GM's Problems are 50 Years in the Making

http://www.fivethirtyeight.com/2009/03/gms-problems-are-50-years-in-making.html

by pg • 17 years ago

82 48 17 years ago

Xichekolas3• 17 years ago

Really enjoyed that. I wonder what that graph would look like for other car companies.

I have to imagine that, as cars became commodities, everyone's margins were slimmer, but it'd be interesting to see what a company unburdened by retirement obligations looks like over that same time span.

Femur• 17 years ago

I also really enjoyed it and agree that charts for other car companies would be fascinating to see.

It is incredible how quickly profit margins were eaten away by obligations GM made to its employees. This is evidence to the fact that the unions and their pressure are the main underpinning of GM's demise.

josefresco• 17 years ago

That and crappy cars, lack of foresight etc.

adw• 17 years ago

Another issue, of course, is the product mix of the American carmakers (which doesn't blunt Nate Silver's point, but is at least another contributory factor). Basically, the American car companies bet the farm on SUVs in the '90s in the way Japanese manufacturers simply didn't. It's a shorter-term concern - bad tactics, rather than bad strategy - but it won't have helped.

I wrote about this yesterday (complete with the underlying data from the Bureau of Transportation Studies: quick disclaimer, this is a project of the startup I'm part of)- http://byline.timetric.com/2009/03/30/kick-out-the-traffic-j...

markessien2• 17 years ago

Companies should not be responsible for payments to workers after they stop working. This should be the responsibility of the government - the companies should pay in while the person works with them, and when the person leaves, the government takes over all payment.

ShabbyDoo4• 17 years ago

I look to the 401K/403B as one answer that meets your criteria.

dkokelley5• 17 years ago

Why does the government need to pay for them? I understand issues like social security and medicare, but shouldn't the employees have been saving for retirement in the first place?

I agree that the company should not be expected to pay for work not done, but these payments are essentially part of the benefits package agreed upon when the employee started working. It was probably unwise for management to agree to those terms, but it's no different than police and firefighters who receive checks into retirement. It's delayed payment for their commitment to the organization.

catz2• 17 years ago

> I agree that the company should not be expected to pay for work not done, but these payments are essentially part of the benefits package agreed upon when the employee started working.

Those benefits packages were done under extreme coercion from the unions. The management of GM basically just deferred these costs.

Things such as pension funds should not be handled by the employee (IMHO). You should get your full salary (with benefits included) and make your own choice what funds you will use for medical aid/retirement.

Also - on a side note (of topic), these companies should be allowed to fail. They are easily replaceable and most motor manufacturing already happens in lower cost countries in any way.

Aren't there companies that are much more important pillars of the world economy that deserve a bailout more (e.g. AMD).

markessien2• 17 years ago

Look at it this way: If the individual is supposed to personally save for his own retirement, you'll have 20% or so that will not have any money when they retire. So your society, whatever it is, will have an extremely poor and old social class. These are the people who will also have the most problem with health care. When they get sick, the hospitals will not let them die - their medical care will be paid - by the government. Those people will turn to begging, alcohol and create a new class of homeless people.

It's nice to want to put responsibility on the individual, but those 20% will make your society an unpleasant place to live in. Are you willing to deal with all this?

Retirement has to be be made into an institution that runs on its own. Don't let people work their entire life, and then retire into hell.

laut• 17 years ago

Why should the next generation of tax payers be forced to pay for them? People can save money, while they are working. It shouldn't come as a surprise that you get older every day.

rudyfink• 17 years ago

"This issue is wrongly portrayed by both the liberal and the conservative media as one of management versus labor, when really it is a battle between General Motors past and General Motors present."

That is a really wise point. It very well may have been a battle between labor/management, but the real cost is clearly past vs present/future.

pg• 17 years ago

Actually there's a lot of overlap between those battles: much of the problem with GM past is that they caved in to unions.

mdemare• 17 years ago

I'm not so sure. GM's stockholders and employees are being cast as the losers. Are they really?

GM employees have been getting a great salary, great job security (until now), with excellent health care and pension benefits (the latter guaranteed by the PBGC) for semi-skilled labor.

And GM stockholders also got a good deal. Even if (when) the stock price goes to zero, they'll have received dividends over a 45 period. Dividends seem small, but over a long period, reinvested, they've gigantic. (dividends: http://is.gd/pXny )

And any investor who understood the consequences of this deal would have sold their stock in the late eighties.

When you look at it this way, GM is not so different from Bernie Madoff's pyramid game, with the U.S. taxpayers and bondholders left holding the bag.

far33d• 17 years ago

The article basically argues that they didn't "cave" - instead they made a rational choice to write contracts that were detrimental to the long-term viability of the company in return for short-term margins and profits.

The same could be said for the legacy airlines. They made their contracts under regulation, where they could raise rates to match their labor costs without fear of competition, and now are suffering the consequences.

ShabbyDoo4• 17 years ago

The core issue seems to be one of transparency and the lag time for FASB (Financial Accounting Standards Board, http://en.wikipedia.org/wiki/Financial_Accounting_Standards_...) to recognize that its rules had exploitable loopholes.

We have to be careful to differentiate between profitability and cash flow. If the GM of the 60's had been forced to purchase a unit of pension/retiree health benefits from a 3rd party for every employee-year worked, that decade's annual reports would have looked a bit different. And, the reports from this decade would look a bit rosier.

Since GM's future obligations were not obvious to investors, the stock price remained relatively high and GM was able to borrow money at favorable terms. Obviously, things have changed. So much so that even newer accounting rules couldn't keep investors from being afraid of the unknown. So, the Big3 negotiated VEBAs (http://en.wikipedia.org/wiki/Voluntary_Employee_Beneficiary_...) as a way of converting a seemingly unknown stream of future payments into a simpler scheme of definite ones.

The politics of this are interesting -- a bankruptcy would allow a judge to modify contractual provisions, an outcome likely unfavorable to UAW members. I suppose that these changes could include the recently negotiated VEBA payment structure?

Thinking beyond GM's current woes, I have often observed behavior in large companies and thought: If there was a single owner, and he was sitting in this meeting, he'd be screaming. Instead, because of screwed-up incentives, employees do stuff with dire consequences for the business. If GM's 60's era CEO had been a majority owner (and he expected the business to stay in the family), I doubt that the UAW contract would have looked anything like it did then.

I once heard a marketing manager say in a meeting, "I don't care about that revenue stream because we're already above plan there -- concentrate on the other one because we're below plan!" Compared to the latter stream, the former was likely 100x as profitable per dollar, and additional dollars were much easier to capture. When the accounting scheme is "variation from plan," it's obvious what you'll get.

ShabbyDoo4• 17 years ago

I failed to consider the variable of increasing health care costs and lifespans. These contracts were negotiated in the days when union guys all smoked and were expected to fall over from a heart attack well before age 70. Now, they'd get a $50K surgery and live to age 80.

Xichekolas3• 17 years ago

$50k is vastly underestimating it.

My grandfather just had a double bypass, a stent, and a pacemaker put in. (After his third heart attack.) The grand total for operation and post-op therapy came to $942,000.

Granted, the surgery itself was only like $25k. It was all the stabilization in ICU beforehand, and all the therapy afterwards, that really ran up the bill. The majority of it was paid for by Medicare and his supplemental insurance too, which probably ran the price up as well.

chime• 17 years ago

GM faced the classical agency problem where the interests of owners and managers are not aligned with each other. Usually, if the managers (executives) own 40-50% or more, OR own less than 10% of the share, their interests are well aligned with those of the common shareholders because if the company benefits, they benefit. It is when senior managers own between 15-25% of the stock that they tend to use their positions for their personal benefits instead of those of the shareholders. This is known as entrenchment.

For companies where managers own 0-10% of the stock, cash bonuses make them take larger short-term risks. A better solution is long-term stock options for the senior executives and cash for the middle or lower levels. However, as recent turn of events has shown, lots of companies give these kind of stock options to lower and middle level managers who ended up with their entire life savings in the very companies that went bankrupt. The senior management was getting extremely large cash bonuses and thus they had no incentive to care for the long-term growth of the firm.

ShabbyDoo4• 17 years ago

Phil Greenspun had a blog posting (which I can't find) which basically argued that demand for new vehicles ought to go down as their lifespans increased. Today, a car with 100K miles is still considered reliable, especially a Japanese one.

GM and all the car manufacturers benefited from suburbanization, highway construction, working moms, and increasing family incomes. But, what additional forces are there that will drive future increases in demand? Population growth? The US grows primarily though immigration, and we're becoming even more restrictive. More vehicles per person? There are few people who don't have a car who want one, save for the poorest of Americans. Overseas demand? This looks good, but other countries are bringing cheaper, localized production online. So, as cars last longer and longer, the industry should expect demand to drop.

antidaily• 17 years ago

Population growth is rapidly shifting to urban areas, which also means less people buying cars because of shorter commutes and mass transit.

tsally• 17 years ago

I say we hire young, smart people like Nate Silver to fix our economic problems.

rajat• 17 years ago

The issue of oversized compensations/retirement plans, accounting legerdemains, bad car design and bad car quality, is all related: horrible management. They didn't stand up to the unions, decided to play games with numbers instead of running a business, kept their head buried in the sand about the relative quality of their product vs. the Japanese, and chose lousy products.

Nothing overcomes bad management; not just years, but decades of horrible management. But we'll do so much better now with the government choosing new management. Bad business decisions surely will be ended by inserting politics into the equation.

Retric• 17 years ago

The US government actually has a long history of successfully turning around companies. Often the problems are obvious when you actually look at the numbers but management and labor are so dysfunctional they keep acting in an irrational fashion. People like to say large organizations need incredible talent at the top, but the sad truth is simple competence is hard to come by because you don't get into C level positions at billion dollar companies because of skills related to the job.

rjurney• 17 years ago

GM's are a microcosm of the USA's demographic problems. Long-term entitlements hid long term deficits, and spiraling healthcare costs along with increasing numbers of retirees = economic WMD.

So take a long hard look at GM. The whole country faces the same problem.

gfrison• 17 years ago

Fortunately FIAT would save GM...

kingkawn2• 17 years ago

if they made good cars this would all be moot

aoeu• 17 years ago

If you haven't seen it "Who killed the electric car?" is an interesting film/documentary highlighting some of the shortsightedness of car manufacturers..

http://en.wikipedia.org/wiki/Who_Killed_the_Electric_Car%3F

It was aired in the UK last night on More4 so may appear on their on catch up service at some point. Otherwise parts at least are on youtube.

TJensen• 17 years ago

That was seriously one of the most depressing documentaries I've seen. I really want an EV and should have one by now.

kingkawn2• 17 years ago

Also that graph at the top of the page needs an X-axis like my brother needs a job.

GM's Problems are 50 Years in the Making

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