Facts about automakers

by on November 18, 2008 at 12:27 pm in Data Source | Permalink

Yermack estimates that the aggregate capital investment in GM and Ford since 1980 has led to a net reduction in capital of $465 billion…This is what I find particularly disturbing: with that $465 billion, “GM and Ford could have closed their own facilities and acquired all of the shares of Honda, Toyota, Nissan, and Volkswagen.”

Here is more.  And here are facts about GM wages.

spencer November 18, 2008 at 1:17 pm

You get the $73.50 in Big 3 wages by adding all the legacy cost to the pay of the current employees.

How many think this is a fair comparison?

Mario Villarreal November 18, 2008 at 2:03 pm

Government will certainly have the incentives to intervene, in order to –supposedly- save jobs, regions, or whatever other questionable reason they may have. That’s a fact. We may have a better chance trying to influence how they intervene. So far, some have argued that the capital injection to the auto industry will be a loan, not a gift. That is sort of fine so far. My proposal is that the loan goes to Toyota and Honda, so they can buy GM and Ford. I know. I am dreaming.

spencer November 18, 2008 at 2:05 pm

Silas, you are completely right and I agree completely.

But that does not change the point that the $73.50 wage is a massively misleading data point.

Matt B November 18, 2008 at 2:24 pm

@Silas – can you expand on your analogy about the entrepreneur who took out a $10 million business loan and instead dumped that money in his partners’ Swiss bank accounts?

I don’t think I understand the concept of “legacy cost”…

mickslam November 18, 2008 at 2:55 pm

I know several lifelong Ford autoworkers at the Hegewich plant. They don’t make $70/hour. Not even close to $70 an hour.

Mr. econotarian November 18, 2008 at 3:12 pm

This tidbit is interesting – does anyone know about these “state laws”:

“GM has about 7,000 dealers. Toyota has fewer than 1,500. Honda has about 1,000. These fewer and larger dealers are better able to advertise, stock and service the cars they sell. GM knows it needs fewer brands and dealers, but the dealers are protected from termination by state laws. This makes eliminating them and the brands they sell very expensive. It would cost GM billions of dollars and many years to reduce the number of dealers it has to a number near Toyota’s.”

http://online.wsj.com/article/SB122688631448632421.html

meter November 18, 2008 at 3:16 pm

Bill, I plead ignorance on the new plan you cited. You didn’t mention legacy costs, which is sort of the whole problem. If GM were able to transition current employees to this plan that would help, but they still have pension and medical benefit commitments to people who are no longer working.

bill November 18, 2008 at 3:25 pm

Meter,
Under the new terms of the agreement with the UAW GM will have no legacy costs after 2010. Instead it will be the responsibility of the Union which will be managing a VEBA fund. GM has about $16 billion that they have set aside for future liabilities. They will probably kick in another $20 billion. Once they do that they will have no legacy costs going forward. This will eventually allow them to rightsize the business, buy out older existing workers and replace them with younger less costly ones and possibly be profitable.

The most important thing about this new UAW agreement is that it finally gives the automakers a degree of cost certainty. They will not be subject to ever increasing medical liabilities would certainly bankrupt the company.

Mr. Beefy November 18, 2008 at 3:26 pm

I’d call it Tucker’s revenge! :).

bernard Yomtov November 18, 2008 at 4:01 pm

.You get the $73.50 in Big 3 wages by adding all the legacy cost to the pay of the current employees.

How many think this is a fair comparison?

Of course it’s not a reasonable comparison. If you want to know if GM, etc. are as efficient as the foreign manufacturers you have to compare variable costs, and not include fixed obligations like retiree benefits.

I’ve seen these numbers thrown around without explanation a lot. At best that’s careless.

buermann November 18, 2008 at 4:19 pm

“By 2012 around 40%+ of GM’s workforce will consist of these new hires at lower wages. If the auto market recovers by 2010 to around 14-15 million units a year GM can survive.”

This assumes a fairly massive and sudden die-off of about half a million retired auto workers, which is only likely if the B3 actually go bankrupt and all those people lose their healthcare benefits.

buermann November 18, 2008 at 5:41 pm

How about: no one forced the automakers to lobby against nationalizing the healthcare costs of their retirees like the competition did.

Bernard Yomtov November 18, 2008 at 6:23 pm

DanC,

I would, quite seriously, be interested in hearing more about why Detroit lacks the skills to build small cars profitably, while the Japanese have these skills. What inherent difference is there, or are you merely talking about different financial structure?

I’m surprised by the assertion that there is some radical difference involved.

DanC November 18, 2008 at 7:20 pm

The Japanese have more expertise in building small cars. The institutional knowledge at the Japanese companies is a big advantage. For every step forward that the American companies took, the Japanese were advancing another step. When your competitor has such a clear advantage in a market segment, it makes little sense to bash your head trying to defeat him. Go around him, play to your strengths. But Congress demanded that Detroit continue on what has proved to be a suicide mission.

GM might have been able to deal with their labor costs and maintained better margins if they had concentrated on the cars where they could make a profit. If they could have back the millions they spent trying and failing to build economy cars that could compete with the Japanese would they be looking for a handout today?

Not to mention that one of the key problems with the auto industry is excess capacity. If GM had stopped building economy cars the overall health of the auto industry, domestic and import, would have improved.

CAFE standards started in 1975, when did the decline of Detroit start downhill. When did Detroit become more interested in gaming the system then in being responsive to consumers?

buermann November 18, 2008 at 7:58 pm

“Detroit has been a big advocate of national health insurance. GM has openly supported it on many occasions.”

Name one. Just in 2007, when they came out negotiations with the VEBA deal (shirking off a lot of the legacy healthcare costs that Tyler’s numbers above, from four years ago, still include as part of their labor costs), they explicitly didn’t endorse national health insurance:

“A G.M. spokeswoman, Michelle Bunker, said the company had not specifically called for a single-payer health care plan, in which a government program would be created to offer health care benefits.” http://www.nytimes.com/2007/10/06/business/06auto.html?fta=y

They’re still funding a long list of think tanks that explicitly oppose it, so I don’t see how that non-endorsement isn’t really just continued opposition.

And when it really mattered, back when they cut the retirement benefits deals with the unions, national health insurance was a communist bogeyman, and they were so opposed to it that they were willing to cut the generous contracts with the UAW that are the reason we’re now having this discussion.

buermann November 18, 2008 at 8:04 pm

“the real cause of this nightmare: government regulation. The CAFE standards”

Japan’s fuel economy requirements in 2004 was 32mpg. This is the government regulation that killed Detroit.

quadrupole November 18, 2008 at 8:31 pm

Berhard, you said:

“Please notice spencer’s explanation of the widely quoted difference in labor costs. Even if there is a small difference in the cost of actual production labor I don’t see why that ought to make a difference in small cars, but not SUV’s.”

Think of it this way. Let’s say I for the sake of round numbers for argument that it takes about the same number of hours to assemble a car, truck, or SUV.

If Toytota workers take 25 hours to do assembly at $35/hour, and GM workers take 35 hours to do assembly at $70 per hour, then the cost of GM assembling a vehicle is $2450 and the cost of Toyota assembling a vehicle is $875.

So for GM to be competitive with Toyota in the SUV space, they have to find a way to cut that $1575 labor cost difference out of their cost of inputs. The lower the cost of inputs, the harder that gets.

Further assume compact car the material inputs cost me $10000, for an SUV $20000.

So for GM to be competitive in the compact car space, they have to trim 15% out of their cost of materials… in the SUV space they only have to trim out 7% in their cost of materials… see how this makes being competitive with small cars much harder? It’s because labor is a much bigger percentage of the cost of small vehicles.

babar November 18, 2008 at 9:45 pm

quadropole, that’s interesting but it doesn’t make sense. toyota has a strictly dominant position to GM. they can make compact cars 15% cheaper and SUVs 7% cheaper. so in the absense of CAFE standards toyota will focus on compact cars until they crush GM in that area. then they will focus on SUVs until they crush GM. GM actually has to beat toyota at something to survive, ultimately.

quadrupole November 18, 2008 at 10:50 pm

barbar

It makes perfect sense… GM manages to cut the 7% out of it’s SUVs in the quality of materials and the cost of design (by investing less in getting designs right). That’s how they stay competitive in the SUV space. In the compact space even that isn’t enough, so they can’t compete there at all.

It explains *why* it’s harder for GM to find ways to cut non-labor costs in order to stay price competitive in the compact space.

As to Toyota crushing GM in the compact market and then moving to beat them in larger vehicles… that seems to be precisely what Toyota is trying to do (see it’s Tocoma strategy).

mickslam November 18, 2008 at 11:35 pm

Hi Cheeze,

The claim wasn’t about costs to the big three, it was about wages. $73 an hour is like $150K a year. It is a huge wage. GM workers don’t make that much.

As for the legacy costs:

It is clear that the U.S. followed a business model that was not tenable in the era from 1950 through 1990 or so. At that time, and particularly in the early years, this business model was considered to be cutting edge and necessary for the long term success of the companies and for the U.S economy. Not only that, but this model worked extremely well for about 30 years. However, now it is clear that these dead guys were wrong. Why are we punishing an important domestic industry by forcing it to attempt to live up to this liability, one that was decided by people who are now dead?

Having a domestic car industry is important to the U.S from a national security point of view. Having a domestic auto industry is important from a technology perspective. So, let us just nationalize the part that is hurting the firms, and let them get on with building cars. We don’t know if they can build cars profitably, as they have been so burdened with legacy costs it is impossible to determine.

We have industrial policy in building planes, why not in cars and green technology? Hell, we just spent $700B on what can be called industrial policy for wall street. We should do right and honor the contracts written to auto and steel workers, but we should allow these auto companies to compete fairly as well.

Nationalize those legacy costs and get on with life in the U.S. You will know we are spending too much money when 10 year notes start trading well below par, right?

zigurrat November 19, 2008 at 12:24 am

Check out this Korean clone of a Lexus:

http://www.hyundaigenesis.com/

And then, check this out:

http://finance.yahoo.com/currency/convert?amt=1&from=USD&to=KRW&submit=Convert

I don’t want to become a trade nut, but the notion of balanced trade — as opposed to free trade — strikes me as sensible.

If GM had been allowed to outsource manufacturing to China, they could still be a design/engineering/sales firm.

buermann November 19, 2008 at 12:30 am

“The nationalized health-care argument is a ruse, and the reason is obvious. There IS already national health care for retirees, and it’s called Medicare.”

Well, it’s not a ruse in terms of GM, since a public policy forcing GM to drop its over-65 retirees into medicare – like it finally did with its 100,000 white collar retirees this past summer – would have saved them billions of dollars a year. That savings was captured by the government instead, back of the envelope suggests a few billion a year in lower medicare outlays.

Amicus November 19, 2008 at 1:27 am

btw, is the steel industry really an equivalent or apt analogy for automotive manufacture?

Apart from scale and being capital intensive, that’s where it ends, right? And that’s no small cutoff …

zigurrat November 19, 2008 at 2:19 am

Accounting is dull and boring but if you don’t understand how to separate financial reporting from the economics of the business, you can be easily led astray.

My main argument is that if you consider retained earnings the primary source of capital investment, then it was an illusion.

Real Andrew November 19, 2008 at 7:25 am

Tyler quoting BusinessWeek back in April:

Some of Toyota’s U.S. plans are now more than 20 years old, and a growing number of its workers are paid the top wage of about $25 an hour. That’s less than Detroit’s veteran union hands make now, but a contract inked last fall will enable U.S. automakers to replace many highly paid employees with cheaper workers. By 2011, Toyota’s cost advantage over Detroit could disappear.

And Tyler’s commentary:

By late 2009, Toyota’s assembly plant in Georgetown, Kentucky could have the highest labor costs of any auto factory in the country.

M1EK November 19, 2008 at 9:06 am

“GM might have been able to deal with their labor costs and maintained better margins if they had concentrated on the cars where they could make a profit. If they could have back the millions they spent trying and failing to build economy cars that could compete with the Japanese would they be looking for a handout today?”

Could this be any more stunningly obtuse? Yeah, that’s what we needed now: even more SUVs.

Confused November 19, 2008 at 9:30 am

I’m confused. If the 2010 UAW agreement and VEBA addresses the labor and legacy liabilty costs, why is the one thing that dominates every discussion, from the NYT editorial today by Romney to the CNBC folk to virtually every other commentator I hear or writer I read, the overriding need to strike a new deal with UAW to address labor and legacy liability costs?

This is a serious question. I don’t really see these arguments saying “These issues are resolved, but we need to move the timeframe up,” they’re simply acting as if they don’t exist. Does the 2010 agreement as described here (and elsewhere, when you can find anyone really talking about it) inaccurate? Does it not really address these issues? Are there critical issues it does not address? Every “let the free market” talking head out there is saying the bailout would do no good because the domestic makers will still face these labor and legacy costs. Seems to be this is something that would receive more attention.

floccina November 19, 2008 at 10:04 am

DanC wrote:
But the politicians were afraid to raise gas taxes so they placed a burden on the auto companies, a burden that eventually broke helped break them.

I do not know if he is right that the Costs of CAFE standards are a major factor in the big 3’s demise but CAFE always seemed like a very stupid way to reach its supposed goals.
Amen to this also:

The Japanese have more expertise in building small cars. The institutional knowledge at the Japanese companies is a big advantage.

Besides we do not need to know why Detroit does better in large vehicle we just need to know that it is so. Why would you make a rule that makes it difficult for a company to specialize in large cars.

DanC, can I quote you elsewhere?

Andrew November 19, 2008 at 10:26 am

Car superstores is an eminently brilliant idea. Hiring only people who don’t have new ideas is hilarious.

Charlie Munger talked about how furniture superstores were a big hit because noone thought it could be done, because it hadn’t worked before because it hadn’t been tried, but made incredible sense. Think about selection.

American cars have always been over-optioned. It has been a liability, it could have been an asset.

Now, pretend you are considering a furniture superstore, but can drive the furniture home.

Slocum November 19, 2008 at 12:01 pm

I’m confused. If the 2010 UAW agreement and VEBA addresses the labor and legacy liabilty costs, why is the one thing that dominates every discussion, from the NYT editorial today by Romney to the CNBC folk to virtually every other commentator I hear or writer I read, the overriding need to strike a new deal with UAW to address labor and legacy liability costs?

How exactly are the labor cost differences resolved? Yes, there is a lower-tier wage for new hires — but ARE there any new hires? And how many new hires can be expected by 2010 as the companies continue to lose market share and shed, rather than hire, employees?

Confused November 19, 2008 at 12:32 pm

“”An interesting thread, but a bit too complex. The bottom line is that if the big 3 were selling vehicles they wouldn’t be in trouble.”

In 2007, GM sold 3.9 million vehicles, Ford sold 2.6 million, Chrysler sold 2.1 million. If these companies weren’t selling vehicles, none of this would really be an issue.

“How exactly are the labor cost differences resolved? Yes, there is a lower-tier wage for new hires — but ARE there any new hires? And how many new hires can be expected by 2010 as the companies continue to lose market share and shed, rather than hire, employees?”

I don’t know, that’s what I’m asking. Shedding existing employees seems to be part and parcel of the process. The portrayal of the 2010 agreement by those who actually discuss it goes something like this:

1. Older workers are essentially bought out
2. New workers are hired at lower wages
3. The legacy costs that drive production (labor) prices through the roof are offloaded to the Union

The end result is that the domestic auto makers are no longer spending an average of $73.50 per hour to build a car versus Toyota’s $40-something per hour, they’re now paying something comparable to or cheap than that Toyota cost.

Is that the way it really works? Even if 40% of the workforce is not replaced by lower-cost labor by 2012 and it takes until 2013 or 2014, it would still represent a solution. That’s what I’m asking. We seem to have people in the thread who are familiar with this who are supporting this argument, and plenty of people who are critical of the domestic manufacturers as not having solver their labor problem. I’m hoping someone who IS familiar can explain the disconnect.

ryan November 19, 2008 at 2:01 pm

If GM and Ford had closed their own facilities and acquired all of the shares of Honda, Toyota, Nissan, and Volkswagen, THOSE companies would likely now be in trouble.

Slocum November 19, 2008 at 2:19 pm

Is that the way it really works? Even if 40% of the workforce is not replaced by lower-cost labor by 2012 and it takes until 2013 or 2014, it would still represent a solution.

My sense is that although the buyouts have drained billions in cash (which is a big reason why the bailout is needed) they haven’t really reduced the number of high wage workers much below what was needed by ‘natural’ shrinkage in market-share, so Detroit really hasn’t been able to hire second-tier workers as planned. And I see no reason to believe that many more high-wage UAW workers will leave in the next two (or next five) years — unless, of course, the Feds are going to provide billions more for UAW buyouts.

But I haven’t found any numbers of what fraction of UAW workers and high-tier and what percent are low-tier.

floccina November 19, 2008 at 3:45 pm

BTW Navistar International Corp. (NAV), John Deere, Caterpillar and Harley Davidson seem to be doing all right.

DanC November 19, 2008 at 5:12 pm

to floccina
go ahead if you want to use anything of mine here.

International Harvester is a shadow of what it once was. The UAW had a very nasty strike that destroyed most of the company.

Harley Davidson had the protection of import quotas and they dominate what is more of a niche market. If Gm wanted to shrink and concentrate on Corvettes they would be profitable.

I worked with Caterpillar for a brief period. The hatred between management and the UAW was very real. And Caterpillar did not cave to the UAW.

In 2010 much of the future responsibility for health and welfare costs are switched to the UAW. Plus given the rather older population that works at most GM plants, you should see a rather high attrition rate. Job banks should be gone, I assume some restrictive work practices will disappear. Much of what the critics want changed will be changed by 2010. Is it enough soon enough? Who knows.

To M1EK

Dear Mr Obtuse,

If people want to buy SUV’s who are you to stop them. If you want to encourage people to buy economy cars CAFE rules are an extremely inefficient way to achieve that goal. Now go back and try to read what was written and have somebody explain it to you.

Slocum November 19, 2008 at 5:25 pm

In 2010 much of the future responsibility for health and welfare costs are switched to the UAW.

I wonder about that too — didn’t that depend on GM, Ford and Chrysler providing billions for VEBA funds, billions which they’ve not yet contributed and, apparently, no longer have? Or am I wrong and those monies are already set aside?

Bernard Yomtov November 19, 2008 at 8:04 pm

And what pisses me off about the $70/hr number is that it counts payments to the pension fund for current workers and payments out of the pension fund for retired workers both as costs.

Josh,

This is my impression also, but I have been unable to identify a reliable source. Do you have one?

Thanks.

JordanT November 20, 2008 at 12:39 am

BTW The government spends huge sums to protect coastal areas against hurricanes, California from wildfires,

The costs for the wildfires in California usually runs in the millions, and is mostly paid for by the state itself, not the federal government. Secondly, if GM is as bad as hurricanes and wildfires what’s the point of keeping them around. We try to put fires out, not keep them around to do damage later.

Peter November 20, 2008 at 9:16 am

>Do they get benefits? Medical/dental? Matching 401k? Pension?

Pension and 401k plans are reported to the IRS, DOL and PBGC on a form called “5500″. Most of the filing is publicly disclosable (and most of the forms that are not open to public inspection are being discontinued this year, such as the form that lists the names and SSNs of people). One free (well, you’ll get spammed) source of 5500s is http://www.freeerisa.com.

Comparing Toyota’s plan with GM’s plan, and one comes to some very disturbing realizations. Toyota has a “defined contribution” plan (a 401k), while GM has a “defined benefit” plan (the thing that folks traditionally call “a pension”). And comparing the 2005 year filings (GM’s are the latest allowed by law):

386,000 retirees at GM, and
000,035 retirees at Toyota (zero padded so the numbers line up for easy viewing).

According to the 5500 filings, those 386k retirees are supported by 127k active workers – each worker supports 3 retirees, making social security seem positively frugal.

Josh November 20, 2008 at 10:08 am

“GM’s defined benefit plan was $9 billion overfunded, based on assets of $117 billion and accumulated benefit obligations of $108 billion as of Dec. 31, according to a Milliman report.

GM’s 10-K showed a funded status of $19 billion, based on assets of $104 billion and liabilities of $85 billion as of Dec. 31.

GM’s pension asset allocation was 48.9% fixed income, 30.1% equity and 21% other, according to the Milliam report. GM’s 10-K lists the allocation as 26% equity, 52% debt, 9% real estate and 13% other.”

http://pensionpulse.blogspot.com/2008/11/whats-good-for-gms-pension-fund.html

Dan November 20, 2008 at 12:44 pm

Umm, you guys do realize that most of these legacy costs would go away if we just had single payer health care in this country, right?

You know, like they do in every other industrialized country.

M1EK November 21, 2008 at 10:54 am

“If people want to buy SUV’s who are you to stop them.”

That’s not remotely what happened. SUVs were a niche market until GM/Ford/Chrysler engineered massive loopholes for them in CAFE, emissions, and tax law, and then marketed the hell out of them.

During the same period, two of the three (excepting Ford) demonstrated a seething hatred for small car buyers; lied about hybrids (especially GM); and obstructed further attempts to improve CAFE.

The crappy CAFE we got, in other words, was GM’s fault – you have cause and effect mixed up.

If SUVs had to meet the same emissions and safety rules as cars; if they weren’t in their own bucket for CAFE; and if the biggest ones hadn’t gotten that massive deduction in the tax code, far fewer of them would have been ‘wanted’ because their price would more accurately reflect the damage they do and have done to our national, economic, and environmental security.

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