

GM's Problems are 50 Years in the Making - pg
http://www.fivethirtyeight.com/2009/03/gms-problems-are-50-years-in-making.html

======
ShabbyDoo
The core issue seems to be one of transparency and the lag time for FASB
(Financial Accounting Standards Board,
[http://en.wikipedia.org/wiki/Financial_Accounting_Standards_...](http://en.wikipedia.org/wiki/Financial_Accounting_Standards_Board))
to recognize that its rules had exploitable loopholes.

We have to be careful to differentiate between profitability and cash flow. If
the GM of the 60's had been forced to purchase a unit of pension/retiree
health benefits from a 3rd party for every employee-year worked, that decade's
annual reports would have looked a bit different. And, the reports from this
decade would look a bit rosier.

Since GM's future obligations were not obvious to investors, the stock price
remained relatively high and GM was able to borrow money at favorable terms.
Obviously, things have changed. So much so that even newer accounting rules
couldn't keep investors from being afraid of the unknown. So, the Big3
negotiated VEBAs
([http://en.wikipedia.org/wiki/Voluntary_Employee_Beneficiary_...](http://en.wikipedia.org/wiki/Voluntary_Employee_Beneficiary_Association))
as a way of converting a seemingly unknown stream of future payments into a
simpler scheme of definite ones.

The politics of this are interesting -- a bankruptcy would allow a judge to
modify contractual provisions, an outcome likely unfavorable to UAW members. I
suppose that these changes could include the recently negotiated VEBA payment
structure?

Thinking beyond GM's current woes, I have often observed behavior in large
companies and thought: If there was a single owner, and he was sitting in this
meeting, he'd be screaming. Instead, because of screwed-up incentives,
employees do stuff with dire consequences for the business. If GM's 60's era
CEO had been a majority owner (and he expected the business to stay in the
family), I doubt that the UAW contract would have looked anything like it did
then.

I once heard a marketing manager say in a meeting, "I don't care about that
revenue stream because we're already above plan there -- concentrate on the
other one because we're below plan!" Compared to the latter stream, the former
was likely 100x as profitable per dollar, and additional dollars were much
easier to capture. When the accounting scheme is "variation from plan," it's
obvious what you'll get.

~~~
ShabbyDoo
I failed to consider the variable of increasing health care costs and
lifespans. These contracts were negotiated in the days when union guys all
smoked and were expected to fall over from a heart attack well before age 70.
Now, they'd get a $50K surgery and live to age 80.

~~~
Xichekolas
$50k is vastly underestimating it.

My grandfather just had a double bypass, a stent, and a pacemaker put in.
(After his third heart attack.) The grand total for operation and post-op
therapy came to $942,000.

Granted, the surgery itself was only like $25k. It was all the stabilization
in ICU beforehand, and all the therapy afterwards, that really ran up the
bill. The majority of it was paid for by Medicare and his supplemental
insurance too, which probably ran the price up as well.

------
rudyfink
"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."

That is a really wise point. It very well may have been a battle between
labor/management, but the real cost is clearly past vs present/future.

~~~
pg
Actually there's a lot of overlap between those battles: much of the problem
with GM past is that they caved in to unions.

~~~
mdemare
I'm not so sure. GM's stockholders and employees are being cast as the losers.
Are they really?

GM employees have been getting a great salary, great job security (until now),
with excellent health care and pension benefits (the latter guaranteed by the
PBGC) for semi-skilled labor.

And GM stockholders also got a good deal. Even if (when) the stock price goes
to zero, they'll have received dividends over a 45 period. Dividends seem
small, but over a long period, reinvested, they've gigantic. (dividends:
<http://is.gd/pXny> )

And any investor who understood the consequences of this deal would have sold
their stock in the late eighties.

When you look at it this way, GM is not so different from Bernie Madoff's
pyramid game, with the U.S. taxpayers and bondholders left holding the bag.

------
ShabbyDoo
Phil Greenspun had a blog posting (which I can't find) which basically argued
that demand for new vehicles ought to go down as their lifespans increased.
Today, a car with 100K miles is still considered reliable, especially a
Japanese one.

GM and all the car manufacturers benefited from suburbanization, highway
construction, working moms, and increasing family incomes. But, what
additional forces are there that will drive future increases in demand?
Population growth? The US grows primarily though immigration, and we're
becoming even more restrictive. More vehicles per person? There are few people
who don't have a car who want one, save for the poorest of Americans. Overseas
demand? This looks good, but other countries are bringing cheaper, localized
production online. So, as cars last longer and longer, the industry should
expect demand to drop.

~~~
antidaily
Population growth is rapidly shifting to urban areas, which also means less
people buying cars because of shorter commutes and mass transit.

------
rajat
The issue of oversized compensations/retirement plans, accounting
legerdemains, bad car design and bad car quality, is all related: horrible
management. They didn't stand up to the unions, decided to play games with
numbers instead of running a business, kept their head buried in the sand
about the relative quality of their product vs. the Japanese, and chose lousy
products.

Nothing overcomes bad management; not just years, but decades of horrible
management. But we'll do so much better now with the government choosing new
management. Bad business decisions surely will be ended by inserting politics
into the equation.

~~~
Retric
The US government actually has a long history of successfully turning around
companies. Often the problems are obvious when you actually look at the
numbers but management and labor are so dysfunctional they keep acting in an
irrational fashion. People like to say large organizations need incredible
talent at the top, but the sad truth is simple competence is hard to come by
because you don't get into C level positions at billion dollar companies
because of skills related to the job.

------
adw
Another issue, of course, is the product mix of the American carmakers (which
doesn't blunt Nate Silver's point, but is at least another contributory
factor). Basically, the American car companies bet the farm on SUVs in the
'90s in the way Japanese manufacturers simply didn't. It's a shorter-term
concern - bad tactics, rather than bad strategy - but it won't have helped.

I wrote about this yesterday (complete with the underlying data from the
Bureau of Transportation Studies: quick disclaimer, this is a project of the
startup I'm part of)- [http://byline.timetric.com/2009/03/30/kick-out-the-
traffic-j...](http://byline.timetric.com/2009/03/30/kick-out-the-traffic-jams-
motown-and-the-fall-of-the-big-three-carmakers/)

------
rjurney
GM's are a microcosm of the USA's demographic problems. Long-term entitlements
hid long term deficits, and spiraling healthcare costs along with increasing
numbers of retirees = economic WMD.

So take a long hard look at GM. The whole country faces the same problem.

------
Xichekolas
Really enjoyed that. I wonder what that graph would look like for other car
companies.

I have to imagine that, as cars became commodities, everyone's margins were
slimmer, but it'd be interesting to see what a company unburdened by
retirement obligations looks like over that same time span.

~~~
Femur
I also really enjoyed it and agree that charts for other car companies would
be fascinating to see.

It is incredible how quickly profit margins were eaten away by obligations GM
made to its employees. This is evidence to the fact that the unions and their
pressure are the main underpinning of GM's demise.

~~~
josefresco
That and crappy cars, lack of foresight etc.

~~~
dkokelley
Most of their flagship brands (Chevy/GMC, Cadillac... actually, those are
their only flagship brands I guess) are decent cars. I don't think bad cars
are GM's primary problem (though the cancers that are Saturn, Pontiac, Saab,
HUMMER are certainly hurting GM).

From my subjective observations, the things that are hurting GM the most are
rising gas prices (and cars that use too much of it) and unfavorable
employment contracts.

Note: I haven't seen the income sheets for GM (at least not one that breaks
down the brands), nor have I seen any study that shows the quality of their
cars vs. others.

~~~
donw
For years, the quality of American cars was vastly lower than the Japamese.
Things have gotten a lot better, but now it's the overall design and market
positioning that's really lacking, as well as a lack of cars that really
target the market.

There's a line out the door for the Smart car. How hard would it be for GM (or
Ford) to grab one of their little, gas-sipping city cars (like the Ford Ka),
and sell it in the US? It's obvious that consumers want them, and it would
give American automakers a domestic answer to the Honda Fit and Toyota Yaris.

The interior styling needs to stop being so disjointed; I have yet to sit in
any American car and get the feel that people actually cared when they laid
out the inside of the car. The Saturn Sky is a great example -- I can't
operate the controls on the driver-side door, because they are placed right
under the middle of my forearm.

It's even worse in the economy segment -- Ford and Mazda share technology, yet
the interior of the Mazda 3 is such a wonderful place to be, whereas the
interior of the Focus is just... dreary. The Mazda feels like a downsized BMW,
and the Ford feels like... well, a Ford.

~~~
Nelson69
What's amazing to me, is I think the quality gap is much smaller than people
tend to think but the American companies just let that image get created.
Regardless of how the actual quality compares, people think American cars are
lower quality. It didn't happen over night either. I can't imagine what went
through their minds as they just let it happen; there was probably a lot of
corporate thought control and it was un-PC to actually drive a Japanese car or
say anything good about one for decades. You know you contrast that to like MS
and their approach to Linux, MS is on top because they fear EVERYBODY and give
them some respect. I just can't imagine letting my company develop and image
of creating lower quality products than my competitors, for years and years.

Now the bigger difference is when you buy an inexpensive, smaller Toyota or
Honda, they are radically different than an inexpensive, smaller Ford or GM
car. The styling choices are different. For years Americans associated big and
heavy with quality, they always thought the Japanese cars are tinny and
flimsy. It really seems like when you buy an inexpensive American car, you get
a cheap car but when you buy an inexpensive Japanese car you get a cost
reduced version of their nicer cars.

~~~
Xichekolas
Well it probably took years to bring the quality up to par, so in the
meantime, there wasn't much else they could do to fight that perception.

Now they suffer from a branding issue (on top of their other problems). It's
like when the original AT&T was split up, and one of the companies to come out
of it was GTE. GTE had horrible service and customers hated it. It perennially
ranked at the bottom of the baby bells for customer satisfaction, etc. So GTE
went and rebuilt it's whole network and suddenly had the best service and
support. But when people heard 'GTE' they still thought 'crappy and
unreliable'. The solution? They changed their name to Verizon.

So building high quality cars that are stylish and true technical leaders
might not be enough. (Especially now that the public associates 'GM' and
'Chrysler' with 'bailout'.) In all this bailing out they might have to change
their brand name as well.

~~~
philwelch
According to Wikipedia, GTE was independent even during the AT&T monopoly. It
wasn't until the Bell Atlantic merger that they changed names to Verizon.

------
aoeu
If you haven't seen it "Who killed the electric car?" is an interesting
film/documentary highlighting some of the shortsightedness of car
manufacturers..

<http://en.wikipedia.org/wiki/Who_Killed_the_Electric_Car%3F>

It was aired in the UK last night on More4 so may appear on their on catch up
service at some point. Otherwise parts at least are on youtube.

~~~
TJensen
That was seriously one of the most depressing documentaries I've seen. I
really want an EV and should have one by now.

------
markessien
Companies should not be responsible for payments to workers after they stop
working. This should be the responsibility of the government - the companies
should pay in while the person works with them, and when the person leaves,
the government takes over all payment.

~~~
dkokelley
Why does the government need to pay for them? I understand issues like social
security and medicare, but shouldn't the employees have been saving for
retirement in the first place?

I agree that the company should not be expected to pay for work not done, but
these payments are essentially part of the benefits package agreed upon when
the employee started working. It was probably unwise for management to agree
to those terms, but it's no different than police and firefighters who receive
checks into retirement. It's delayed payment for their commitment to the
organization.

~~~
catz
> I agree that the company should not be expected to pay for work not done,
> but these payments are essentially part of the benefits package agreed upon
> when the employee started working.

Those benefits packages were done under extreme coercion from the unions. The
management of GM basically just deferred these costs.

Things such as pension funds should not be handled by the employee (IMHO). You
should get your full salary (with benefits included) and make your own choice
what funds you will use for medical aid/retirement.

Also - on a side note (of topic), these companies should be allowed to fail.
They are easily replaceable and most motor manufacturing already happens in
lower cost countries in any way.

Aren't there companies that are much more important pillars of the world
economy that deserve a bailout more (e.g. AMD).

~~~
mojonixon
I can't tell if you're joking or not. GM paid dividends up until last year,
decades after it was known that they had large health care obligations. Divert
a couple years of dividends in keeping their side of the bargain, and GM is in
good shape. GM management made a deal they were unwilling to keep.

AMD employs 15,000. GM directly employees 240,000 and suppliers employ
millions more. These companies are not easily replaceable. If they were,
another company would have replaced them by now. Setting up an operation of
that magnitude requires decades of experience and huge capital expenditures.

~~~
catz
> GM paid dividends up until last year, decades after it was known that they
> had large health care obligations.

If you look at the post I said that GM did not take into account their future
obligations. Their profits was nothing more than fancy bookkeeping.

> GM management made a deal they were unwilling to keep.

I agree with you on the point that GM should never have made those lavish
packages and kept their salaries in line with the market (or relocated their
factories).

> These companies are not easily replaceable. If they were, another company
> would have replaced them by now.

There are numerous companies that can replace the big auto companies. Toyota
and Honda has been slowly replacing GM is most of the world markets (including
the US). If either GM goes into bankruptcy and gets split up/sold off (e.g.
Opel gets sold etc...). It would not be a bad thing.

> Setting up an operation of that magnitude requires decades of experience and
> huge capital expenditures.

Setting up a car manufacturer is not that impossible in the market. Over the
past years there were 10s of new car manufacturers that started (and some
failed). A good example is some Chinese companies such as GWM, Cherry. There
is also no reason why existing car manufacturers can not grow to fill the gaps
that GM leaves (as they have done for a long time – e.g. Hyundai, Honda,
Toyota, etc...).

> AMD employs 15,000. GM directly empl

Starting a new x86 processor manufacturer would probably be impossible. The
x86 is a patent minefield (to which only AMD and Intel have cross licenses to
use each other's patents). Setting up a new generation fab can cost more than
$5 billion.

And if AMD goes Intel will have a monopoly. Both Chrysler, GM and Ford can
disappear and there still will not be a monopoly.

~~~
evil
catz wrote:

Setting up a car manufacturer is not that impossible in the market. Over the
past years there were 10s of new car manufacturers that started (and some
failed). A good example is some Chinese companies such as GWM, Cherry. There
is also no reason why existing car manufacturers can not grow to fill the gaps
that GM leaves (as they have done for a long time – e.g. Hyundai, Honda,
Toyota, etc...).

Historically, downturns have been the best times to invest (obviously!)

------
kingkawn
Also that graph at the top of the page needs an X-axis like my brother needs a
job.

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tsally
I say we hire young, smart people like Nate Silver to fix our economic
problems.

------
gfrison
Fortunately FIAT would save GM...

------
kingkawn
if they made good cars this would all be moot

