imkittymyers at hotmail dot com
Monday, November 21, 2005
MOTOR CITY BLUES
The following is from regular reader, Mike Grobbel:
Yes, I am a retired GM salaried employee and I am still concerned that someday soon I could be drawing a much reduced pension from the Pension Benefit Guarantee Corporation (PBGC) - a likely outcome if General Motors has to declare bankruptcy and the judge allows them to terminate the GM Hourly and Salaried defined-benefit pension plans.
I don't expect the average Joe to give two whit's about my personal situation, however they ought to know and care that the PBGC is extremely underfunded due to the recent Airline bankruptcies. Any solution will either require Congress to provide an infusion of funds, or the PBGC will have to severely reduce their annual cap on payments to covered pensioners. Think of the PBGC as the FDIC of defined-benefit pension plans - remember the "Keating Five" and the S & L bailout?
Regarding today's announcement of GM's latest cost cutting plans, I think they are long overdue and unfortunately, their impact on the bottom line will not be felt fast enough. Just prior to my retirement in early 2002, I worked on a structural cost reduction project for one of the GM Manufacturing executives. He had retained consultants from McKinsey & Co. to help us organize and quantify realistic cost reduction targets and opportunities. As one part of the project, my sub-team identified a number of plants for closure, some of which have since been announced (none of which are on today's list).
I clearly remember the morning our team meeting was interrupted by word that the WTC and been hit by planes. Consumer confidence was immediately shattered and vehicle sales tanked, causing GM to counter with the "Keep America Rolling" 0% interest rate promotion to get consumers back into the marketplace. Meanwhile, our structural cost reduction targets were ratcheted upwards. Three months later at the completion of the project, I was asked if I would be interested in making a very personal contribution towards reducing GM's structural costs by accepting an early retirement package.
The plants identified for closing during our 2001 project have only recently been closed - that is how long it takes for these kind of changes to be put into effect (the least-cost method for shedding production capacity is to close a plant at the end of the lifecycle of the product they make). The plants announced for closing today will not all be closed until late 2008.
Turning around a large corporation like GM is not a quick and easy proposition, especially as the foreign competition adds additional manufacturing capacity here in the US and continues eating away at the US domestic manufacturer's market share. In a situation like this where there is significant excess vehicle manufacturing capacity, only the least-cost producers will survive. The least-cost vehicle producers in the US are only now beginning to retire their first employees. They also have young and healthy workers and most importantly, they are not bound by union agreements that limit their ability to match variable costs with production volumes.
Economists teach that labor costs are what is known as variable costs, that is, they can be varied flexibly as conditions change. Unfortunately, management at GM, Ford and Chrysler bought labor peace with their unions many years ago by agreeing to create what is known as the "jobs bank". Back in the early 1980's, union leaders were concerned about the negative impact that robotics and flexible automation would have on their members (and union dues) and the "jobs bank" seemed to be a reasonable solution for both sides. Workers who could no longer be given a production job would go into the "bank" where they could either sit around all day in the cafeteria or work on community service projects while still collecting 95% of their pay (what they actually did depended on how their union local organized things).
As long as total US manufacturing capacity remained in line with US vehicle demand, the number of workers in the "jobs bank" were relatively small and were a result of the automaker's productivity increases. Management felt that these "jobs bank" costs could be easily passed on to the consumer, however they had turned their labor costs from a variable to a fixed or structural cost, which is the same, regardless of the level of production. As the US domestic manufacturer's market share began to be eaten away by the lower-cost transplant manufacturers in the 1990's, high-cost plants had to be closed, the number of workers in the jobs bank grew and the domestic manufacturer's labor costs stayed the same. They found that the only way they could reduce the size of the jobs bank was through attrition in the overall workforce (deaths, terminations and retirements) and that rate was lower than their increasing loss of market share.
So now we have the latest round of downsizing from General Motors, which in 1962 held a 50% US market share and lived in fear of the being broken up by the US Government "monopoly police". Saddled with a disproportionate amount of legacy costs, GM has been especially vulnerable to the low-cost producers - even without the product strategy and quality mis-steps that have hastened their slide.
GM currently has only 145,000 total U.S. employees, yet they provide health-care coverage for about 1.1 million employees, retirees and dependents. Last year, GM spent $5.2 billion on health care, which amounts to more than $1,500 for every vehicle produced. When it comes to health care costs, Toyota has an estimated $4 billion cost advantage on its U.S. operations over GM. The only solution available to GM on this front is to require higher health care cost sharing by their employees and retirees. Their recent agreement with the UAW establishing cost sharing for hourly retirees was a step in the right direction for GM's bottom line, but hourly employees still have the "Cadillac" of health care plans.
It is encouraging to see that hourly retirement incentives are a part of today's announced plan, but nothing short of the abolition of the "jobs bank" will enable GM to get their structural costs in order, and that is not likely to happen before the next union contract negotiations in 2007.
The press loves to see the once-mighty get cut down to size, so they have had a field day for years feasting on GM's troubles. So don't expect to hear them trumpeting that GM is now producing some of the highest quality vehicles in North America. According to the latest J. D. Power Initial Quality Survey, Buick and Cadillac both landed in the top five brands, ahead of Toyota, Honda, Acura, Nissan, Infiniti and Mercedes-Benz. There are 84 vehicle assembly plants in North and South America and according to that same study, three GM plants took top honors, beating out all other vehicle manufacturers. GM plants also took three of the top five spots in the most recent Harbour Report on plant productivity. Despite GM's continuing market share slide, their Chevrolet division regained car sales leadership in the US last year, passing Toyota. Their GMC division has set annual sales records for 11 of the past 12 years and GM regained overall truck sales leadership in 2001 and continues to hold it. GM has a lot going for it that doesn't make the headlines.
Having said all of this, will my pension check in 2008 still say General Motors on it - or will what is left of it be coming from the PBGC? GM management and the UAW leadership have been playing brinkmanship for far too long, but recently, the UAW seems to have come to the realization that their contract is no longer sustainable in the current marketplace. If there are no more marketplace "shocks" like 9/11 or $4 gas between now and 2008, and if the new union agreement in 2007 significantly increases hourly worker health care cost sharing AND eliminates the "jobs bank", I think GM can survive without resorting to Chapter 11.