GM's Problems are 50 Years in the Making

[Andrew_Pakula]

I thought this was an interesting look at GM's problems, more specifically their union contracts from the past 50 years.

FiveThirtyEight: Politics Done Right: GM's Problems are 50 Years in the Making

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GM's Problems are 50 Years in the Making

Let's take something of a 30,000-foot view on the condition of General Motors. The chart below details GM's operating margin -- its profits divided into its revenues -- over the past 50 years:

http://4.bp.blogspot.com/_ov-pT1x-W8...1k/s400/gm.png

I haven't provided the dates on the chart because they aren't important. The auto business is highly cyclical because consumers are buying expensive assets that last for years at a time. Nobody ever really has to buy a new car (they can buy a used one if their car breaks down), and therefore consumers are willing to hold on to their existing vehicles and wait out economic slumps. You can't do that with, say, a loaf of bread, or even something like a cellphone, which has a much shorter lifespan.

But you knew all of that already. The remarkable thing is that, once you account for the economic cycles, the trend for GM is exceptionally steady -- an exceptionally steady trend downward. There were still bad times thirty years ago -- but they weren't bad enough to threaten GM's survival, and conversely, the good times were much better. These are General Motors' operating margins by decade:

Average Annual Operating Margin, General Motors
1960s: 8.7%
1970s: 5.5%
1980s: 3.0%
1990s: 1.3%*
2000s: -0.5%
* Excludes one-time $20 billion accounting charge for retiree health benefits in 1992.

If I were an alien beaming down from Rigel-3 looking at this pattern -- an alien with an MBA degree -- my first guess is that it would reflect some sort of systemic problem, some chronic imbalance that magnified over time. Something, in other words, like the costs of GM's retiree pension and health care programs. It's difficult to get a precise figure on these so-called legacy costs, but they averaged about $7 billion per year between 1993 and 2007 and are probably at least $10 billion per year now. Considering that GM has never made as much as $10 billion in profit in a year and that its entire operating lossses in 2008 were $13.8 billion, you can see why this is a significant problem.

Of course, GM benefited by promising its employees access to lucrative retirement programs -- it benefited by being able to pay less to those employees in the form of salary. But whereas the benefits to GM came long ago, the costs come now. This, indeed, is the entire crux of the problem, as is cogently explained by this Washington Post article from 2005:

GM began its slide down the slippery slope in 1950, when it began picking up costs for medical insurance, pensions and retiree benefits. There was huge risk to GM in taking on these obligations -- but that didn't show up as a cost or balance-sheet liability. By 1973, the UAW says, GM was paying the entire health insurance bill for its employees, survivors and retirees, and had agreed to "30 and out" early retirement that granted workers full pensions after 30 years on the job, regardless of age.

These problems began to surface about 15 years ago because regulators changed the accounting rules. In 1992, GM says, it took a $20 billion non-cash charge to recognize pension obligations. Evolving rules then put OPEB on the balance sheet. Now, these obligations -- call it a combined $170 billion for U.S. operations -- are fully visible. And out-of-pocket costs for health care are eating GM alive.

GM was willing to cut its employees some very attractive deals in the 1950s through the 1980s -- provided that they took them in the form of retirement benefits rather than salary, which wouldn't hit GM's books until much later and which until 1992 weren't even required to be carried on its balance sheets all, making its financial statements (superficially) more appealing to its shareholders. That health care costs have risen so substantially in the United States have made a bad matter worse.

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. In the 50s, 60s and 70s, everyone benefited: GM and its shareholders got the benefit of higher profit margins, and meanwhile, its employees benefited from GM's willingness to cut a bad deal -- for every dollar they were giving up in salary, those employees were getting a dollar and change back in retirement benefits. But now, everyone is hurting.

Nor does this provide for much in the way of solutions. The retirees might have benefited from GM's short-sightedness -- but they also worked hard Monday through Friday every week of in expectation of receiving the benefits that GM had promised them. From the standpoint of fairness, it would be much better to require GM to take the hit -- but there isn't much of GM left to punish, as its outstanding retiree obligations exceed its market capitalization many times over, and as the decision-makers who led GM into this position left the company decades ago. Today's employees at GM, and the unions that organize them, likewise don't have anything much to do with the problem -- most of the excess costs it requires to produce a Buick versus a Toyota come in the form of legacy costs, not what those employees are receiving in salary and benefits today. And the taxpayer is bound to to get screwed either way, either picking up the tab to bail out GM, or bearing the costs of the pension programs, which are guaranteed by the government (although the legacy health benefits aren't guaranteed).

Policy-makers, finally, share in the blame too. General Motors might be the latest casualty of the distorted incentives created by our employer-based health care system. Meanwhile, the government would probably improve incentives by providing a more generous Social Security guarantee in lieu of guaranteeing private pension programs. The whole idea of Social Security is that people do an inadequate job of saving when left to their own devices. But companies, even companies as big and proud as General Motors, are overly concerned with the present as well.

[redbull]

yep.

[Nimrod's Son]

The problem is the unions and that the federal government gave them too much power by interfering

[dudehitscar]

Originally Posted by Nimrod's Son

The problem is the unions and that the federal government gave them too much power by interfering

of course... Management shares no blame.. NONE.

[Trotskilicious]

yeah i think an equal share should be levied at the excessively bloated framework of GM. I mean, how do you make money when you have like six or seven different companies making the same cars?

i mean it makes sense to have stuff like Vauxhall and Opel under the banner of GM but having Buick, Pontiac, Chevy, and Cadillac which all make full lineups of cars for the American market just doesn't make a lot of sense. Toyota doesn't have seven different brands of full car companies under one corporate namesake. Toyota has Lexus (luxury sedans), Scion (tuners) and Hino (busses and trucks for japan) and that's about it. I don't think Scion, with a lineup of a whopping 2-3 cheap sports cars even counts as a full company, just a brand.

I mean if GM went ahead and said ok, Caddy is the luxury division, Chevy is the general cars and trucks lineup, pontiac is performance sports cars, and Buick...(what the fuck is buick for?) and GM did industrial stuff...i think that would work better. Buick, Saturn, Hummer all need to be shut down. There's just too much fucking overhead. I mean we're looking at five companies that all make midsize sedans for the american market. And this is not counting Saab which is currently being shopped around.

But yes, even though I'm a big labor guy and a general leftist there's no reason that american car makers are obligated to pay their employees 80/hr when Toyota can set up in San Antonio and pay their guys 40/hr. As if 40 an hour is somehow unreasonable for someone to make without a college degree.

[Nimrod's Son]

Originally Posted by dudehitscar

of course... Management shares no blame.. NONE.

they do in many regards for the lower gross profits, but if you look at what that chart is saying and the article itself, it's not talking about gross profits. it's talking about operating margin, which i do believe is a direct result of ridiculous union contracts that, should management not agree to, the unions strike and then the government steps in and protects them

[Trotskilicious]

yeah it has nothing to do with management's excessive overhead

or the fact that the recent plummet (even though we're talking about 50 years of GM) has a lot to do with the fact that an energy crisis lowered sales of the SUVs that GM was churning out, when they have at least five companies making SUVs and Chevy itself making 2-3 different models of SUV and SUTs. There really was no long term planning, and if you read about Toyota, one of their foundations of business philosophy, in fact, I think it's the 1st rule of the Toyota Way, is that long term planning should be prioritized before short-term profit.

theoretically, crowding the marketplace with 10 SUVs made by GM should increase profit since odds are better that consumers will buy a GM suv be it an Esc-O-Lade, Jimmy, Trailblazer, Hummer or a Suburban but then you have to figure in all the production cost for the seperate plants, the managerial staff for those plants, the GM coordination staff that has to make sure everything is working smoothly and all of that. I mean it's just a total goddamn mess. It's about as labyrinthine and counterproductive as your average government.

[Trotskilicious]

there have even been models of vehicles made by axillary companies of GM that were for all intents and purposes identical. what is the point of that?

[Nimrod's Son]

Originally Posted by Trotskilicious

yeah it has nothing to do with management's excessive overhead

or the fact that the recent plummet (even though we're talking about 50 years of GM) has a lot to do with the fact that an energy crisis lowered sales of the SUVs that GM was churning out, when they have at least five companies making SUVs and Chevy itself making 2-3 different models of SUV and SUTs. There really was no long term planning, and if you read about Toyota, one of their foundations of business philosophy, in fact, I think it's the 1st rule of the Toyota Way, is that long term planning should be prioritized before short-term profit.

theoretically, crowding the marketplace with 10 SUVs made by GM should increase profit since odds are better that consumers will buy a GM suv be it an Esc-O-Lade, Jimmy, Trailblazer, Hummer or a Suburban but then you have to figure in all the production cost for the seperate plants, the managerial staff for those plants, the GM coordination staff that has to make sure everything is working smoothly and all of that. I mean it's just a total goddamn mess. It's about as labyrinthine and counterproductive as your average government.

we. aren't talking. about. gross. profits.

[Trotskilicious]

i'm talking about operating margin here dude, which is a function of profit, isn't it?

i mean i thought that we were dividing its profits into cost. I dunno where you got "gross profit" in there, anywhere. the whole point of it is that their operating costs are enormous because of the corporate structure, not just the guy on the line, but the entire scope of the entire operation. pensions and salary and all that are part of the entire mismanagement of the company. the reason they have to pay so many pensions and what not is because they have too many employees because they have five different brands making the same model car.

[redbull]

and they're also paying all those employees 80/hour

[Trotskilicious]

and more

i mean for every Pontiac, every Chevy, every horrible Buick there's a design team, engineers, advertising personnel, and executives and managers for every one of those teams that all get pensions, salaries, and medical coverage. the thing is so big it's just ludicrous.

to blame the line guys in addition to mr. big evil government is a really myopic and small minded point of view but you know that's nimrod in a nutshell

[Nimrod's Son]

nobody is blaming the line guys... seriously, you must be drinking.

[duovamp]

Originally Posted by Nimrod's Son

The problem is the unions and that the federal government gave them too much power by interfering

There are always going to be costs of production. If you sell a profitable product, then those costs are offset. GM doesn't offer a product that is profitable. Nobody wants to buy their shitty cars, and what cars they do sell don't make up for all the horrible decisions they've made in inefficiently producing their vehicles, or making them of poor quality, or whoring out the same car to nine different badges.

Cost of labor is one cost of production, but the others that GM brought on itself are considerably larger than blaming the workers. Blaming the workers is the easy route, and the last ditch effort for management to explain generally HORRIBLE executive decisions.

The least of GM's problems is worker pay. If you're familiar with the automotive business, you'd know this. If you're familiar with any business, this would at least be more apparent.

[duovamp]

Here's a big cost of production GM doesn't complain about:

A look at the GM way of handling one car, the Cobalt:
1. Engineer chassis for Cobalt
2. Design exterior and interior of Cobalt
REDESIGN AS PONTIAC Gx
3. Pay designers to re-design the Cobalt as the Pontiac Gx, both inside and out
4. Pay engineers to make this happen
5. Pay for marketing to sell this vehicle
REDESIGN AS SATURN ION
6. same
7. same
8. same
DESIGN SEDAN VERSION
...
DESIGN SS VERSION FOR CHEVY BADGE


Okay, now do the same with the sedan, but as a Saab. And now a Buick. And now a Cadillac.

Seriously, the least of GM's problems is how much their line workers want. They could pay those guys six cents an hour and be four billions dollars in debt by the end of the quarter.


UNIONS! IT'S UNIONS! UNIONS UNIONS UNIONS!

[Nimrod's Son]

operating margins. operating margins. operating margins.

i dunno how many times i try to point out that we're not talking about gross profits.

[Trotskilicious]

i guess because nobody's talking about gross profits and we're talking about overhead

maybe since this is apparently so hard to for us to understand you'd actually like to demonstrate some learned knowledge and explain this simply for us lowly plebes? Because i'm having a hard time figuring out why "revenue" only counts "ridiculous union contracts" and not the entire cost of the corporation.

i mean we're still talking about every employee in the company over a 50 year span aren't we? are we not talking about the fact that it's so big and so inefficient because this isn't about gross profit it's about operating margin?

I'll confess I don't really know why we're dividing profit by revenue. But the way I understood it was that "operating cost is going up." And that's not just because of the people they're paying now, it's because of the people they're still paying on pensions and through health care, etc, which includes EVERYONE not just people in nebulous "unions."

[Trotskilicious]

Originally Posted by Nimrod's Son

nobody is blaming the line guys... seriously, you must be drinking.

...

Originally Posted by Nimrod's Son

The problem is the unions

Originally Posted by Nimrod's Son

direct result of ridiculous union contracts

[Nimrod's Son]

the "line guys" aren't the Union.

[Trotskilicious]

so when are you going to stop being contradictory and condescending and actually put out an argument that owns all of us

[Trotskilicious]

i'd really love to hear it

[Trotskilicious]

seriously

[ryan patrick]

Originally Posted by Nimrod's Son

they do in many regards for the lower gross profits, but if you look at what that chart is saying and the article itself, it's not talking about gross profits. it's talking about operating margin, which i do believe is a direct result of ridiculous union contracts that, should management not agree to, the unions strike and then the government steps in and protects them

i think what you see in this article depends on how you feel about unions.

Nate's argument is that the reason that this is a steady, mostly linear decline, instead of a straight line, is that GM was striking deals that traded lower pay for sweet longterm retiree benefits, instead of a more balanced agreement that would have paid higher salary but less sweet retiree benefits.

if you like the idea of unions, you'll assume as Nate puts forward that this is GM's fault for pushing for these deals in order to keep operating margin high in the short term without worrying about the consequences down the road. if you don't like unions, I guess your assumption is that the union demanded it be this way and GM either foresaw the problems but had no choice or didn't have leverage to bargain but assumed things would work out because they were maintaining high operating margin at the time.

[ryan patrick]

while we have a GM thread up, i was thinking GM's best hope for the future, the Volt, has a 40 mile range on its batteries. the Tesla Model S, coming out a year later and costing according to current figures about 17-25k more (significant, but we're talking 57-65k instead of 40k so they're both a bit up there) is getting a 300 mile range on batteries on the higher end model and 150 miles on the lower end. i assume GM could have extended the range and chose not to so they could keep a gas motor around. but if i was a consumer who was into electric cars and had the money i think the choice is pretty clear here.

[severin]

Originally Posted by ryan patrick

while we have a GM thread up, i was thinking GM's best hope for the future, the Volt, has a 40 mile range on its batteries. the Tesla Model S, coming out a year later and costing according to current figures about 17-25k more (significant, but we're talking 57-65k instead of 40k so they're both a bit up there) is getting a 300 mile range on batteries on the higher end model and 150 miles on the lower end. i assume GM could have extended the range and chose not to so they could keep a gas motor around. but if i was a consumer who was into electric cars and had the money i think the choice is pretty clear here.

jesus, 25k more is the cost of a normal car. that's more than "significant, but".

but in there lies the problem. if the big auto makers would have gotten into the serious electronic cars market like 10 years ago and started research on batteries, they'd be able to produce cars with the mileage of the tesla for less the price of the volt by now. one because the batteries would be better and two because they'd have the quantitiy to roll over research costs much better. two things the tesla currently struggles with. and afaik the overheating problems of the tesla battery-system are not really solved

[ryan patrick]

well other figures would have it only 13k more because people are predicting the volt will actually be around 52k. but i have no idea if that's right, GM's figure is still 40k for now but they started aiming at 30k.

i'm just saying if you're going to drop 40-50k on a car solely because of its electric car function, 57-65k for a far superior product isn't that much more of a hole in your wallet.

the tesla business model seems good. they were selling their high end luxury roadster at 109k to finance this second project, the model s, still luxury priced at 57-65k right? but the goal is to use the technology developed for and the revenue from this project for a third car more in the range of the average consumer (aiming for under 30k). that third, affordable car isn't due until 2012 at the earliest though, and it will probably be later. and 2013 might be too late.

[duovamp]

The Volt was never intended to be an actual Prius fighter. It's just a PR move designed to showcase GM's hybrid technology.

The Model S is more of a BMW 540 fighter.

Tesla's business model sucked until they decided to make a sedan. Otherwise they just grabbed an Elise chassis (known for its lightness) and packed a bunch of heavy batteries in it which weighed it down, thus making the Roadster a rather pointless vehicle. With a big sedan, however, being heavy isn't really an issue because most big cars like that have some heft to them in the first place.

Anyway, the Volt is just PR, like the FCX Clarity.

[ATS]

gm makes shitty cars, we have a chevy aurora and it is a hole you throw money into

[Nimrod's Son]

Originally Posted by ATS

gm makes shitty cars, we have a chevy aurora and it is a hole you throw money into

If you mean an Olds Aurora I had a 1995 one about 10 years ago and that thing was fucking awesome.

[gurr8]

The article is fantastic - and this post is off-topic...But I can't sit here and read this drivel without responding to it.
If it's at all relevant, I've been in the car business for five years selling import cars: I have little love for GM...

Originally Posted by Trotskilicious

if you read about Toyota, one of their foundations of business philosophy, in fact, I think it's the 1st rule of the Toyota Way, is that long term planning should be prioritized before short-term profit.

If you read about Toyota, you'll realize that nobody has been making more mistakes in the USA market over the past couple of years.
For example:
-Building huge capacity and totally mis-reading the market that resulted in a year-and-a-half old truck plant being mothballed
-the Mississippi plant* that was going to build Highlanders (until the SUV market crashed) so they began modifying it to build Priuses (until the hybrid market crashed) so now the plant is mothballed.
-Two years ago Toyota was pushing it's Tundra line of (shitty)** full-size pickup trucks while GM was pushing it's Volt. This was just before gas prices went into ludicrous speed.

Originally Posted by duovamp

Nobody wants to buy their shitty cars

GM sells more cars*** than any other automotive manufacturer. "If you're (sic) familiar with the automotive business, you'd know this."


GM has done more to improve their product and make it more relevant than nearly any company (with the exception of Ford). Toyota has been doing everything wrong, they just have the cash reserves (for now) to weather the storm and hopefully not make any more mistakes as huge as the ones that they have made.
What pisses me off is not how wrong you are about these things, but how certain and condescending you are from your position! ("if you read..."; "if you're familiar...you'd know this...") This isn't a simple battle of good v. evil and neither of you would have the first clue about running these companies. It's a tad more complex than you're making it out to be.

One final point...these companies are suffering far more than they should because somewhere along the line they tried to use predictions and focus groups to figure out what consumers are going to want...An impossible task with a product as slow and expensive to produce as an automobile. Successful companies don't try to meet demand, they create demand.

[/threadjack]

The article is bang on 100%. It would be nice to see more thoughtful analysis like this during the economic crisis.

*Toyota delays Mississippi Prius plant indefinitely - USATODAY.com
**YouTube - Ford F150 vs Chevy vs Toyota - Bed Bounce
***Auto Sales - Markets Data Center - WSJ.com