New York Times: Siphoning G.M.’s Future

[GTAHVIT]

This is a much better article that really explains the interal issues that have GM in the situation its in. Not the vomit poop talk that idiot at Forbes published. Now, I don't like this article much either. But it appears to have many more facts and reasonable assumptions than the moron who stayed at a Holiday Inn last night and is now an economics expert....

http://www.nytimes.com/2008/07/10/op...nstein.html?hp

WHO shot General Motors? The company’s stock is at its lowest level in 50 years, and its market valuation has plunged to $5.9 billion, less than that of the Hershey candy-bar company. The automaker is weighing yet another round of layoffs — and maybe even a fire sale of venerable brands like Buick and Pontiac.

General Motors once manufactured half the cars on the American road, but now it sells barely 2 in 10. Bankruptcy is not unthinkable for Detroit’s former king. The immediate cause of G.M.’s distress, of course, is the surging price of oil, which has put a chill on the sale of gas-guzzling sport utility vehicles and trucks. The company’s failure to invest early enough in hybrids is another culprit. Years of poor car design is another.

But none of G.M.’s management miscues was so damaging to its long-term fate as the rich pensions and health care that robbed General Motors of its financial flexibility and, ultimately, of its cash.

General Motors established its pension in the “treaty of Detroit,” the five-year contract that it signed with the United Automobile Workers in 1950 that also provided health insurance and other benefits for the company’s workers. Walter Reuther, the union’s captain, would have preferred that the government provide pensions and health care to all citizens. He urged the automakers to “go down to Washington and fight with us” for federal benefits.

But the automakers wanted no part of socialized care. They seemed not to notice, as a union expert wrote, that if Washington didn’t provide social insurance it would be “sought from employers across the collective bargaining table.”

Detroit was too flush to envision that it would ever face a financial strain. Ford and Chrysler signed identical pacts with labor, so all three automakers were able to pass on their costs to customers. Besides, the industry’s work force was so young that few workers would be collecting a pension any time soon.

But pension commitments last forever. They far outlived Detroit’s prosperity.

General Motors got into the dubious habit of steadily increasing worker benefits. In 1961, G.M. was able to get away with a skimpy 2.5 percent increase in wages by also guaranteeing a 12 percent rise in pensions. Such promises significantly burdened the company’s future. As workers lived longer, the cost of fulfilling pension commitments rose. And health care costs exploded.

By the 1980s, it was clear that the Big Three automakers faced a serious threat from Japan. But General Motors and the U.A.W. were locked in a mutually destructive embrace. G.M., fearing the short-term consequences of a strike, continued to grant large increases in benefits — creating an intolerable gap between its costs and those of its foreign competitors. Union officials feared to face the rank and file without a big contract.

In the ’90s, the consequences of maintaining a corporate welfare state became too obvious to ignore. In that decade, General Motors poured tens of billions of dollars into its pension fund — an irretrievable loss of opportunity. What else might G.M. have accomplished with that money? It could have designed new cars or researched alternative fuels. Or it could have acquired half of Toyota — a company that the stock market now values at close to $150 billion.

G.M. acknowledged in its most recent annual report that from 1993 to 2007 it spent $103 billion “to fund legacy pensions and retiree health care — an average of about $7 billion a year — a dramatic competitive and cash-flow disadvantage.” During those 15 years, G.M. paid only $13 billion or so in shareholder dividends. The company has been sending far more money to its retirees than to its owners.

After falling $20 billion behind on its pension earlier this decade, G.M. doggedly put money into its plan to catch up. It has also agreed to invest more than $30 billion in a fund to cover future health-care expenses. But these efforts have starved its business.

The sorry decline of General Motors has proved Reuther right: the government is the better provider of social insurance. Let industry worry about selling products.

Unhappily, however, the fate of many public-sector pension plans is even worse than G.M.’s. Responding to the same temptation to offload expenses into the future, public employers have committed to trillions of dollars in future liabilities. In New Jersey, a huge pension liability has created a budgetary nightmare for the state. The city of Vallejo, Calif., burdened by police pensions, recently filed for bankruptcy.

Just as G.M.’s shareholders bore the burdens of its pensions, states and cities will have to force taxpayers to sacrifice in the form of service cuts, tax increases or both.

It is too late to restore G.M. to its former grandeur. But if public officials do not show courage by quickly funding the pensions they have promised to their workers, taxpayers will soon find themselves in an even worse crisis than the one G.M.’s shareholders are facing now.

Roger Lowenstein is the author of “While America Aged: How Pension Debts Ruined General Motors, Stopped the N.Y.C. Subways, Bankrupted San Diego and Loom as the Next Financial Crisis.”

[boxmonkeyracing]

I agree that GM should have hopped on the hybrid band wagon before they did but at the same time look how many cars are out there that they have that get better then 30 mpg. . .and what were people buying until recently? big SUV's and that's what GM did very well. lol. oh well.

[Nickdago]

That is a really good article actually. It once again shows that socialism in any form never works. Our social security system is heading down the same path, and as the article said citys are also heading down this path with all of these pensions they have promised to firefighters, police and school teachers. Even worse most of these people were able to retire at 55 which puts an even greater strain on the citys. It is now like a pyamid scheme with the top starting to get larger than the bottom.

I hope GM is able to pull it out because if they are not able to it is going to effect America in a lot of other areas, could even be the switch that triggers our decline. And if you think the foreign auto makers give a crap about America other than their own bottom line guess again.