-paid benefits, while their former bosses in management have to rely on Medicare. The companies could -- and did -- unilaterally change the health-care plans for management, but they have to negotiate changes for union workers and retirees. Other missing links include any agreement with bondholders to substantially reduce the amount of outstanding debt, which is an especially acute issue for GM. And the cost of compensating dealers for killing brands -- Hummer and Pontiac, as well as Saturn and Saab -- is likely to be substantial. GM justifies its bailout request by contending that a bankruptcy filing will cost the government $100 billion to guarantee pension payments and other obligations. But here's the thing: The total of nearly $45 billion requested so far from the Treasury Department, the Energy Department and friendly foreigners gets us almost halfway to $100 billion, even if the company doesn't request more money down the road -- which one suspects it will. Without a bankruptcy filing, the issues with the UAW, dealers and bondholders are likely to remain unresolved. The same pain-avoidance motive that has kept these issues festering for years will continue. Chrysler's plan, meanwhile, basically requires constant government subsidies until the benefits of its proposed alliance with Fiat begin to flow, at best a couple years from now. So the taxpayers are being asked to provide funds that neither Chrysler's private-equity owners nor Fiat, which would get 35% of Chrysler's stock, are willing to provide. Hello? As for the auto makers' fear that Americans won't buy cars from a company in bankruptcy, that damage has been done. In fact, bankruptcy will improve their chances of survival by relieving them of financial obligations that they can't afford. And that's just the conclusion that President Barack Obama's new automotive task force should reach. The purpose of bankruptcy -- either a plain-vanilla Chapter 11 or a special-flavor version that would require a new federal law -- wouldn't be to punish Detroit's car companies. It would be to give them a chance to survive, just as radical surgery, however painful, often saves the lives of sick patients. And as their latest restructuring plans make clear, General Motors and Chrysler are very sick indeed. |
| Posted by:GolfBravoUSMC |
| #12 #9 That would be: 1) Toyota 2) Honda 3) Nissan |
| Posted by: Woozle Elmeter 2700 2009-02-19 21:35 |
| #11 Put engineers in charge. The sales and finance people work for them, not the other way around. Wow! That's revolutionary talk. Does any company, anywhere do that? Sun Microsystems, and HP (during the time of Bill and Dave). |
| Posted by: DMFD 2009-02-19 19:15 |
| #10 while sales and finance would be sh*t without the engineers, I'm not sure you'd want us engineers in charge. F'rinstance, there's be a lot less sales and finance staff as the well-designed products would sell themselves, quality-wise, and do we need that many more unemployable people out on the street? |
| Posted by: Frank G 2009-02-19 17:58 |
| #9 Put engineers in charge. The sales and finance people work for them, not the other way around. Wow! That's revolutionary talk. Does any company, anywhere do that? |
| Posted by: Ebbang Uluque6305 2009-02-19 17:54 |
| #8 Sea, thanks for the links. |
| Posted by: Steve White 2009-02-19 16:37 |
| #7 how many of those retirees are working under the table, rather than volunteering at the nearby elementary school? Quite a few....quite a few. Lots of 'cash work' in the rural parts of the world. Volunteer at a school (unless it's for their own child for an hour or two a year)? No, that's 'doing the government's job'. Very sad. |
| Posted by: Mullah Richard 2009-02-19 15:33 |
| #6 Put engineers in charge. Please, no! I love engineers dearly, as y'all know, but engineers spend money like water on developing really neato cool new stuff if not focussed tightly on making something both appealing to the customer and profitable. Put a marketing guy in charge, with an engineer at one elbow and a really sharp purchasing guy at the other elbow. Explain to the unions that the old job classifications game is over, if they want the company to stay open 'til Christmas... and if not the entire union's last paycheck will be dated Friday, with a few individuals being called in for interviews on Monday. "The list has already been written out, I'm afraid, and won't be modified." Dr. Steve's recommendations for right-sizing the company sound reasonable to me, but I'm not really qualified to judge. Mullah Richard, how many of those retirees are working under the table, rather than volunteering at the nearby elementary school? |
| Posted by: trailing wife 2009-02-19 15:08 |
| #5 The Curse of the Opel, Part 1 (Companion piece to the link above.) |
| Posted by: Seafarious 2009-02-19 14:52 |
| #4 Re: Saturn The unions killed Saturn. I'm sure you're surprised. The production lines were set up like Toyota/Honda, but union intransigence ultimately brought Saturn back into the swamp: The Plot To Kill Saturn is Working (April 2001) |
| Posted by: Seafarious 2009-02-19 14:47 |
| #3 Coming from an area that has a good number of the "48 year old retirees", when you ask them if they're getting another job (full-time or part-time) after retirement, the answer is inevitably "No, that will screw up my benefits". |
| Posted by: Mullah Richard 2009-02-19 13:36 |
| #2 Shame about Saturn. I owned a Saturn SL2 for ten years and the first nine were great. That last year was a tough one. The whole point to Saturn was to have it teach GM to build cars the Toyota way. It initially worked; cars like the SL2 and L300 were pretty good. Then GM lost its focus (not a new problem there) and decided that Saturn would sell re-badged GM cars. The Vue (piece of junk up until last year), the Relay (mega-suck), the Ion (just a re-badged Cobalt which sucks) and the Aura (just a Malibu). It was nonsense. GM blew it with Saturn and now Saturn is unnecessary. Fold Saturn and Buick. Sell Saab and Hummer. Unload everything that doesn't have anything to do with building cars and trucks. The new divisions, as I would do it if I were in charge: Chevy: cars and trucks for working people Pontiac: upscale sporty cars for young people with money Cadillac: upscale larger cars for middle-aged and older people with money GMC: trucks in a separate dealer chain That's all they need and all they can do right now. Re-size the corporation accordingly, remove the 30 year clause, let the union pay their own representatives, eliminate the work rules and the multiple, multiple job classifications and feather-beddng, and unload the many layers of middle management that paralyze the company. In return guarantee the union that the basic hourly wage rate will remain and that health care benefits will be equal to that of the workers at Toyota USA. Let the engineers be engineers. Put engineers in charge. The sales and finance people work for them, not the other way around. Tell the bondholders that they'd better accept 17 cents on the dollar in a debt for equity swap because otherwise their bonds are going to be worth zero. Tell the shareholders that they'd better be prepared to be wiped out. Tell the retirees that things are being scaled back: their medical care will be Medicare plus some gap coverage and their pension will be SS plus a stipend over that. And remove the upper management as conditions allow. They need new blood. |
| Posted by: Steve White 2009-02-19 12:57 |
| #1 R.I.P. Saturn & Hummer and in intensive care Saab & Pontiac The Wall Street Journal is reporting that, "Saturn dealers are planning to spin off from General Motors Corp. into a new company that will seek to sell third-party vehicles under the Saturn brand, according to Dan Januska, the owner of Saturn of Scottsdale. Under the new plan, Mr. Januska said, Saturn dealers would be open to selling vehicles made by Indian or Chinese manufacturers that would be sold as Saturns. "There are not a whole lot of alternatives," said Mr. Januska, who is on the Saturn Dealer Council. "Someone is going to see the value of us and I don't know who it will be." |
| Posted by: ed 2009-02-19 12:21 |