GM: Turning the Corner. Again. And Again.

GM has been apologizing to the American public for nearly 30 years.  For decades they’ve been telling us that they’ve "turned the corner."  Unfortunately for GM, you can only turn the corner so many times before you’re just going in circles.

Quoting BusinessWeek:

GM has lost a breathtaking 74% of its market value -- some $43 billion -- since spring of 2000, giving it a valuation of $15 billion.

GM is not, as they’d have us believe, a fundamentally sound company fallen on hard times due to the economy.  Despite their continual pronouncements of an imminent comeback, they’re never going to regain the market share they once had; there are simply too many other car companies now for that to be possible.  And those other companies are actually profitable, unlike GM.

Quoting BusinessWeek:

GM has reached the point at which it actually consumes more cash than it brings in making cars, for the first time since the early ’90s.  GM, once the world’s premier auto maker, is now cash-flow-negative.  [...]  Normally a company in such straits contracts until it reaches equilibrium.  But for GM, shrinkage is not much of an option.  Because of its union agreements, the auto maker can’t close plants or lay off workers without paying a stiff penalty, no matter how far its sales or profits fall.  It must run plants at 80% capacity, minimum, whether they make money or not.  Even if it halts its assembly lines, GM must pay laid-off workers and foot their extraordinarily generous health-care and pension costs.  Unless GM scores major givebacks from the union, those costs are fixed, at least until the next round of contract talks in two years.

That was nearly four years ago!  And that is the crux of why a bailout is the wrong answer to GM’s problems: they don’t need some quick cash for a temporary problem; they need boatloads of money for a systemic problem: the UAW, which is bleeding GM to death.

GM and the union want to make it seem like a bailout is the only option, but the truth is, there’s another option: fix the real problem by renegotiating the labor contracts now.  In addition to actually fixing the problem, this has the added benefit of being funded by the people involved with the company, rather than being taken out of the pockets of the taxpayers, who never enjoyed the extremely high compensation that the UAW workers do.

Quoting Fred Wilson:

I really don’t know why it takes a year to negotiate a union contract, but if they want to auto industry to survive, the union leaders ought to be prepared to rip up their current contract and negotiate a new one over the weekend.  That’s how things are done when you are on the verge of going out of business and losing $4.4bn per month.

Indeed.  And perhaps if we stopped even entertaining the idea that taxpayers would willingly fork over tens of billions of dollars to finance such outlandish compensation packages, then the auto-workers at GM (and Ford and Chrysler) would consider a different solution:

Quoting Associated Press:

Most Southern U.S. auto plants run by Toyota, Honda Motor Co., Nissan Motor Co., BMW AG, Daimler AG and other manufacturers are nonunion. The UAW has tried numerous times without success to organize workers at the foreign-owned factories.

That’s because no sane person or business would want to be in the position that GM is in, and they’re in that position in large part because of the union.

To a GM employee, getting paid a fair market rate for their labor sounds bad, because congress is sending the signal that the other option is free money to preserve the unionized (and unrealistic) status quo.  But if those employees thought that the other option were actually unemployment -- as it would be in any other business in America -- then suddenly a fair market rate doesn’t sound so bad.

Of course creating realistic compensation packages will only solve part of the problem.  GM is also going to have to get a lot smaller in order to survive, which means some workers are going to have to lose their jobs -- and again, that’s something that the labor contracts make difficult or impossible.

Posted by Anthony on reply

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