Why the Big Three Auto Companies Could Easily Fail

An earlier posting entitled Outrageous Employee Compensation Liabilities Continue to Haunt General Motors; Will American Taxpayers End Up Paying the Bill? highlighted pension and healthcare cost issues that have made American auto makers like General Motors cost the high cost producer in a competitive global marketplace.

These points and the structural problems that sustain them are highlighted in a Wall Street Journal article entitled UAW Is Facing Biggest Battle In Two Decades:

...UAW President Ron Gettelfinger and other UAW leaders face the union's worst crisis since the late 1970s and early 1980s, when oil price shocks and a surge of Japanese cars forced thousands of layoffs at Detroit's Big Three, and drove Chrysler Corp. to seek a government bailout. How Mr. Gettelfinger handles the challenge could be critical in whether General Motors Corp. and several major U.S. auto parts makers pull out of their recent financial crises.

...the UAW is again facing management demands to give back some of what it has won, particularly in health benefits, or risk even more job losses...

"I do get a little bit irritated when I constantly hear and read that the problems are UAW," Mr. Gettelfinger told a popular Detroit morning radio host, Paul W. Smith, Wednesday morning on ABC-affiliate WJR. The question, he says, should be why the U.S. can't create a single-payer, universal health-care system. And he says the U.S. needs a tougher trade policy. "You say we can't rely on Washington," Mr. Gettelfinger told Mr. Smith and his Detroit audience. "Well, why can't we? These people are elected by us, and I think our expectation is way too low."

You know the economic debate about uneconomically high American car manufacturing costs is getting off to a good start when the ideas of socialized medicine and some sort of tariff/import restrictions - both of which would raise costs - are the initial counter proposals to the challenges arising from global competition. Are these UAW people really that economically illiterate? E.g., see Canadian Supreme Court: "Access to a Waiting List is NOT Access to Health Care" for more information on the failures of socialized medicine.

The article continues:

...Rick Wagoner, GM's chairman and chief executive, used Tuesday's annual shareholder meeting to deliver his strongest public warning yet that the No. 1 auto maker is prepared to take action to cut its $5.6 billion U.S. health-care bill -- with or without the UAW's agreement...an agreement with the union to cut health costs is "our very strongly preferred approach"; then he added, "Either way, it is crystal clear that we need to achieve a significant reduction in our health-care cost disadvantage and to do so promptly. We are committed to do that."...

Yesterday, UAW leaders representing union locals from GM and Delphi plants throughout the country gathered in Detroit for the first of two meetings to review the two companies' situations. Officials who were there say the focus of the first session was on GM and health care. Richard Shoemaker, the UAW official charged with negotiating with GM and Delphi, spelled out GM's dire situation. A Power Point presentation highlighted its declining market share, rising health-care costs and legacy burden of retiree benefits. The message was grim: Each percentage-point drop in market share means 170,000 fewer vehicles built by UAW members.

Mr. Shoemaker's thrust: What can the UAW do within the confines of the contract to help GM? But he also said the UAW wouldn't reopen the contract, which isn't set to expire until 2007, the officials said...

A crisis is at hand - and has been for years now - and the UAW's response is to say "see you in 2 years."

The article continues:

Mr. Coven said several officials stood up and said that while they would bend on health-care issues for current workers, they wouldn't be willing to bend on retiree issues...

Retirees form an increasingly large share of all UAW members. Since 1980, active membership in the UAW has fallen by more than half to just over 622,000, according to the UAW. The union says it currently has more than 500,000 retirees.

Two-tier contracts are already becoming more common at auto suppliers...

Think about how much the current employee contracts are going to have to change if nearly one-half of the costs (for retirees) are defined as off-limits. It begs the question of whether they can change enough to even make a competitive difference to General Motors.

Here are further excerpts from the article:

Workers in China earn an average of $1.96 an hour, compared with $36.55 for the average American auto worker, says automotive consultant John Hoffecker of AlixPartners, Southfield, Mich. Chinese car makers are gearing up for a major export push, he says, as their car-making capacity outstrips that nation's demand.

But even more threatening for auto workers is the grim scenario playing out now in the airline industry: Unionized carriers, such as UAL Corp.'s United Airlines, have sought bankruptcy-court protection, then shed their union pension plans and forced through big wage cuts.

While none of the Big Three auto makers has suggested bankruptcy protection as a way to shed health-care or pension obligations, several big auto suppliers have made Chapter 11 filings in bankruptcy court in recent months...

The health-care coverage GM currently offers hourly retirees is more generous than the coverage it offers white-collar retirees and the coverage many comparable large companies offer their retirees. GM's UAW retirees pay no premiums, compared with monthly premiums of $75 paid by GM's white-collar retirees and an average of about $166 paid by retirees at comparable large firms, according to Sanford C. Bernstein analyst Brian Johnson.

Note the key words: UAW retirees receive rich healthcare benefits - and pay no premiums for that coverage. And the UAW says changing that is off limits - when they finally get around in 2007 to negotiating a new contract.

What could the impact of such changes be?

Raising the monthly premiums for hourly retirees to $50 would improve GM's annual earnings by about $1.44 per share and its cash situation by about 73 cents per share, Mr. Johnson said. If the monthly premiums were raised to $100, GM's earnings per share would be boosted by $2.93 a share and its cash would be improved by $1.45 a share, Mr. Johnson wrote in a report published recently. GM has more than 565 million shares outstanding.

According to Mr. Shaiken, the labor expert, only two times in the UAW's history has its agreed to reopen a master contract. Once was in the 1950s; the second time was in 1982. He described the 1982 re-opening as "politically explosive" and "a very painful process."

In 1982, the UAW agreed to concessions with GM. But after the agreement was officially ratified, GM disclosed a new, more-generous bonus plan for the company's top executives. "You can imagine how that played," Mr. Shaiken said. "So, when the UAW says, 'Let's figure out what else we can do,' that doesn't come out of thin air. There's a history behind that."

What sort of buffoons in management would introduce a new, self-serving bonus plan at the same time they are taking away compensation from hourly workers? It is hard not to reach the conclusion that these management and union personnel deserve each other.

Economics 101 is the ultimate reality show. If you won't deal with economic reality, then it will deal with you - on its own terms.

ADDITIONAL INFORMATION:

Bankrupt pensions, extraordinary healthcare insurance benefits, related issues with private and public sector unions, and the misguided incentives that exist in public sector taxation have been discussed previously on Anchor Rising:

Misguided Incentives Drive Public Sector Taxation
If You Won't Deal With Economic Reality, Then It Will Deal With You
Underfunding Pensions, Public and Private, can Hurt Taxpayers
Bankrupt Public Pensions: A Time Bomb That Will Explode
Why Truly Free Markets & Timely, Transparent Information Are Needed to Protect the Freedom of American Citizens
RI Public Pension Problems
The Cocoon in which Entitled State Employees Live
The Union's Solution for the Future: Get More People in Unions
Bankrupt Public Pensions, Part II
Outrageous Employee Compensation Liabilities Continue to Haunt General Motors; Will American Taxpayers End Up Paying the Bill?