6 ms·

GM's Problems are 50 Years in the Making

82 points by pg 18y ago

Xichekolas 18y ago
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 18y ago
  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 18y ago
    That and crappy cars, lack of foresight etc.
    - dkokelley 18y ago
      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 18y ago
        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 18y ago
        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.
adw 18y ago
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-jams-motown-and-the-fall-of-the-big-three-carmakers/ http://byline.timetric.com/2009/03/30/kick-out-the-traffic-j...
markessien 18y ago
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.
- ShabbyDoo 18y ago
  I look to the 401K/403B as one answer that meets your criteria.
- dkokelley 18y ago
  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 18y ago
    > 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).
    - dkokelley 18y ago
rudyfink 18y ago
"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 18y ago
  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 18y ago
    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 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.
  - far33d 18y ago
    The article basically argues that they didn't "cave" - instead they made a rational choice to write contracts that were detrimental to the long-term viability of the company in return for short-term margins and profits. The same could be said for the legacy airlines. They made their contracts under regulation, where they could raise rates to match their labor costs without fear of competition, and now are suffering the consequences.
ShabbyDoo 18y ago
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_Board http://en.wikipedia.org/wiki/Financial_Accounting_Standards_...) 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_Association http://en.wikipedia.org/wiki/Voluntary_Employee_Beneficiary_...) 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 18y ago
  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.
ShabbyDoo 18y ago
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 18y ago
  Population growth is rapidly shifting to urban areas, which also means less people buying cars because of shorter commutes and mass transit.
tsally 18y ago
I say we hire young, smart people like Nate Silver to fix our economic problems.
rajat 18y ago
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 18y ago
  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.
rjurney 18y ago
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.
gfrison 18y ago
Fortunately FIAT would save GM...
kingkawn 18y ago
if they made good cars this would all be moot
aoeu 18y ago
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 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 18y ago
  That was seriously one of the most depressing documentaries I've seen. I really want an EV and should have one by now.
kingkawn 18y ago
Also that graph at the top of the page needs an X-axis like my brother needs a job.

82 points by pg 18y ago

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 18y ago
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 18y ago
  That and crappy cars, lack of foresight etc.
  - dkokelley 18y ago
    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 18y ago
      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 18y ago
        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.

adw 18y ago

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-jams-motown-and-the-fall-of-the-big-three-carmakers/ http://byline.timetric.com/2009/03/30/kick-out-the-traffic-j...

markessien 18y ago

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.

ShabbyDoo 18y ago
I look to the 401K/403B as one answer that meets your criteria.
dkokelley 18y ago
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 18y ago
  > 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).
  - dkokelley 18y ago

rudyfink 18y ago

"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 18y ago
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 18y ago
  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 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.
- far33d 18y ago
  The article basically argues that they didn't "cave" - instead they made a rational choice to write contracts that were detrimental to the long-term viability of the company in return for short-term margins and profits. The same could be said for the legacy airlines. They made their contracts under regulation, where they could raise rates to match their labor costs without fear of competition, and now are suffering the consequences.

ShabbyDoo 18y ago

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_Board http://en.wikipedia.org/wiki/Financial_Accounting_Standards_...) 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_Association http://en.wikipedia.org/wiki/Voluntary_Employee_Beneficiary_...) 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 18y ago
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.

ShabbyDoo 18y ago

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 18y ago
Population growth is rapidly shifting to urban areas, which also means less people buying cars because of shorter commutes and mass transit.

tsally 18y ago

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

rajat 18y ago

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 18y ago
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.

rjurney 18y ago

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.

gfrison 18y ago

Fortunately FIAT would save GM...

kingkawn 18y ago

if they made good cars this would all be moot

aoeu 18y ago

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 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 18y ago
That was seriously one of the most depressing documentaries I've seen. I really want an EV and should have one by now.

kingkawn 18y ago

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