General Motors May Be Worthless
Kurt Brouwer November 10th, 2008
You’ll see plenty of stories about GM’s troubles and about a potential government loan or bailout. But, what you won’t see in most articles about the company is a succinct demonstration about why GM is close to failure.
However, in our effort to give you insights into the truth behind the headlines, we present the following chart which shows the average hourly rate for U.S. workers at GM, Ford and Chrysler versus Toyota and across the spectrum of domestic goods producing industries. In addition to management problems, quality problems and other issues, GM is stuck with very high cost production labor as you can see below:
Source: Carpe Diem
Due to very strict contracts with the United Auto Workers union, the Big Three automakers (GM, Ford, Chrysler) are saddled with labor costs that are roughly 50% higher than Toyota is paying workers at factories here in the U.S. In addition, there are silly requirements such as the Jobs Bank that requires the Big Three to pay workers that are not even working.
Having grown up in Michigan, I can attest that the U.S. auto makers have had plenty of bad management decisions and design and quality problems so it is not enough to suggest that all problems stem from ultra high labor costs. In fact, Toyota generally has significantly higher quality and customer satisfaction ratings than GM or Ford or Chrysler.
Politically speaking, after the November 4 election, a bailout may be inevitable. But, bailing out GM would be a mistake in my opinion. First, a bailout won’t work unless GM changes the cost structure shown above and the bailout plan being discussed says nothing about amending the union contracts. Second, why should Americans (who generally make far less than autoworkers make) be asked to pay taxes in order to preserve the jobs of overpaid autoworkers?
Update: David Gaffen at the Wall Street Journal’s MarketBeat Blog points out that GM is approaching the point at which it could get taken out of the Dow Industrials Average [emphasis added]:
The Dow industrials had a lackluster session, falling 73 points. Leading the way in terms of percentage was General Motors, which fell 23%, accounting for a whopping nine points of the decline. Earlier in the day Deutsche Bank put a $0 price target on the automaker, and the stock has approached the point where such a decline would barely cause a blip in the Dow 30. Were it to give up its remaining $3.36 a share, the drop would account for 26 points of negative drag on the Dow.
…The situation is not improving for the company, as Deutsche Bank analysts noted. They estimate that even with a sharp reduction in costs and a large package of loans, the company will still burn cash, projecting a break-even point when the U.S. seasonally adjusted annual rate of auto sales recovers to about 15.5 million — and it only projects about 14 million by 2010. “We would expect GM’s brand/distribution structure to remain a significant competitive disadvantage, likely leading to ongoing market share losses in the years beyond 2010,” they write…
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“Second, why should Americans (who generally make far less than autoworkers make) be asked to pay taxes in order to preserve the jobs of overpaid autoworkers?’
This is a good question. I would also like to know why Americans should be asked to pay taxes to perserve the jobs of overpaid investment bankers?
It’s easy to criticize the unions but when I hear about executive salaries which are so much more and the bonuses they get for driving their compaines into the ground I can’t really hold the unions up for special criticism.
The auto companies won’t disappear if they file for bankruptcy, they will reorganize so the disruption to the economy will not cataclysmic.
However it also depends on what the bail out would be. Loans that would be repaid with interest would return income to the tax payers (if they are really repaid). So I’m not totally against that type of bail out if the companies can get back on a profitable track.
On the other hand I don’t really have a lot of sympathy for the car companies because they already had the experience of having their gas guzzlers stop selling when the price of gas went up in the 70’s. There have been lots of recessions in history so why are they unprepaired for this one?
If the real problem is that the car companies can’t get loans to tide them over due to the special circumstances of the banking crisis then it might be reasonable for the govt to step in and be a lender.
SBV…
Taken together, your comments and Adam’s above actually make the point I was covering quite comprehensively. This is a rapidly changing and volatile business climate, so companies needs to make changes as needed. There are winners — and losers — in this environment.
The problem with making loans to GM and other car companies is that, at least in GM’s case, it almost certainly won’t be able to repay the loan. Credit is not that tight for solvent companies, but for nearly insolvent companies, it’s nonexistent.
As the chart showed, GM is operating at a huge competitive cost disadvantage. If it’s management practices were perfect and employees were highly motivated and very productive, the company would still be struggling because of the labor cost differential.
As someone who grew up in Michigan in the 1960s early 1970s, I can attest to the fact that the Big Three companies put out very poor products and relied on their near monopoly to carry them through. But then, Toyota, Honda, Mercedes, VW and many more overseas car companies took advantage of that opening and gave Americans cars they wanted. It’s been downhill for the Big Three ever since.
Unfortunately, management and labor just never got the message.
This is one thing I do not understand. Why, even for union jobs,
isnt it part of the deal to structure wages according to the actual
performance of the company?
Otherwise a company bound by union contract to pay workers more than it can afford can end up bankrupt and those workers will be out of jobs, in a case of killing the goose that laid the golden eggs.
And…I am writing this as the great grand daughter of a guy who union organized for Knights of Labor and ended up blacklisted, and the daughter of a mom who did union organizing at Monkey Ward in the late 1930s, back when all the ladies asked for was half an hour for lunch instead of 20 minutes for lunch, and two 15 minute breaks, rather than just one.
Even Mom was convinced that by the 1970s, the unions had become, in far too many cases, greedy and corrupt.
Very strange. You’d think that the gas shortages of the 1970s wouldve taught the GM executives the necessity of creating well performing, fuel efficient automobiles.
I cannot recall whether it was in the Sunday NY Times or the Monday edition, but in the business section, someone mentioned the work of a Yale social psychologist named Irving Janis, who identified a trend by which groups or committees engage in riskier behavior as a group than individuals do, and termed the phenomenon ‘groupthink.’
This may have been going on at GM, as well as at Greenspans Fed and at Enron.
It is interesting that even Greenspan has recently admitted that his ideology (partly derived from Ayn Rand) was, in the long run, not realistic. No idealogy ever is.
December Baker — Good points. I also grew up in a union family. My Dad was a member of the Teamster’s Union and he was the shop steward for his company. Unfortunately, today union work rules and pay scales are inflexible. As you point out, they also do not adjust for the quality of work someone does.
SBV…made the point above that GM executives have already experienced once gas crisis, so they should have figured out how to produce efficient cars. And, in all fairness, their cars are better and more efficient in many ways than the equivalent car was 20-30 years ago. But, the GM cost structure is so high, they cannot make money producing small cars so they focused on making bigger, more profitable models.
Let Exxon/Mobile buy GM. After all, GM’s customer products use more of E/M’s product than any of GM’s competitors.
Good idea Mike. Unfortunately, I doubt if they would want it.
Awesome post! I love stuff like this