GM's Problems are 50 Years in the Making(fivethirtyeight.com)
fivethirtyeight.com
GM's Problems are 50 Years in the Making
http://www.fivethirtyeight.com/2009/03/gms-problems-are-50-years-in-making.html
48 comments
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.
$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.
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.
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.
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.
"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.
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.
Actually there's a lot of overlap between those battles: much of the problem with GM past is that they caved in to unions.
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.
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.
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.
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.
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.
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.
Population growth is rapidly shifting to urban areas, which also means less people buying cars because of shorter commutes and mass transit.
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.
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.
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.
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...
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...
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.
So take a long hard look at GM. The whole country faces the same problem.
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.
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.
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.
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.
That and crappy cars, lack of foresight etc.
Most of their flagship brands (Chevy/GMC, Cadillac... actually, those are their only flagship brands I guess) are decent cars. I don't think bad cars are GM's primary problem (though the cancers that are Saturn, Pontiac, Saab, HUMMER are certainly hurting GM).
From my subjective observations, the things that are hurting GM the most are rising gas prices (and cars that use too much of it) and unfavorable employment contracts.
Note: I haven't seen the income sheets for GM (at least not one that breaks down the brands), nor have I seen any study that shows the quality of their cars vs. others.
From my subjective observations, the things that are hurting GM the most are rising gas prices (and cars that use too much of it) and unfavorable employment contracts.
Note: I haven't seen the income sheets for GM (at least not one that breaks down the brands), nor have I seen any study that shows the quality of their cars vs. others.
For years, the quality of American cars was vastly lower than the Japamese. Things have gotten a lot better, but now it's the overall design and market positioning that's really lacking, as well as a lack of cars that really target the market.
There's a line out the door for the Smart car. How hard would it be for GM (or Ford) to grab one of their little, gas-sipping city cars (like the Ford Ka), and sell it in the US? It's obvious that consumers want them, and it would give American automakers a domestic answer to the Honda Fit and Toyota Yaris.
The interior styling needs to stop being so disjointed; I have yet to sit in any American car and get the feel that people actually cared when they laid out the inside of the car. The Saturn Sky is a great example -- I can't operate the controls on the driver-side door, because they are placed right under the middle of my forearm.
It's even worse in the economy segment -- Ford and Mazda share technology, yet the interior of the Mazda 3 is such a wonderful place to be, whereas the interior of the Focus is just... dreary. The Mazda feels like a downsized BMW, and the Ford feels like... well, a Ford.
There's a line out the door for the Smart car. How hard would it be for GM (or Ford) to grab one of their little, gas-sipping city cars (like the Ford Ka), and sell it in the US? It's obvious that consumers want them, and it would give American automakers a domestic answer to the Honda Fit and Toyota Yaris.
The interior styling needs to stop being so disjointed; I have yet to sit in any American car and get the feel that people actually cared when they laid out the inside of the car. The Saturn Sky is a great example -- I can't operate the controls on the driver-side door, because they are placed right under the middle of my forearm.
It's even worse in the economy segment -- Ford and Mazda share technology, yet the interior of the Mazda 3 is such a wonderful place to be, whereas the interior of the Focus is just... dreary. The Mazda feels like a downsized BMW, and the Ford feels like... well, a Ford.
What's amazing to me, is I think the quality gap is much smaller than people tend to think but the American companies just let that image get created. Regardless of how the actual quality compares, people think American cars are lower quality. It didn't happen over night either. I can't imagine what went through their minds as they just let it happen; there was probably a lot of corporate thought control and it was un-PC to actually drive a Japanese car or say anything good about one for decades. You know you contrast that to like MS and their approach to Linux, MS is on top because they fear EVERYBODY and give them some respect. I just can't imagine letting my company develop and image of creating lower quality products than my competitors, for years and years.
Now the bigger difference is when you buy an inexpensive, smaller Toyota or Honda, they are radically different than an inexpensive, smaller Ford or GM car. The styling choices are different. For years Americans associated big and heavy with quality, they always thought the Japanese cars are tinny and flimsy. It really seems like when you buy an inexpensive American car, you get a cheap car but when you buy an inexpensive Japanese car you get a cost reduced version of their nicer cars.
Now the bigger difference is when you buy an inexpensive, smaller Toyota or Honda, they are radically different than an inexpensive, smaller Ford or GM car. The styling choices are different. For years Americans associated big and heavy with quality, they always thought the Japanese cars are tinny and flimsy. It really seems like when you buy an inexpensive American car, you get a cheap car but when you buy an inexpensive Japanese car you get a cost reduced version of their nicer cars.
Well it probably took years to bring the quality up to par, so in the meantime, there wasn't much else they could do to fight that perception.
Now they suffer from a branding issue (on top of their other problems). It's like when the original AT&T was split up, and one of the companies to come out of it was GTE. GTE had horrible service and customers hated it. It perennially ranked at the bottom of the baby bells for customer satisfaction, etc. So GTE went and rebuilt it's whole network and suddenly had the best service and support. But when people heard 'GTE' they still thought 'crappy and unreliable'. The solution? They changed their name to Verizon.
So building high quality cars that are stylish and true technical leaders might not be enough. (Especially now that the public associates 'GM' and 'Chrysler' with 'bailout'.) In all this bailing out they might have to change their brand name as well.
Now they suffer from a branding issue (on top of their other problems). It's like when the original AT&T was split up, and one of the companies to come out of it was GTE. GTE had horrible service and customers hated it. It perennially ranked at the bottom of the baby bells for customer satisfaction, etc. So GTE went and rebuilt it's whole network and suddenly had the best service and support. But when people heard 'GTE' they still thought 'crappy and unreliable'. The solution? They changed their name to Verizon.
So building high quality cars that are stylish and true technical leaders might not be enough. (Especially now that the public associates 'GM' and 'Chrysler' with 'bailout'.) In all this bailing out they might have to change their brand name as well.
According to Wikipedia, GTE was independent even during the AT&T monopoly. It wasn't until the Bell Atlantic merger that they changed names to Verizon.
You're very correct about the corporate thought control -- for years, GM employees were forbidden to buy anything but a GM car, and foreign cars were often vandalized in Detroit. There's still a mantra that 'Americans don't buy small cars.', even with the success of the Miata, the Mini, the Civic, and so on.
I don't think you fully understand the market either. The Ford Ka is not in any way in the same league as the Smart car. IMHO the Big Three's obsession with out-competing the Japanese in the econo-car market contributed no small part to their demise.
Entire lines of "all American" cars were scrapped in favor of inferior ripoffs of Toyota creations. This continued well into the 2000s; look at cars like the Chevy Aveo, a Korean-made, budget econo-mobile that couldn't hold a candle to the Echo/Yaris' fuel efficiency nor reliability.
Ford was the first one to recover from this and reintroduce big muscle, which in the end was what the American market wanted all along (but couldn't justify).
I do agree on the interior point though. Why is it that I can sit in a Toyota and feel like I'm in a luxurious, well-appointed interior, and then sit in a similarly-priced Ford and feel like I'm sitting in someone's high school science project?
Entire lines of "all American" cars were scrapped in favor of inferior ripoffs of Toyota creations. This continued well into the 2000s; look at cars like the Chevy Aveo, a Korean-made, budget econo-mobile that couldn't hold a candle to the Echo/Yaris' fuel efficiency nor reliability.
Ford was the first one to recover from this and reintroduce big muscle, which in the end was what the American market wanted all along (but couldn't justify).
I do agree on the interior point though. Why is it that I can sit in a Toyota and feel like I'm in a luxurious, well-appointed interior, and then sit in a similarly-priced Ford and feel like I'm sitting in someone's high school science project?
> How hard would it be for GM (or Ford) to grab one of their little, gas-sipping city cars (like the Ford Ka), and sell it in the US?
It wouldn't help because the fuel-efficiency of imported cars doesn't count for GM's domestic CAFE.
It wouldn't help because the fuel-efficiency of imported cars doesn't count for GM's domestic CAFE.
I don't think many people have seen any studies that compare quality of GM cars versus other brands.
It's probably more of a perceived quality than anything based on numbers that is detrimental to GM.
If GM cars are at par in terms of quality but nobody believes it, that still hurts GM.
It's probably more of a perceived quality than anything based on numbers that is detrimental to GM.
If GM cars are at par in terms of quality but nobody believes it, that still hurts GM.
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.
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.
That was seriously one of the most depressing documentaries I've seen. I really want an EV and should have one by now.
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.
I look to the 401K/403B as one answer that meets your criteria.
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.
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.
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.
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.
It's a matter of personal responsibility. Granted, there will be people who
A: Don't save,
B: Invest their savings foolishly,
or C: Fall on hard times and burn through their savings,
Why would it be so bad to force people to save a percentage of their income?
If you don't, and guarantee benefits for the C category, then there's a perverse incentive: don't save any money your whole life, get bailed out at the end.
In any case, those who choose to not save any money for retirement (whether willfully or ignorantly) are a huge burden on society, one that the rest of us who did save will have to pay for.
In that sense, examine this solution: we each have a "personal retirement account", with rules set up in such a way that you can only invest the amount of money above what would provide for a minimally sufficient retirement in "riskier" investments, such as the stock market, and you are forced to save 10% of your earnings into this account, which would follow you from job to job.
End result: Everybody has a personally accountable retirement benefit that they directly contributed to their whole life -- it's their money that they saved, and their money that they get. You cannot place the minimum amounts at risk, but you are free to choose how to invest anything above the minimum amounts as you wish. Given that we (eventually) eliminate all social security obligations, we can also completely remove that tax, and several others that currently pay for it.
If you don't, and guarantee benefits for the C category, then there's a perverse incentive: don't save any money your whole life, get bailed out at the end.
In any case, those who choose to not save any money for retirement (whether willfully or ignorantly) are a huge burden on society, one that the rest of us who did save will have to pay for.
In that sense, examine this solution: we each have a "personal retirement account", with rules set up in such a way that you can only invest the amount of money above what would provide for a minimally sufficient retirement in "riskier" investments, such as the stock market, and you are forced to save 10% of your earnings into this account, which would follow you from job to job.
End result: Everybody has a personally accountable retirement benefit that they directly contributed to their whole life -- it's their money that they saved, and their money that they get. You cannot place the minimum amounts at risk, but you are free to choose how to invest anything above the minimum amounts as you wish. Given that we (eventually) eliminate all social security obligations, we can also completely remove that tax, and several others that currently pay for it.
I like the mandatory savings plan, provided it is offered as an alternative to social security. The thing with mandatory savings plans (such as 401k's, were they mandated) is that ultimately the money belongs to the individual, and you can effectively access the money as you like when you borrow against it. My point is that the people who are not likely to save on their own accord are the same ones who will effectively spend their savings through debt.
In Australia, we have something called 'Superannuation' which is a bit like a 401k plan, except it's mandatory. The employer must pay 9% of your total wages into the plan. You can also contribute extra if you like, and some employers offer terms matching your contributions.
You are not allowed to draw down on your 'super' plan until you are at retirement age, and even then there are rules as to what you can take as a lump sum, and what is paid as an annuity. After a certain point (I'm not an expert) you actually get your money out tax free.
You take this super plan with you from employer to employer as you move jobs, and you're free to transfer the money from one fund to the other. You have to choose the fund yourself, and you can even create your own fund to invest in whatever you like (there are rules on size and reporting, and you can't leverage your fund with debt).
These rules enforce saving for the people who can't do it themselves, because they never see the money. They are a little annoying to people who can quite capably invest for themselves, but there is enough incentives and flexibility to cater for the self-directed investor. It was actually the unions who pushed for this system as they could see the folly of the employer-funded pension scheme. Plus they formed their own 'funds' which their members use - the management fees probably brings in more income for the union than the union dues do.
In addition to super funds, Australia has a universal health care system which you pay with a 2.5% tax on your income. This system covers everyone who is a citizen,whether they are working or not. You may also opt for private healthcover, and there are tax incentives for people on higher incomes to do so (both for the employer and the employee). With this system there are no co-payments or anything like that : just turn up at either the public or private hospital, and get treated. Elective surgery (knee reconstructions, etc) goes onto a waiting list for public, private hospitals you get it done sooner.
The system has it's flaws, but for the most part it works, and you don't get companies with massive pension and healthcare liabilities. It also means that employees are more confident to move between jobs knowing that their pension and healthcare are not tied to a particular employer.
Finally, and most relevant for this discussion, it allows startups to run much leaner because they don't have to worry about pension and healthcare for their employees.
And, to answer the question, on average, an Australian worker pays less tax (local, state, federal) on their income than the equivalent worker in the USA. So it's not about paying less tax and choosing : it's about building a national system that has lower running costs but still allows for choice where the individual can afford it.
You are not allowed to draw down on your 'super' plan until you are at retirement age, and even then there are rules as to what you can take as a lump sum, and what is paid as an annuity. After a certain point (I'm not an expert) you actually get your money out tax free.
You take this super plan with you from employer to employer as you move jobs, and you're free to transfer the money from one fund to the other. You have to choose the fund yourself, and you can even create your own fund to invest in whatever you like (there are rules on size and reporting, and you can't leverage your fund with debt).
These rules enforce saving for the people who can't do it themselves, because they never see the money. They are a little annoying to people who can quite capably invest for themselves, but there is enough incentives and flexibility to cater for the self-directed investor. It was actually the unions who pushed for this system as they could see the folly of the employer-funded pension scheme. Plus they formed their own 'funds' which their members use - the management fees probably brings in more income for the union than the union dues do.
In addition to super funds, Australia has a universal health care system which you pay with a 2.5% tax on your income. This system covers everyone who is a citizen,whether they are working or not. You may also opt for private healthcover, and there are tax incentives for people on higher incomes to do so (both for the employer and the employee). With this system there are no co-payments or anything like that : just turn up at either the public or private hospital, and get treated. Elective surgery (knee reconstructions, etc) goes onto a waiting list for public, private hospitals you get it done sooner.
The system has it's flaws, but for the most part it works, and you don't get companies with massive pension and healthcare liabilities. It also means that employees are more confident to move between jobs knowing that their pension and healthcare are not tied to a particular employer.
Finally, and most relevant for this discussion, it allows startups to run much leaner because they don't have to worry about pension and healthcare for their employees.
And, to answer the question, on average, an Australian worker pays less tax (local, state, federal) on their income than the equivalent worker in the USA. So it's not about paying less tax and choosing : it's about building a national system that has lower running costs but still allows for choice where the individual can afford it.
Well said, just wanted to add that you only need to be a permanent resident, not a citizen, to be eligible for Medicare.
> 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).
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).
I don't think you've ever worked in the auto industry - most cars are not built outside of North America. In fact, I can't think of a single car that is built in a radically cheaper country like China that's currently on the American market.
You get imports from Japan, Germany, the UK, etc, but those are hardly cheaper manufacturing grounds.
The only major "cheap" source of cars is Mexico, and in general consumers have reacted badly to this sort of cost-cutting (the massive drop in the Mercedes-Benz C-series build quality after moving to Mexico has resulted in an exodus of buyers to other brands, same goes for VW).
By and large the cars you buy today, even ones from Toyota and Honda, are built in the US or Canada, both of which are hardly cheap when it comes to wages and benefits.
And keep in mind that Toyota and Honda are suffering greatly right now. I have many colleagues in the auto industry, and Toyota has already scaled back production in a major way - the demand is simply no longer there. IMHO the American public is waking up from decades of the suburban dream, and car ownership is something that will decrease in importance in our culture as time goes on, especially as new spending in mass transit kicks in and the urban culture takes center-stage.
You get imports from Japan, Germany, the UK, etc, but those are hardly cheaper manufacturing grounds.
The only major "cheap" source of cars is Mexico, and in general consumers have reacted badly to this sort of cost-cutting (the massive drop in the Mercedes-Benz C-series build quality after moving to Mexico has resulted in an exodus of buyers to other brands, same goes for VW).
By and large the cars you buy today, even ones from Toyota and Honda, are built in the US or Canada, both of which are hardly cheap when it comes to wages and benefits.
And keep in mind that Toyota and Honda are suffering greatly right now. I have many colleagues in the auto industry, and Toyota has already scaled back production in a major way - the demand is simply no longer there. IMHO the American public is waking up from decades of the suburban dream, and car ownership is something that will decrease in importance in our culture as time goes on, especially as new spending in mass transit kicks in and the urban culture takes center-stage.
I can't tell if you're joking or not.
GM paid dividends up until last year, decades after it was known that they had large health care obligations. Divert a couple years of dividends in keeping their side of the bargain, and GM is in good shape. GM management made a deal they were unwilling to keep.
AMD employs 15,000. GM directly employees 240,000 and suppliers employ millions more. These companies are not easily replaceable. If they were, another company would have replaced them by now. Setting up an operation of that magnitude requires decades of experience and huge capital expenditures.
AMD employs 15,000. GM directly employees 240,000 and suppliers employ millions more. These companies are not easily replaceable. If they were, another company would have replaced them by now. Setting up an operation of that magnitude requires decades of experience and huge capital expenditures.
> GM paid dividends up until last year, decades after it was known that they had large health care obligations.
If you look at the post I said that GM did not take into account their future obligations. Their profits was nothing more than fancy bookkeeping.
> GM management made a deal they were unwilling to keep.
I agree with you on the point that GM should never have made those lavish packages and kept their salaries in line with the market (or relocated their factories).
> These companies are not easily replaceable. If they were, another company would have replaced them by now.
There are numerous companies that can replace the big auto companies. Toyota and Honda has been slowly replacing GM is most of the world markets (including the US). If either GM goes into bankruptcy and gets split up/sold off (e.g. Opel gets sold etc...). It would not be a bad thing.
> Setting up an operation of that magnitude requires decades of experience and huge capital expenditures.
Setting up a car manufacturer is not that impossible in the market. Over the past years there were 10s of new car manufacturers that started (and some failed). A good example is some Chinese companies such as GWM, Cherry. There is also no reason why existing car manufacturers can not grow to fill the gaps that GM leaves (as they have done for a long time – e.g. Hyundai, Honda, Toyota, etc...).
> AMD employs 15,000. GM directly empl
Starting a new x86 processor manufacturer would probably be impossible. The x86 is a patent minefield (to which only AMD and Intel have cross licenses to use each other's patents). Setting up a new generation fab can cost more than $5 billion.
And if AMD goes Intel will have a monopoly. Both Chrysler, GM and Ford can disappear and there still will not be a monopoly.
If you look at the post I said that GM did not take into account their future obligations. Their profits was nothing more than fancy bookkeeping.
> GM management made a deal they were unwilling to keep.
I agree with you on the point that GM should never have made those lavish packages and kept their salaries in line with the market (or relocated their factories).
> These companies are not easily replaceable. If they were, another company would have replaced them by now.
There are numerous companies that can replace the big auto companies. Toyota and Honda has been slowly replacing GM is most of the world markets (including the US). If either GM goes into bankruptcy and gets split up/sold off (e.g. Opel gets sold etc...). It would not be a bad thing.
> Setting up an operation of that magnitude requires decades of experience and huge capital expenditures.
Setting up a car manufacturer is not that impossible in the market. Over the past years there were 10s of new car manufacturers that started (and some failed). A good example is some Chinese companies such as GWM, Cherry. There is also no reason why existing car manufacturers can not grow to fill the gaps that GM leaves (as they have done for a long time – e.g. Hyundai, Honda, Toyota, etc...).
> AMD employs 15,000. GM directly empl
Starting a new x86 processor manufacturer would probably be impossible. The x86 is a patent minefield (to which only AMD and Intel have cross licenses to use each other's patents). Setting up a new generation fab can cost more than $5 billion.
And if AMD goes Intel will have a monopoly. Both Chrysler, GM and Ford can disappear and there still will not be a monopoly.
catz wrote:
Setting up a car manufacturer is not that impossible in the market. Over the past years there were 10s of new car manufacturers that started (and some failed). A good example is some Chinese companies such as GWM, Cherry. There is also no reason why existing car manufacturers can not grow to fill the gaps that GM leaves (as they have done for a long time – e.g. Hyundai, Honda, Toyota, etc...).
Historically, downturns have been the best times to invest (obviously!)
Setting up a car manufacturer is not that impossible in the market. Over the past years there were 10s of new car manufacturers that started (and some failed). A good example is some Chinese companies such as GWM, Cherry. There is also no reason why existing car manufacturers can not grow to fill the gaps that GM leaves (as they have done for a long time – e.g. Hyundai, Honda, Toyota, etc...).
Historically, downturns have been the best times to invest (obviously!)
Aren't there companies that are much more important pillars of the world economy that deserve a bailout more (e.g. AMD).
Haha. I agree that there are more deserving companies, but I would argue that none of these companies should be bailed out. Take your medicine and be done with it. IMO the bailouts are doing more good than harm.
Haha. I agree that there are more deserving companies, but I would argue that none of these companies should be bailed out. Take your medicine and be done with it. IMO the bailouts are doing more good than harm.
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.
Also that graph at the top of the page needs an X-axis like my brother needs a job.
I say we hire young, smart people like Nate Silver to fix our economic problems.
Fortunately FIAT would save GM...
if they made good cars this would all be moot
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.