Wake Up, Folks, We’re Going to Have an Auto Industry
My compadre tgriffith got all steamed last week about the chintzy buyouts GM and Chrysler have offered their workers. For $20,000, much less than one year’s pay, and $25,000 toward an already-depreciated, devalued car, GM workers sign over their rights to receive all retirement and health care benefits.
The company wants to shrink the number of its long-term employees, since it pays far less for new ones. Well, would you take that offer if you knew there might be a bailout coming? And why would you take it anyway?
One year ago, GM was offering its entire hourly workforce buyouts of $140,000 for those with 10 years of service or more, $70,000 for those with less. Buyout offers have been a fact of life in the car industry for years.
A Little History, Please
Those who commented on tgriffith’s post, with the exception of Randy, have no idea how the auto industry works, much less the UAW. They don’t know that both company and union are carrying $47 billion in retiree health care costs, and that is the biggest obstacle to an agreement right now, the union having given way on most issues since 2007. New workers at the Big Three and the transplants are paid roughly the same.
Detroit has a 70-year history with its workers, whereas the transplants in this country virtually just arrived. In better times, the UAW and the Detroit companies made expensive and expansive deals each is having trouble living up to now.
The larger point is that everyone knows President Obama is committed to having a viable auto industry, and he has created a task force of his top economic advisors to bring that about. Messrs. Geithner, Summers, Bloom & company will have their hands full, but they aren’t stupid people.
Through bankruptcy, formal or informal, the companies will get remade and restarted. Wagoner, Nardelli, and their top brass will go, many jobs will be lost, and you and I will pay for it. Why? Because the alternative is much worse.
Four Big Potholes Ahead
I see four very big economic problems that will have to be solved. If not, you’ll see the much worse alternative. I’m not even looking at the energy side, which may or may not give us the new cars we all like to write about.
U.S. automakers and their dealers are swimming in inventory, and the problem will get worse. With sales tanking and factories still producing, though at a lower rate, inventories will grow this year. Nobody sees demand increasing enough to catch up for a long time. Prices will continue to drop, including those for hybrids.
Health care costs are at the root of much of the cost problem for the industry and the nation. With retiree benefits cut, unions have assumed more and more of the health care burden. With fewer employees, they will have less clout and may even cease to exist. We desperately need a national health care policy that will spread the risk, cut the costs, and reduce the advantage the imports have.
Finally, there are two other predicaments we have often written about here: one, the expensive and inefficient dealer network and other structural problems in the industry, like its enormous fixed costs; and, two, the supplier network which serves all car manufacturers. A cascading failure of suppliers could well bring down all the companies, foreign and domestic. And another million jobs would be lost.
So, we’re looking to the feds and Mr. Obama’s people to come up with brilliant (or at least workable) solutions. To solve these massive problems, there will have to be fundamental reform in the industry, and that means a kind of bankruptcy or “reorganization.” The costs may not all be borne by taxpayers. There has been recent talk about other financing options, maybe the banks, maybe foreign companies. One China firm was reportedly talking to Chrysler, though the firm denies it.
Bottom line: Let’s start thinking about how to help the industry survive. Worker buyouts aren’t the answer. (If they were, why didn’t more folks take them?) Besides, we may all be getting a very nice discount voucher on a new car soon.
Would a $10,000 discount on a $30,000 U.S.-made car or truck tempt you?
We just got word that Ford signed a deal with the UAW permitting the company to substitute its stock for up to half the payments owing into the health retiree fund (VEBA), subject to member and court ratification. For Ford, that comes to $13.2 billion.
This effectively means that GM and Chrysler will follow suit—something they had been hoping to achieve in their talks. I think Ford beat them to the punch simply because they are in better financial shape. The union would be crazy to offer this deal to their competitors, who are edging ever closer to bankruptcy. It’s like buying health insurance from a firm that’s sure to go under.
But they will probably make this final concession in order to get a deal from the Feds.
What should happen, as I said above, is universal health care, but that’s impossible in the urgency that faces the industry now. Maybe the government will backstop the union, as it seems to be doing for the banks, so as to take the health care burden off their back when and if times improve.
As some wag said in a comment on the NY Times story, “I wonder if the Ford stockholders, management and board would ever accept a deal similar to this for their families’ future?”
GM shares rose from their lowest since the Great Depression to $1.84 today.