More Retirees Than Workers In Domestic Car Companies
Kurt Brouwer November 22nd, 2008
In this chart, we see graphically one important factor in why the Big 3 domestic car companies are struggling so much. They have more retirees than active workers. That trend will continue as the auto companies downsize. Clearly, this is situation cannot be maintained for long.
I was listening to a radio program while driving the other day. One of the callers was a retired auto worker who mentioned that he has been receiving a pension for more years than he actually worked at the company. He’s probably unusual, but the trend toward longer life spans has added to the burden of auto companies that promised a pension for life along with lifetime health insurance. I hope we can figure out a way to ease the burden for retirees in this process, but this is a topheavy situation that cannot last long.
As an analogy, does anyone think that Social Security could be maintained with four people on Social Security for every worker paying in? Currently, we have about three paying in for every retiree on Social Security and even that 3 x 1 ratio is a bit dicey, much less 1 x 3.
Source: Carpe Diem
In my opinion, the best solution would be for the Big 3 to file for bankruptcy (Chapter 11). This would allow them to make drastic changes such as getting rid of the current senior executives, eliminating duplicative dealers, cutting back on duplicative car lines (Oldsmobile, Pontiac, Chevrolet etc.), changing onerous work rules and overly generous labor contracts and so on. Filing for bankruptcy does not mean they shut down nor does it mean they lay off all their workers. Rather, it means the bankruptcy court supervises the company’s reorganization and is given broad latitude to change or even cancel contracts. This gives the company in Chapter 11 bankruptcy breathing room to restructure its business.
To those who think no one will buy a car from a company in bankruptcy, I can attest that most Americans have flown at one time or another on a bankrupt airline. I regularly flew on United when it was in bankruptcy and I also flew on Aloha when it was in bankruptcy. The maintenance of a large jet is quite critical to passengers yet we all seemed to have faith that maintenance would be handled. I think the same would be true of service contracts and warranties for cars.
Update: The New York Times editorial board puts forth its point of view in this editorial:
…Michigan’s three car manufacturers have said that they would go bankrupt this year without an infusion of taxpayers’ money. Failing to provide it would be a truly irresponsible act that could obliterate one or more companies, potentially causing other bankruptcies and costing many hundreds of thousands of jobs.
Unpalatable as it seems to underwrite the proven record of failure of Detroit’s automakers, Congress must provide sufficient money to shore them up until the Obama administration takes office. Then, the new president and new Congress can decide how to manage either a rescue package with tight strings attached or a bankruptcy process that ensures the fallen companies have a reasonable shot at picking up the pieces.
In this section above, the NYT advocates an immediate government loan or bailout that gives these companies time for…something. I really don’t disagree with this, but I have very little faith in the desire of the senior executives or the unions to make the necessary changes. This stopgap loan may be necessary, but it just kicks the can down the road a bit.
I do agree fully with the following:
Bankruptcy proceedings are designed to allow ailing companies to be restructured into profitable businesses, but that is by no means guaranteed - and it requires infusions of credit.
…To get America’s carmakers back on their feet, difficult choices will have to be made - including cutting labor costs and the cost of health insurance. That is likely to mean selling off some product lines, laying off workers and closing the least productive plants. It could mean renegotiating the deal with the auto workers’ union to pay billions into a fund to cover retiree medical costs…
I agree that difficult choices have to be made, but I did not hear much support for those choices in the recent Congressional hearings. In my opinion, if we just give these companies billions in loans without changing their present failed management and operating structure, we just make future failure or liquidation more likely.
For example, Congressional leaders seem to be saying that a bailout loan would be tied to the Big 3 making cheaper, more fuel efficient cars. Unfortunately, the cost structure at the companies is such that they cannot make money on cheaper cars. Detroit has focused on SUVs, light trucks and expensive passenger cars because those are the only models on which they make a healthy profit. Ordering them to build a higher proportion of smaller cars would just accelerate the cash burn.
At a minimum, I believe the present senior management of the companies has to go and I would prefer it if the board of directors of the companies did the deed. As just one example of how out-of-touch the senior executives are, just consider the recent hearings before Congress. All three CEOs came to Congress begging for a bailout, but they did so by flying in separately on private jets. Brain dead? You bet. With that kind of ‘leadership’ it is no wonder these companies have problems.
See also Should We Let GM Fail? and General Motors May Be Worthless.
- Business , Economy , Geopolitics , Personal Finance , Retirement
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