General Motors (GM) and, for that matter, all three of the American auto companies are at a point, now, where they have to come to grips with the realities of going bankrupt. Any Federal bailout money will just delay the inevitable. It doesn't matter if they retool for more fuel efficient cars or not. Actually, retooling will just increase their expenses and their losses. The real problem with our Detroit-based auto industry is a structural one. GM is losing over $1800 a car and they will continue to lose $1800 a car after the bailout. It doesn't matter if they are selling hybrid's or electric cars or one of their highly fuel-inefficient Humvee's. Even if GM was able to sell twice as many cars as it does right now, the loss per car would still be $900 a car. Quite frankly, with oil prices falling as fast as they are, having a fleet of fuel efficient vehicles isn't as important as it was just a few months ago. The conditions for the loss will remain; with or without the bailout monies. The real problem is not the loss of sales.
GM's biggest problem is that it has enough retired pensioners and their surviving spouses to replace the entire population of the City of Detroit. That's more than quadruple the number of active, world-wide employees. Similarly, the number of retirees at Ford and Chrysler, combined, would also replace the population of the "Motor City." Taken all together, those 2 million pension holders at GM, Ford, and Chrysler are equal to the entire population of this nation's 4th largest city: Houston, Texas. Much of Michigan's auto industry revenues are being eaten up in the funding of pensions. In effect, every employee at GM, Ford, and Chrysler is literally working to support 4 retirees. Further, more than half of those pensioners are getting paid health care for life. All those retirees are living longer and, because of that, they will need more company-paid heath care services in the years to come.
GM apparently didn't learn from their own past. When the railroads in America converted to the diesel engines, mostly made by GM, the efficiency of those new locomotives was lost because the railroad worker's unions demanded and obtained contracts which maintained obsolete coal tenders on board each new diesel locomotive. They already had obsolete brakemen on board as a result of past contracts. Like the union auto contracts of today, the railroads were burdened with higher and higher costs for pensions. Taking advantage of this cost inefficiency, GM (for both trucks and engines), White, and other truck builders in America converted their trucks from gasoline to the more efficient diesel fuel. This fact also allowed them to increase the gross weight that each truck could carry; making the cost of transporting cargo more economical than rail. Then, lobbying our government, the highway weight restrictions for trucks was upped on all the roads of the then-new interstate highway system. Ultimately, the trucking industry was able to kill hundreds of inefficient and labor-burdened railroad companies with excess pension by moving freight more efficiently and at lower cost by truck. GM did, then, what Toyota and the other domestically-based foreign companies are doing to GM, now.
The lesson is one of both productivity and mechanical efficiency versus labor inefficiency. Toyota, Nissan, Honda, BMW, Mercedes, and Hyundai all have plants in America that are efficiently and cost effectively pumping out cars. They, too, have been hit with slowing sales due to the credit crunch and recession but, unlike GM, they are not in any serious trouble. They have no labor unions or massive group of pensioners and are not saddled with contracts covering work rules, vacations, retirement age, etc. and those that limit the use of manufacturing robots. Their plants are highly efficient and that is one of many reasons (along with the cost for active and retired labor) why GM, Ford and Chrysler have been unable to raise prices to cover their losses. Quite frankly, the U.S. based Asian auto manufacturers' management were smart to be more consistent with fuel efficiency in their vehicles than the Americans were with their emphasis on gas-guzzling SUV's. The market, which had already been strong for the Asian auto builders in America, only got stronger as the price for fuel went up. In contrast, GM, Ford, and Chrysler all lost sales for their gas-guzzlers as prices for oil hit record highs.
This problem with GM didn't just happened. Over the last 40 years they have gone from 53 percent of the domestic market to below 20 percent. Now, they are nearly in a tie with Toyota for total domestic sales. They have too many car lines with too many duplicate classes of vehicles. In comparison Toyota only has three lines in America (Toyota, Lexus, & Scion). In the year 2000, GM stock was selling at an all time high of $94 dollars a share. Since then, the decline in the stock price has been a near-perfect straight line to last week's low of $2.75. Ford has moved from a high of $38 per share in 1999 to last week's low of $1.72. Obviously, the traders in the stock market had seen the writing on the wall as early as 9 years ago; starting with Ford.
In my mind, GM and the others should be allowed to take the shock of bankruptcy. The billions of dollars in proposed Federal funding should be used to fund GM's underfunded remainder of their pension responsibilities under a Congressional Act of 2006. The Congress should, then, mandate the Federal government's Pension Benefits Guarantee Corporation (PBGC) to assume the pension responsibilities of the company. The same would be true for both Ford and Chrysler. All existing active labor contracts should considered to be negotiable; with those negotiations aimed at more reasonable health and retirement benefits and age of retirement. The plant robotics and work rules issues should also be revisited. GM, more than Ford or Chrysler, should look to slimming the number of makes and models. This will focus engineering, parts, and production on just a few lines of cars and would eliminate the redundant overlap of lines that they have today. Some workers will definitely lose their jobs. Some dealers will have to shut their doors. But, the union should look at this as a semi-blessing because the consequences of GM completely going out of business would be much more detrimental to their overall membership.
With the pension burden gone, the auto industry should be able to remake themselves and be more competitive. In the years forward, they should be able to regain market share and even hire more union labor. Our government should also spur auto sales by initiating the rebate program that I talked about in by blog entry the subject of creating jobs (See Full Story). If this is not done and the Federal money is just handed to the industry, GM will be back addressing the same "going out of business" problem of today in just a year or two from now when this money runs out and the losses are even bigger. Just mark my words.