2/15/2005

Bankruptcy is Not an Option for GM

During the 1970s GM had something that excited people, cars. Really cool cars and trucks too, but more than anything they had fast great looking automobiles that the American public sought after. Those were the good old days. When GM was king and profits were solid, with steady growth year after year. When imports like Toyota, Nissan, and Honda came to town, profit margins began to slip and GM found itself scrambling to regain market share that they once owned. It seemed they were regaining some of that market share a couple of years ago when it recorded strong gains back to back with its Cadillac and Hummer sales. Once again though, they are losing ground with shrinking profit margins, and less than excited customers.
The biggest culprit is not poor sales, although that is one part of GMs financial problems, but it is GMs retiree health-care costs that are eating up profits. This year they are expected to spike $1 billion to a total of $5.3 billion. The problem seems to be that GM doesn’t know the reason they are in business. They are more of a huge medical and pension provider rather than a manufacturer of automobiles. So why are Japanese automakers stealing away market share? They have retired employees as well, but because Japan has a national pension system they are able to have much lower fixed costs in their home markets. For example, each car that GM sold last year made them only $213 compared to Toyota that made nearly $1,500 per vehicle sold. There is no question why GM cannot compete they just aren’t making as much money on their sales as they were before. This is due to the cost of their retiree, and pension plans that are putting a bigger dent in their bottom line than they ever have.
“Anyone who thinks bankruptcy is an answer is nuts.” (Welch, Byrnes) GM is still a good distance from this worst-case scenario. They would have to lose a lot of cash before they claim bankruptcy. Chief Executive for GM G. Richard Wagoner Jr. said, “GM is in the black, is cash-positive, and has $23.5 billion in its coffers.” (Welch, Byrnes) Despite the fact that GM does have a positive cash flow the important thing will be for it to keep up with its debt obligations [pensions and health care], and patch the hole in the bucket. By controlling the cost of their health, and pension plans GM can put itself in a position to compete again. Ultimately the success of GM will be determined by its ability to realize what their product is, cut their overall fixed costs, and make smart investments with the precious funds they have remaining to design and build sleek, attractive vehicles that outperform their foreign counterparts.

3 comments:

Chuck said...

It sounds to me that GM needs to reform their retiree medical and benefit programs. I bet that GM is locked into the the current program with those who retired with GM, or at least find it ethical to uphold the current system. But what about those who are not yet working at GM, who will be in the future, and may retire with them? Upon or before employment, one should be informed of the medical and retirement packages and if not personaly acceptable they can choose not to work at GM. Function trumps form.

Dr. Tufte said...

-2 on Drake's post for grammatical errors and a poorly formatted link.

I liked this line: "...GM doesn’t know the reason they are in business. They are more of a huge medical and pension provider rather than a manufacturer of automobiles."

I don't want to step on the toes of anyone in human resource management, but the field is a Frankenstein creature created by our legal system. It is one thing for workers to want more and better benefits, or to choose to work in an auto plant to get good benefits. It is quite another to have firms like GM where managers seem to be selling benefits to workers in exchange for assembly of cars. I find it odd that little of the trendy management focus on pursuing core competencies seems to conclude that something like "we stink at providing benefits" could be a possible conclusion.

BTW: The single most expensive component in American made cars is health insurance for workers. Has been for quite a while now.

Scott said...

great article

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