Wake Up, Folks, We’re Going to Have an Auto Industry

February 23rd, 2009

chrysler-plant-2My 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.

car-glutU.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?

—jgoods

Update

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.

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  1. | #1

    Not really fair to say that people who commented on last weeks blog post doesn’t know anything about the auto industry.

    I’m well aware that providing employees with $25,000 and a brand new Malibu is actually a cost cutting measure, and my issue is with the UAW AND GM and Chrysler. The deals made with the UAW, which Randy so passionately defends, simply guarantees unionized workers MUCH better benefits than any other industry. If my employer needs to cut costs, I get let go (like 5 million Americans have) – I’m pretty sure that I wouldn’t be offered $25,000 and the keys to a new Chevy Malibu. When I retire I don’t get lifetime health-care coverage through my employer, so why do unionized workers get, and feel like they are owed, that benefit? Why did GM and Chrysler (and Ford) agree to those terms?

    When contracts state things like “Eligible employees cannot be laid off because of new technology, sourcing decisions, or company-implimented efficiency actions” what hope do the manufacturers have? Basically that says that if GM finds a way to run their operations in a more efficient and cost saving manner, they CANNOT lay off employees.

    It’s unfair to say people don’t know anything about the auto industry, or that they hate the working man, because his opinions on the UAW and The Big 3 are different from yours.

  2. CQ
    | #2

    nicely put Colin R.

  3. david
    | #3

    You ignored the fact that we’re really not very good at making cars. We haven’t been for quite some time. Some of the blame for this goes to the union – demanding exorbitant wages and benefits for diminishing quality of work is wrong, but they had the power, and they abused it. The CEOs certainly weren’t going to take a hit, and the stockholders still want a return on their investments. Corners have to be cut some where, so now too many American cars are these flimsy, plasticky pieces of junk that still are nowhere near worth the sticker price. Wanting to support your country is one thing, but if the deal on the table is $30K for crap, then no thanks, I’ll take a Honda.

    Which is not to suggest that I even have $30K to spend on a new car right now. I drive a 1991 Acura (older than my driver’s license) w/ 260000 miles. It is still in better shape than my 1998 E150 that I work out of (at 160000 miles). Fact: Most American cars are junk, and the big three deserve to fail. They can force a rewrite on their deal w/ the UAW, and if the union members don’t like it, they can quit (or hang out in the parking lot w/ their picket signs). Plenty of other people need a job right now, and will be happy to do it for less.

    Some weeks ago, I read an article (I have since been unable to relocate it – I would love to have direct quotes, but I don’t, so what follows is a paraphrasing). During one of the bailout hearings, a Congressman asked why they don’t try to restructure themselves like some of the Japanese automakers. One CEO responded along the lines, “well, we don’t operate the same way as the Japanese.” What? Don’t you think maybe that’s part of your problem? Where exactly do the two business models diverge? The Japanese make quality products that people want to own, and American companies can’t live up to that standard? I don’t know. It just seemed very bold, for him to show up w/ his hand out, and then to respond like that.

    To respond to your apparent attitude of “YAY, bailouts!” – who’s going to pay for it? The government is just as bankrupt as the big three. At the approximate age of 12, I asked my father why the government didn’t just print more money if they needed to pay down the national debt, and he explained to me that the more money you put out in circulation, the less each individual dollar is actually worth. And so it was that there, at the approximate age of 12, 5 minutes after I asked that question, I apparently had a better understanding of how money works than the US government has had since the last depression. I don’t want to buy their crappy cars, and I certainly don’t want to buy their crappy car companies. If I did want to buy the company, I’d hit the stock market. It’s like a fire sale down there.

    To respond to your apparent attitude of “YAY, nationalized health care!” – who’s going to pay for it? First off, this government is good at two things – spending money and killing people (not necessarily the specific people they’re looking to kill, but a lot of people are dead, nonetheless). It does not know how to run a business (neither well, nor profitably). Under a nationalized health care system, do you really think you would get anything better than the absolute lowest standard of care? Every now and again, I hear someone say they’re going to Canada, because they’ve got free health care. First off – no you’re not. Second off – have fun on that waiting list. I hope you didn’t want that mysterious lump looked at this month.

    At long last, to tie all this together (this was supposed to just be a simple response, and i accidentally wrote another essay (or a rant)), our money is not worth anything. Making more of it and injecting it in to the system will not ever work. There is a set, finite value that this country is worth, and every time we dilute the money pool, that hurts all of us that live here and depend on these scraps of paper in which more and more people are losing faith. I am scared to death that too few people are going to see this coming until, like pre-Nazi-Germany, it is going to take a damned wheelbarrow full of Americabucks to buy a loaf of bread.

    And then who are we going to elect?

    Further, to respond to your title, yes, we will have an auto industry, but it will (rightfully) be limited to foreign brands operating manufacturing plants here and the little boutique brands who, unlike the big three, are doing some really cool outside-the-box stuff w/ full electrics, though they remain outside of most people’s price range for now. Just let the dinosaurs die. Maybe in a couple million years, some future species will find a way to use the big three’s stock certificates as a fuel source.

  4. V8 ALEX V8
    | #4

    I find it frustrating how people keep looking for a solution to this problem like its just something thats hiding… there is no easy solution … The solution isnt gonna be good and it wont be pretty… personally i think they need to wholesale their old inventory immediatley… i mean start selling cars at COST +10%+ delivery… just to move the inventory… sell everything thats in stock or recycle it… Im sure it would cost a lot of money but if certian lineups of vehicles need to be axed for the good of the companies the engines can go elsewhere and everything is shared cross platform… it may be time for GM to take a look at its pontiac and buick lines… maybe its time to cut one of them just to cut costs a bit…

    FORD
    Ford seems to be on the right track in bringing their european spec vehicles here to north america… but its a little late in my opinion… the mondeo is a fantasitc car and often frequents the top 10 surveys in the Britain… why isnt it here then? seems like a no brainer… the focus and fusion have proven to be good cars and personally i love both… the new addition of the supermini ford (the name escapes me right now) is another bonous… Personally i like the Ford FLEX and its a good car… huge cargo space, efficent realitive to competitors, and i suppose beautey lies in the eyes of the beholder because its love / hate styling… i love it… the mustang is the longest running sports car next to the corvette in american automotive history and i dont see it going anywhere soon… but it too could use another kick in the pants…

    GM
    I too like much of the GM lineup… they have produced many vehicles with inexcusable interriors for far too long though. The biggest problem with GM is that they try to carry on too many lines… Pontiac, Buick, GMC, Saturn, Hummer, Caddilac, SABB, and of course Chevrolet… But i think you could cut Buick, Pontiac, Hummer, and possibly even Sabb… because when i think about their lineup they are all the same cars with different styling and trim levels… Do a malibu in a number of luxuary trims or something… you dont really need Buick when you have another awesome luxuary brand in Caddilac… The SRX is brilliant… whats the point of all the different Pontiacs? the G5 is a Cobalt basically, The G6 is a malibu, and the G8 an impala… so cut the fat… the Corvette will never be extinguished completely and is still my favorite GM product… the only true casualty of pontiac dissapearing would be the loss of the Solstice… all the buick cars have a caddilac sister car so axe it and sell caddilac or vice versa i love the lucern and the enclave…

    DAMIER CHRYSLER
    Waow what can i say about this company? Seriously theres 4 cars i like from them and 3 are built on the same chassis… the 300C, the Charger, The Challenger, and the insane Viper… Seriously heres the brakedown of the Chrysler lineup… 300 good… Aspen outclassed by almost every other competitor… terrible ride worse fit and finish. Sebring convertable… are they seriously still making these??? WHAT THE HELL FOR!??? who buys these other than rental car places in florida??? Sebring sedan… see previous comment but add fact that its worse because you cant look out of the vehicle as easily… Town and country… possibly their only redeeming vehicle if you like being boring… but its a copy of the caravan which is pretty good… DODGE, Avenger: tiny version of the charger. Caliber: suppose to be the replacment for the neon… hardly… dakota inferrior to competitors trucks. Durango based off the jeep platform and is outclassed in most aspects. it does however offer some offroad potential… Caravan see town and country remarks… Journey Seriously??? Get a ford escape better in every way… Nitro, the gutless wonder… and its called nitro FLEX FOR ME THANKS! the RAM series trucks have always been pretty but there not really the toughest trucks out there…. they are luxuary trucks and id take a F150 over a loaded 1500 anyday… im not even gonna comment on the sprinter but will mention the viper… its a lunitic with an axe comming to get you… and i love it for that… building the largest engine in production is cool… and as far as jeep goes… i just dont want it anymore … some pepole might because they do some decent offroading and are quite cheap but its been a dying brand for a long time… IMO its time to let this company go… im sure they could downsize and just sell the viper, charger, and challenger… the three desirable cars that currently are produced by this company…

    So in conclusion i think that the companies need to cut the fat here and FAST!!! its time to liquidate and start downsizing their lineups…

    I hope this generates some controversy because that sparks ideas… and those are good…

    CHEERS
    and no my name doesnt mean that i dont respect all cars… i do if they are legit good!

    CHEERS

  5. Car Man for too many years!
    | #5

    Tons of subject matter here on the bailout/restructuring of the industry. First to a few common misconceptions:
    1. basic quality is about the same these days between Ford, GM, Toyota, Nissan et al
    2. That being said the feel, interiors, general driving feel, and value retention in Japanese vehicles is generally much better.
    3. Production here for the Japanese is benefited because they put their plants in non-union areas.
    4. The old edge for the Japanese may not survive this recession. They are losing their butts now as well, and I might add that if you look at their home market, it makes our look good. The overall economy in Japan is down 12.7%, yes 12.7%. Only 25% of younger men in Japan long to own a car. Their business plan is suffering too.
    5. Their system worked based on fewer model and equipment offerings and great production technique. Detroit was WAY behind on incorporating vision and a dedicated plan.
    6. As was pointed out the basic pay is about the same between guys on the lines, it is the benefits built from decades of labor unions that hurt.
    7. Yes, entire brands need to go away

  6. Panayoti
    | #6

    The issues raised by the author are legitimate. Growing inventories and incentives offered by Detroit are obviously not moving enough vehicles and the author is correct in his observation. Why are they still producing ANY vehicles in this climate?? Alex hits the nail on the head when he suggests clearing out inventories NOW, despite the cost.

    Health care costs are indeed only part of the problem. Universal health care however, as David points out, is NOT the answer. If we are talking about that kind of health care, we are looking at something close to the Canadian model which most observers would agree, doesn’t serve its base very well. Colin points out the larger problem of contracts and the insanity of work rules pervasive throughout the industry. I also agree with Colin’s larger point of worker’s sense of entitlement concerning their benefits. I usually always side with workers in their relations with management, but here, I will part ways simply because of attitude.
    This is life and death and these guys and their sense of entitlement is somewhat nauseating.

    I believe that most of us don’t share that attitude but feel that working for employers that do their best to make things “right” for their employees is a blessing and a privilege. My suggestion for heath care is a market driven approach. Let me have the privilege of paying for my benefits so long as they provide me the comfort level that I am willing to pay. The problem with auto workers and their union is that the union negotiated a contract that would make Congress blush and now, they are facing the probability of greatly reduced benefits and that certainly will be very painful.

    The dealer and supplier networks will actually be a larger problem than the automakers because here we are dealing with much more fragmented segment that doesn’t have the political clout of the automakers. The devastation here will make us cry when we hear their stories. Many of these folks don’t have pensions that are partially covered by the PBGC and I truly feel for these little guys.

    The only responsible and relatively quick solution to this mess is a structured bankruptcy where the costs will be smaller that a Chapter 11.
    I realize that the automakers weren’t very quick or reactive to the writing on the wall, but I will not fully condemn them either. Look, they gave us what we wanted, crap or not. They sold 17 million vehicles. So those who say they didn’t make cars that Americans wanted, are somewhat deluded. They gave us EXACTLY what we wanted and we gladly paid the tariff. Now that they are drowning, mostly because of the credit crisis, everyone is condemning them and kicking them in the nuts when they are helpless. End the credit crisis, restore economic confidence, and restore all the lost jobs and watch the resurrection that will occur.

  7. jgoods
    | #7

    We all sure have our opinions, don’t we? Thanks to all for your contributions. Colin R.: Yes, maybe I was a little harsh in my remark about comment-posters. The union and the companies were both victims of good times and easy money. “Why did GM and Chrysler (and Ford) agree to those terms?,” you ask. Good question. I want to talk about the UAW in another piece and respond to tgriffith’s recent post soon.

    Many people say they don’t like or want to be involved in politics. Well, if you love cars, you’re now in a situation where you’ve got to be politically savvy. David gets it, but I question what real alternatives to bailouts and universal healthcare he has. Panayoti’s suggestion for a “market-driven approach” sounds like a variation on the mess we have. But I agree on the structured bankruptcy.

    And he’s right on the automakers having given us exactly what we wanted in the past. Now, however, the demand has gone very much south, and the car culture we had is going with it.

    Let me hear from you about how we can develop a new car culture that makes sense.

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