Thursday, November 13, 2008

What's Wrong With General Motors

Lately we've been hearing a lot of palaver about this subject. 

Sales are down all across the automotive sector,  between the General, Ford, and what's left of Chrysler, and these last three have been caught with a severe case of the shorts, as my old man used to call being between paydays.

To us here in the Dougloid Towers, a few general observations on the subject seem to be in order.

In the automotive context there's a lot of mythology at work in the field of perception-and, as my friend John the used car salesman says on occasion "For most people perception is reality." 

It's also true that what is common knowledge generally is conventional wisdom-something that everyone knows that is unfortunately uninformed and erroneous. As Edwin Armstrong once observed, what people know isn't dangerous-it's what they know that ain't so that is.

One aspect of that conventional knowledge is that GM, Ford and Chrysler cannot build a quality motor vehicle. 

Let me give you an example. The Dragon Lady has been enamored of the Scion XB ever since she saw one. I once asked her if she would buy the same exact car from the same exact factory if it said Chevrolet on it. She said "Oh no-it'd be no good."

J.D. Power, the noted quality benchmarking firm, tells us that the best quality midsize and full size cars for the 2008 model year are made by General Motors and FordIn the truck and van line, five of the top quality SUVs and vans are made by General Motors, Chrysler, and Ford. 

They have by and large, learned the quality lesson that they've been getting spanked with since the seventies-when the General and its accomplices built some really awful cars and had a pretty cavalier, "Let 'em eat cake!" attitude. That cost them, because it allowed the Asian Big Three to establish a bridgehead that they've expanded into the General's turf.

"B-b-but Sparky!" you say, "I-i-isn't the Tundra made in Texas? and Nissan?"

Well, yes, they are, and we're thankful for the jobs that have been provided, even if they are scab jobs with no future that a working man is bound to respect.  

But although they're assembled here, they're no more American companies than Daimler Benz is, because they've got no stake in the future of this country where you and I live. 

To the people at Honda, Toyota, Nissan, Hyundai, Subaru, Mitsubishi, and all the others, this country is a profit center,  and the day it stops being a profit center is the day that the machinery will be crated up and sent somewhere else-which is exactly what happened to the Volkswagen plant in Westmoreland, Pennsylvania.

GM, Ford, and Chrysler are North American owned companies, and they source their parts primarily from other North American companies. That means that their products support a large number of subcontractors all across the country and a lot of workers in small companies, and truckers, and waitresses in the cafes across the street from the plant.  One of the features of the aviation business in years past was small operators who specialized in hotshot deliveries to the auto plants.  I used to see a couple Turbo Commanders with the interiors ripped out that would haul seat covers from a small company in southwestern Michigan to any number of auto plants across the midwest and Canada at night.  

The effect of an industrywide shutdown would be catastrophic for a lot of people, most of whom only dimly realize that their fortunes are linked to those of the (not so big anymore) Big Three.

Also, it's worth remembering that GM, Ford, and Chrysler and the infrastructure they support has also been critical to the national defense-their expertise in developing and producing products for our military and their contributions in wartime have been unparalleled. They put rifles in the hands of the GIs and the tanks and jeeps under their asses, the engines in the bombers that smashed Japan and Germany, the DUKWs that carried GIs ashore, and a helluva lot of B-24 Liberators right there at Willow Run. Dismantle that capacity and you cannot fight your wars.

Perhaps the main reason GM, Ford and Chrysler have got the shorts right now is legacy costs. That's right, folks, the contracts they signed and the undertakings they made to support in their old age the people who'd given the best years of their working lives to the company back in the glory days have come back to haunt them in this brave new world of globalization.

The New Yorker did a piece last year on the subject that's well worth a read. It refers back to an earlier piece from 2006 by Malcolm Gladwell that's even more trenchant.

Legacy costs are those obligations to provide retirees with health care benefits and generous pensions, and contract provisions that required generous severance and maintenance benefits to workers who lost their jobs in layoffs like the infamous 'job bank'. 

The approach of the offshore auto makers has been pretty simple. No retirees? No benefits. No unions? No contracts. No follow on costs. Honda considers what legacy cost they have as insignificant.

And it's worked well. Estimates are that legacy costs for the General are on the order of $2,000 per vehicle. I think that's a conservative estimate. Although I'm not generally a fan of the National Review, they also did a piece on the subject that's grim but informative reading.

By comparison, in 2005, Toyota had only 258 retirees from its North American operations spread across 30,000 employees.  General Motors has over 400,000 retirees. The cost for that is folded into the price of every vehicle they make and it is a small block tied around the neck of everything they try to do.

"B-b-but Sparky!" you say, "What's the takehome?"

GM, Ford and Chrysler are going to have to shed their legacy costs and soon. If they do not, they won't be able to compete and if they can't compete they won't survive in their present form. I would suspect that they know this, and as they go to the Obama administration with their hands out, they will have to show how they can do this or go away empty handed.

The offshore builders, on the other hand, will never have these costs, and if by chance it gets a little too expensive for them they'll go back where they came from and cut the rest of us loose.

And we did all this to ourselves, by trying to be decent and having a care for people who worked their asses off in the automobile plants by providing a modest retirement for them free of the care and worries that old age brings. 

That, it seems, is a positive disadvantage in this day and age of free trade.


At 9:29 PM, Anonymous Anonymous said...

The sad remains of the once powerful Southern California aerospace industry:

At 7:09 PM, Anonymous Anonymous said...

Consider what happened to the copper industry, the union millstone sank and took copper with it. Mother said,"nothing in life is free, somebody pays..." I knew that at age 3. Unions starved my family and I've never joined as a result. However my son is a IBEW faithful member, not sure I remember him as he used to be.

At 9:25 PM, Blogger Robert Luedeman, attorney at law said...

I don't know whether y'all are the same Anonymous (Anonymi?) so we'll deal with you seriatim as we say in the trade.

This is like the board game Clue in which the players try to figure out who the murderer is.

Local 148 did not kill Douglas. The don't bother me with the details free traders in government did when they allowed Boeing to establish a monopoly in the construction of large commercial aircraft in this country with the blessing of a government that was all for bare knuckles, let's have some real competition free trade.

Well, as Arthur Brown once observed "Gut Brother, you lie."

I really don't know what happened in the copper industry except a world price structure and people in Chile who will work for wages that an American can't even starve on. Don't forget, my old man was a veteran of the copper mines in Chile before the war. The Indians who worked in Kennecott's mine in Braden were as expendable as drill bits and cheaper to get because they'd come to you.
You can't blame the union for placing the same value on labor as the mine owner places on his capital. That's what you call arms length bargaining and working people are as entitled to do that as the owners are.
On the other hand if the union thought it was worth having no benefits and stoop labor pay, then maybe it was not too much to ask.

Either way, your mother sounds like a wise old owl, and I'd like to hear more about that particular situation such as the who, the what the where and the when of it.

At 4:09 AM, Blogger Angela Navejas said...

This comment has been removed by a blog administrator.

At 6:14 AM, Blogger Robert Luedeman semi retired attorney and amp mechanic said...

Angela, once again I am deleting spam comments. Take a hike and drag your sorry shit along with you.


Post a Comment

<< Home