Here in the Real World
They’re Shutting Detroit
Down
By Morley Winograd and
Michael D. Hais
Once upon a time, not so
long ago, in a city at
the heart of the
American continent,
General Motors produced
cars, like Pontiac’s
“Little GTO,” celebrated
in Beach Boys songs that
captured the thrill of
driving Detroit’s latest
creations. Today, as GM
struggles to appease the
government’s auditors
just to stay alive, Kris
Kristofferson, with a
little help from Mickey
Rourke, curses the
financial wizards from
Wall Street that are
“Shutting Detroit Down”
while “livin’ it up in
that New York town.”
Never has the inherent
tension between the
investor class and the
country’s manufacturing
sector been more
pronounced or the stakes
in this particular poker
game higher for the
future of America.
Chrysler may be forced
into bankruptcy first,
but it’s GM's downfall
that represents the true
mid-American earthquake.
Back in the late 1950s,
General Motors so
dominated
the American automobile
market that its
corporate goals were
focused on achieving a
60% market share. The
hubris of its executives
led them to decide to
pick up more and more
costs for medical
insurance, pensions and
retiree benefits,
beginning GM’s slide
down a slippery slope of
poor financial
performance
This posed a huge but
not initially recognized
risk to GM. By taking on
these obligations that
didn't show up as a cost
or balance-sheet
liability until the
government changed its
accounting rules in 1992
and required companies
to show the cost of
“other post-employment
benefits” (OPEB) on
their books, General
Motors lit a ticking
time bomb that has now
exploded in its face. In
1972, as GM came the
closest it would ever
come to achieving its
sixty-percent market
share goal, GM was
paying the entire health
insurance bill for its
employees, survivors and
retirees, and had agreed
to "30 and out" early
retirement that granted
workers full pensions
after 30 years on the
job, regardless of age.
Its world then began to
come apart.
In 1973, OPEC’s embargo
tripled the price of
oil. GM failed to
respond quickly enough
to the consumer’s sudden
demand for
fuel-efficient cars. At
the same time, the
Japanese with their then
superior, lean
manufacturing techniques
stepped into the vacuum,
gaining a foothold in
the North American car
market that they have
continued to expand.
Ironically, thirty years
later the very same
inability to shift
product offerings during
a spike in oil prices
precipitated GM’s
current difficulties.
GM’s reluctance to go
green is often cited by
its new government
owners as the reason
it’s in so much trouble
now, but the crux of
GM’s problems really go
back to those heady days
of market domination and
financial profligacy.
In the 1960s GM’s annual
operating margin
(profits divided by
revenues) averaged 8.7%.
The turmoil of the
seventies and the
pressure from Japanese
competition drove those
average margins down to
5.5%. Margins fell by
about half to an average
of 3% in the 1980s, and
about half again to 1.3%
in the 1990s (not
counting the $20 billion
hit GM took when the new
accounting rules for
OPEB took effect.)
Finally, in this decade
the slide has actually
taken the company into
an average of negative
margins. Now only the
government’s suggested
radical restructuring
seems to offer a way to
stop the bleeding.
It is estimated that the
cost of OPEB,
essentially GM’s retiree
pension and health care
programs, have cost the
company about $7 billion
each year since 1993 and
are probably around $10
billion per year now.
The bargain auto company
management made back in
the 60s with labor to
provide generous off the
balance sheet benefits
has now become an
albatross that threatens
the manufacturing jobs
for the Big Three’s own
current workers and
suppliers across the
Midwest. It’s the kind
of problem only
government can solve.
But the Obama
Administration’s early
efforts to do so have
been far from promising.
First it selected Steve
Rattner as its “car
czar”, a politically
well-connected private
equity investor and
turnaround artist from
“that New York town,”
someone with no
significant automobile
industry experience. In
addition, the
government's demands
that GM dismantle more
brands and shut down
more dealerships
suggests the process may
get a lot uglier by the
May 31 decision
deadline.
Luckily the United Auto
Workers remain on watch
to try to ensure that
whatever concessions are
demanded of GM’s current
and retired employees
reflect an equitable
shared sacrifice with
the company’s
bondholders and
investors. The kind of
GM that emerges from
these negotiations will
have a huge impact on
these workers and on the
many industrial towns
that depend on the car
business for their basic
existence.
Ultimately, the decision
on how best to “rescue”
GM may turn out to be
the most difficult call
President Obama will
make in his first year
in office. He will be
pulled by pressures from
the green gentry left to
force GM’s future
products to conform to a
pre-determined
environmental agenda. He
also will face
predictable Republican
calls to let the market
work its will, even if
it means the end of the
company.
President Obama will
need the wisdom of
Solomon to recognize
that today’s workers no
more deserve to be
punished for the
mistakes of prior
management than CIA
agents do for carrying
out the orders of their
equally arrogant
Republican counselors
during George W. Bush's
administration. To
paraphrase the
President’s words, it’s
“time to move on” and
offer GM the support it
needs to “Catch a Wave”
and start producing more
“Good Vibrations” for
America’s hard pressed,
but still very critical
manufacturing sector.
