Tuesday, November 18, 2008

A GM bailout makes no sense

The potential GM bailout doesn’t have a sugar daddy to fall back on like Delphi had, unless the tax payer steps in.  Before we do a little history would help.

GM took on $2.1 billion of unfunded hourly pension liabilities and assumed about $6.8 billion of Delphi’s post-retirement benefit liabilities.  GM, Delphi’s former parent, has taken on billions of dollars in financial obligations for the parts maker. However, in a regulatory filing, GM said Delphi is unlikely to emerge from bankruptcy protection in the short term and may not be able to emerge at all.  Delphi had many suitors during its early bankruptcy.

Delphi's bankruptcy began in 2005.  Its bankruptcy opened the floodgates for the buyout crowd.  Cerberus entered into negotiations with Delphi and in 2007 Cerberus dropped out of the bidding.  Cerberus dropped partly because of the hard stand its workers are taking.  To obtain UAW agreement for the 1999 spinoff, Delphi agreed to match the pay of GM factory workers. This averaged $73.26 per hour in pay and benefits last year. Most longtime Delphi workers have since taken buyouts.  The union has agreed that unskilled workers hired since 2004 will earn $27 an hour and $42 by 2011. Cerberus told the union it wouldn't pay that much, since it's double the pay at other U.S. parts companies.

The UAW needs a little tough love.  It derailed the Cerberus deal at Delphi.  Today GM suffers a loss of about $2,000 per vehicle sold.  On the other hand Toyota whose employees are not part of the UAW earns a profit of about $1,200 per vehicle sold.  If GM was able to operate with labor prices near Toyota’s it would have pocketed an additional $29,715,200,000.
If there is going to be a bailout the heads of the UAW, the Big 3, Treasury, the Fed and a few members of congress need to sit in a room and find a way to restructure employees pay to look more like that which Toyota has.  As painful as it might be for me a resident of Michigan where the auto industry began,  a bailout would only buy GM a little more time before it went into bankruptcy anyway.


The Old Broad said...

Show me fact to back that up, Jason. The UAW has negotiated heavily this past year to take the load off of the Big 3.

Mike G said...

I'd like to know the source of the cost gap claims made in this post.

Jason said...

GM declares on thier annual report the number of vehicles sold in 2007.

9,286,000 cars sold

Toyota profit

GM loss




anton said...

It would appear that US America should have heeded the message from Al Cap whose cartoon strip included references to General Bullmoose who infamously proclaimed that "what was good for General Bullmoose was good for America!"

It would appear that your readers are more concerned with bickering about how much "blood" is gushing out rather than deal with the fact that the soon to become corpse is bleeding out!

Jim Peet said...

Good comments Jason. I appreciated the comment you left of my blog.

Sincerely, Jim Peet

Distressed Volatility said...

tough situation, judgment day is coming!

muckdog said...

Good write-up, Jason. I couldn't agree more. If there is a bailout, there needs to be some major tweaking of that business model!

Paul_Z said...

Sad to say, but in my 28 years as a professional I’ve been through various painful restructurings, in a couple of cases I was restructured right out onto the street with well wishes and brilliant letters of recommendation (meaning no Golden, Silver, Bronze, brass, steel, iron or otherwise parachute). The truth is, the people to blame were clearly “us” top management. We did not see the trends coming, or we were too entrenched in our philosophies and we failed the company and the employees.

These cold realities, once faced, affect how you lead future companies that you are lucky enough to have the opportunity to shape. Since the bad experiences, I must say that my business acumen has been sharpened and honed by all the beatings imparted by business realities. And, that is precisely why I don’t think the bailout is needed, but a “Work Out” is what the Automakers need.

The bailout needs to be evaluated as a business deal, and if the big three don’t have a plan, the money will be gone, and they’ll be coming to us [tax payers / investors] for further bail outs and that’s not acceptable.

We all need to start a campaign of e-mail to our congressman and senators to ensure they know how we feel about this.

The Lee’s Summit Conservative

bosscauser said...

What does sense have to do with it? Since when do politicians suffer from this malady? Paybacks are in order. It remains to be seen if the union money injected into the democrat party will pay off. Probably not in this Congress but the bailout is coming. Maybe we call it a loan guarantee or a recovery fund etc. but the simple fact that every congressman is also being bombarded by every car dealer to do something assures us that it's coming.

Emory Mayne said...

But you are missing the essencial truth about GM. They are building crap nobody wants, are slow to get to market, have no plan for a future, and have been mis-managed into the ground.

The old UAW union stuff just doesn't hold water. Audi, VW, MB, Citroen, Peugeot, Renault, Volvo, Saab, Jaguar, Vauxhall, Rover, BMW, and every other European manufacturer have an organised work force, that is paid higher than an American UAW member. They are all healthy, and are all building desirable products.

So, lets look are the Asian Manufacturers.

Their units are sold at comparable prices to GM crap. They have a measurable and substantive build quality, and more importantly a desirability over GM.

We buy these cars - based not on cost - but on value. There is a huge difference between cost and value.

The life cycle of a Honda Accord (for example)is far more cost efficient, than anything GM has produced in 30 years. The resale value is far beyond a GM. So cost has nothing to do with it. People would rather have a used Honda, than a new GM.

What is the resale on a Malibu?

So if the idea is to further reduce cost by gutting Unions (by the way that 27 billion you quote goes back into local economies, it doesn't sit in vault at the local UAW hall) then you have missed the point all together.

It is about innovation, desirability, management, and build quality. It is about holistic vision, and a plan to get there. Not bean counting and guessing at the market.

Take Toyota's Scion division. They decided to create a market of younger consumers, and built a product that addresses the wants and desires of that market. The Micro Cars are a huge hit. They did not exploit a niche, they had the vision to create the niche. The American mini-van did the same thing with middle-class America in the 1980s, and that product saved Chrysler - for the time being.

MB did the same sort of thing you are advocating in cost reduction. They went from the best production cars ever built - the E Series of the 1980s, to the worst products Mercedes had ever deployed, those of the 1990s. Finally they realized that their brand had eroded, and got back to building quality again. Sure, the unit cost went up, but their product life cycle make those costs redundant, and the Tri-star marque is again the absolute premier.

OK, suppliers.

You are only as good as the quality of your suppliers. You are only as good, as the worst detail in the product. Take Jaguar for example. They have the most beautiful (IMHO) cars ever built. Absolutely gorgeous coach work, wonderful handling, fantastic power to weight ratio, and in the Jaguar V12 of the 1980s XK series, the best power plant ever installed in a production automobile.

So why has Jaguar damn nearly disappeared every decade? Well, the damn things wouldn't start, and wouldn't keep running because of their electrical systems, and Lucas Electric (their supplier) in particular. Ford bought Jaguar and fired Lucas. Today you have in Jaguar (recently sold to Tata)a car worthy of its price, but still fighting for its sullied reputation thanks to a single supplier.

So yes, GM made a management decision to hold onto Delphi - that decision was not Union based, but made in the GM board room.

No, Jason. Slapping labor with GMs failure is not healthy for GM. Eliminating management is healthy for GM.

Without replacing management, and totally restructuring their business model will only make a bail-out a band aid. They don't a need 'bean counting,' restructure they need Lasik to repair their vision.

Jack Yan said...

Great points above, Emory. A glance at what Ford and GM sell everywhere but North America indicates that the best stuff is not being sold to Americans. Both companies are so arrogant that they believe Americans don’t want their superminis, subcompacts and compact minivans. Until they realize the Japanese are selling right into niches that they themselves occupy in Europe. And even then it takes them four or five years to bring the product in to North America.

Dionysus said...

BEG 3 had their chance to compete and failed miserably. I dont see any of the foireign auto makers in trouble. Also, what really ticks me is that BEG 3 provides a much much better auto to the overseas markets. They are the same cost, but have much higher (almost 2x) MPG and much lower (almost 1/2) CO2 emissions. The real pi$$er is that GM spends millions lobbying against better standards for fuel economy and emissions. LET THEM FALL BIG TIME…degenerates.


Larry said...

A little PR advice for the Big 3

I don't work for a Public Relations firm, I do not send press releases all day long; but I still feel qualified to give the CEO's at Ford, GM and Chrysler a small piece of advice.

If you are going to Congress, crying about how you are running out of money- don't go there in a private jet!
I've got an idea; drive there. After all, you work for companies that make cars!
Wouldn't this be an opportunity to show off your new lines of fuel-efficient autos. I know in the scale of the problem is such that even if the top management of these companies agreed to work for minimum wage, the savings would be inconsequential; but it would change peoples perceptions, and perhaps their willingness to help.

Larry Lubell