Monday, April 10, 2006

GM'S General Malaise

Things haven't been good at General Motors in quite some time and now, perhaps, they are about to get even worse.

GM's troubles are many and, cumulatively, they are potentially leading to a once unimaginable bankruptcy. Case in point, the company lost $10.6 billion last year.

That's a worrisome possibility for many other businesses, as well as the U.S. government, because GM's massive size and sprawling commercial reach make it central to the entire U.S. economy. GM is the world's largest auto manufacturer. It is so big that in the FORTUNE 500's first half-century it ranked No. 1 on the list in 37 years. On the most recent list, it fell to No. 3.

GM has been the world's leading auto manufacturer for 74 consecutive years, a position it is expected to cede to Toyota this year. The longtime industry leader has been reduced to an embarrassing 26% market share. As a result, in November the company announced plans to close a dozen plants and slash 30,000 jobs in North America.

GM is burdened by the highest labor and health care costs in the industry and is responsible for many workers -- both past and present. GM supplies health coverage to a total of 1.1 million employees, retirees, and dependents -- a population bigger than Detroit's.

Its efficient and eminent Japanese competitors, such as Toyota, pay health benefits for their active U.S. employees and dependents too. But Toyota does not have GM's retiree health costs, a massive burden that at year-end totaled an unfunded $64 billion. That cumbersome expense adds about $1,300 to the cost of every car and truck GM produces in the U.S.

GM spent about $5.7 billion on health care last year. That has led to an enormous competitive disadvantage. Foreign automakers that manufacture in the U.S. have a nonunion workforce that is younger and therefore generally more healthy. That results in a huge competitive advantage.

The top pay for a GM hourly employee is $27 an hour, but with benefits and future health care costs GM estimates that hour of work costs the company $73.73.

Though the union has agreed to a "giveback" of health-care benefits, GM still needs many more concessions.

The company entered into some rather unwise deals with the United Auto Workers (UAW), from which it is now struggling to free itself. For example, under one welfare-like agreement called the Jobs Bank, laid-off union members get paid for not working. Many of those employees make $100,000 annually to just stay home. The current union contract isn't up for renewal until September 2007, and in the meantime the UAW wields enormous leverage in its ability to strike.

To get an idea of the union's power, consider this: when GM proposed changing its health plan for retirees to cut $20 billion off its liabilities, the union ordered an independent audit of the company -- at GM's expense -- which the company wasn't even allowed to read upon completion. Eventually, the union got a very clear view of just how bad things are at GM and ultimately conceded.

Additionally, many industry analysts have insisted that GM's eight domestic brands (Buick, Cadillac, Chevrolet, GMC, Hummer, Pontiac, Saab, and Saturn) are too many for a 26% market share. Those analysts suggest that GM phase at least one, if not two, additional lines out of existence, just as it did with Oldsmobile a couple of years ago. But, unfortunately for GM, dealer franchise laws make that nearly impossible.

Over the years, there was a gradual blurring of the distinctions between GM's numerous divisions. At one time, those distinctions created an orderly upgrade path from one division to the next, leading from the practical and economical Chevrolet to the premium Cadillac nameplate. Customers were passed along, graduating up the product chain, which kept profits flowing to the corporate parent. But eventually the divisions began competing with each other and eating into each other's market share.

Additionally, product design has been weak, or lacking, at GM for many years. In short, they have not built the appealing, desirable cars that car buyers want. And the company has a lopsided number of trucks, pickups, and SUVs, just as gas prices have begun to soar. That is a very bad combo.

GM is also living with a legacy of poorly designed and built vehicles that have soured the American public and lost their confidence. As a result, people have turned to Japanese models for their reliability.

In its April issue, Consumer Reports released the results of its annual car reliability survey. The editors say Asian vehicles are by far the most reliable. Japanese and Korean vehicles had, on average, 12 problems per 100 vehicles. The magazines reports that U.S. makers "have been edging closer to the Asians in reliability," with an average of 18 problems per 100 vehicles. European manufacturers are still "the most unreliable overall," with 21 problems per 100 vehicles.

Dan Neil, the Pulitzer Prize winning editor of the LA Times auto section, says that American manufacturers are building very competitive, high-quality cars, but that past history is still hurting sales. Apparently the public still lacks confidence because of previous experiences.

GM's increasingly burdensome financial difficulties forced it to sell a majority stake in its finance subsidiary, GMAC, in order to gain liquidity. But GMAC is perhaps the most profitable asset that GM holds, and losing that dependable annual revenue stream ($2.83 billion in profits last year) may prove regrettable. Surrendering an asset that's been responsible for such a large portion of earnings is selling the hand that feeds.

GMAC's credit ratings are linked to GM's and therefore have been repeatedly lowered. Perhaps, then, the wiser move would have been to spin off the profitable GMAC into a separate company and raise money through the sale of stock. Too late now.

Then there is the considerable problem of the bankruptcy of GM's parts supplier, Delphi. The wages and benefits it pays exceed other players in the market, making Delphi uncompetitive. The supplier has asked the UAW to accept lower wages, which the union has refused. Instead, there is now talk of a strike, which would cripple GM. What's worse, the union contract would require it to keep paying workers, hemorrhaging as much as $1 billion a week in additional losses.

Things have gotten so bad at GM that, in an effort to cut labor costs and put an end to billions of dollars in losses, it is offering all of its 113,000 U.S. hourly employees as much as $140,000 each to leave the company.

However, it's anticipated that relatively few GM employees will take the buyouts since, under an alternative early retirement plan, most of them are eligible to receive more than $100,000 while still keeping their health care coverage.

This titan of the U.S. industry is now teetering on the precipice of bankruptcy, a notion that would have been unimaginable to almost all previous generations of Americans. Chrysler and Nissan both bounced back from poor sales and near financial ruin.

Now, the biggest player of them all will take on the biggest task of them all, as it attempts to right the ship and set it on a course for both profitability and respectability.

Copyright © 2006 Sean M. Kennedy. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed without the author's consent.

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