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General Motors Faces Financial Hurdles

January 12, 2006 at 12:00 AM EDT
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PAUL SOLMAN: Last spring’s graduating MBAs at Columbia University. Where were they headed?

How many of you are going to New York to go into Wall Street? (hands raising) How many to California and high tech? You over here. How many to Detroit and the auto industry? (Laughter)

GRADUATE: They still make cars in Detroit?

PAUL SOLMAN: I’m sorry what?

GRADUATE: They still make cars in Detroit?

PAUL SOLMAN: They still make cars in Detroit, yes.

What about working for General Motors?

GRADUATE: In one of my classes we talk about the bankruptcy of GM in a few years, so you don’t want to work for a company you think is going to go bankrupt.

PAUL SOLMAN: General Motors isn’t bankrupt, but the once-great firm is on the rocks, having lost nearly $4 billion last year alone through September, recently announcing 30,000 layoffs.

And at first glance, its long decline would seem to be GM’s fault. Consider perhaps its foremost headache: Its hulking health insurance costs for which workers pay nothing out of pocket, and retirees very little.

GM’s Tom Kowaleski:

TOM KOWALESKI: We have about 145,000 employees, active employees, and we have health care coverage for 1.1 million retirees, independents and family members. Last year we spent $5.2 billion on health care coverage for all of our employees in the U.S. basically. It equates to about $1,500 a car.

PAUL SOLMAN: That’s more than the steel in an average car and $1,500 that GM’s foreign rivals, with government health insurance, don’t pay.

GM’s got another cost disadvantage as well: full pensions after only 30 years of service, regardless of age. To pay for this largesse, tack on another $1,000 per car.

The lushest benefit of all, however, may be GM’s jobs bank. Workers whose plant closes can transfer elsewhere in the company or, if they choose not to, take classes, do community service, continue to get full pay and never retire.

So in Baltimore, when a GM plant closed recently, the jobless weren’t exactly distraught.

REPORTER: How do you feel about this plant closing?

GEORGE GAMBICHLER: I feel really good. I’m happy, I’m happy.

ANNA CLARKE: Most of us are going to be in the job bank volunteering. And I’d like to go to school in the fall because I don’t want to put all my eggs in GM’s basket.

REPORTER: But does Did GM help you go to school?

ANNA CLARKE: Sure. They’ll pay for us to go to school. And we’ll, we’ll continue to receive a paycheck. So that’s great. I mean it’s, it’s a no-brainer.

PAUL SOLMAN: Since his layoff at Flint’s Buick plant, Dean Braid has cared for a quadriplegic friend.

DEAN BRAID: I would say I’m a rare exception where they’ve allowed me to help a single individual. But it’s a case by case that the UAW and GM look at for those sort of opportunities for their jobs bank workers.

PAUL SOLMAN: When you add the jobs bank to the pensions and health care tab, GM has a total cost disadvantage, compared to non-U.S. rivals, of $2,500 or more per car — before it even starts making one.

DAVID COLE: It’s like an Olympic swimmer, trying to swim with a couple bowling balls hanging around his neck. He’s just not going to get very far very fast.

PAUL SOLMAN: David Cole, son of the man who designed the ’55 Chevy and went on to become GM’s president. The son is now a top industry analyst. Why, we asked, didn’t regulators and investors squawk when GM negotiated such generous union deals?

DAVID COLE: Historically you always viewed the company as a rock of Gibraltar. No matter what we did in bargaining and collective bargaining between the union and management, the company was always going to be there.

PAUL SOLMAN: Why worry that benefits would balloon over time? Who knew that efficiency and foreign rivals would kill so many jobs, create so many retirees? No wonder regulators and stockholders look the other way.

Today, profligacy is an easy charge. But GM’s decline may have had as much to do with fate as its earlier success did. Flint, Mich., happened to be home to the carriage industry just when it began to go horseless. The next step was arguably luck, says labor historian Neil Leighton at Flint’s GM museum.

NEIL LEIGHTON: The entrepreneurs come in and begin to pour some money into this, to begin to mass produce cars.

PAUL SOLMAN: A marketing genius named Will Durant starts selling Buicks, and with backers, buys up Cadillac, Oldsmobile, Oakland — later Pontiac — and then Chevrolet.

By the 1930s, General Motors is said to have a model “for every purse and purpose.”

NEIL LEIGHTON: It converts to making weapons and aircraft engines, tanks, all of this type of thing –

PAUL SOLMAN: In the auto plants.

NEIL LEIGHTON: — In the auto plants.

PAUL SOLMAN: Some say GM was smart, some say lucky. But it was perfectly placed when the war ended.

NEIL LEIGHTON: And there was all the pent-up demand from the war years when people couldn’t buy houses or cars and so in that period right after the war, car production, like every other kind, goes sky-high.

SPOKESMAN: Oldsmobile rockets ahead.

PAUL SOLMAN: And with Europe and Japan flattened, China and the Soviet bloc iron curtained off, the U.S. was the world’s premier economy — GM, its industrial paragon.

SINGING: See the USA in your Chevrolet. America is asking you to call. Drive your Chevrolet through the USA America’s the greatest land of all

PAUL SOLMAN: “What was good for the country was good for General Motors, and vice versa” its chairman said in 1953 because, in part, the first corporation to make a billion dollars a year was forced by the United Auto Workers to share its bounty with labor.

Between World War II and Vietnam, the real incomes of GM’s blue collar workers doubled.

WAYNE POOL: Where else are you going to get out of high school and make back then, $18,000 a year or four and a quarter an hour and everybody else is making two?

ANDREW GERKOWSKI: Best benefits I’ve ever seen. The best pay I’ve ever seen thus far. The pay is amazing for non-skilled hourly workers.

PAUL SOLMAN: The pay and benefits blamed today for hobbling GM, that is, helped create America’s universally envied middle class.

At the same time, though, GM benefited from the great productivity boom. In 1979, GM had 600,000 workers; it now has 150,000 to turn out roughly the same number of cars. And this helps explain the jobs bank.

Union activist Gregg Shotwell:

GREGG SHOTWELL: They wanted to increase productivity. Now the UAW said, look, if you’re going to ask people to put forth ideas to eliminate their own jobs, I don’t think you’re going to get much help. So they made a deal. GM said, I’ll tell you what, we will promise these people that if they eliminate their jobs through higher productivity, we will pay them.

PAUL SOLMAN: In short, GM has a pretty good excuse for what at first might seem like monstrous mismanagement, which is not to say GM’s entirely blameless.

JOHN LAUVE: This is hallowed ground. This is where Chevrolet was born and it covered this entire area.

PAUL SOLMAN: John Lauve, a lifelong GM manager, spent time at the vast Chevrolet complex in Flint, demolished in 2004. At its height, GM had half the U.S. car market.

SPOKESMAN: Super turbine transmissions — and more.

PAUL SOLMAN: It now has one quarter. And Lauve blames the drop on GM’s stodgy bureaucracy.

JOHN LAUVE: It’s just a failure of management, of arrogance, of not listening to people. They don’t listen to the customer, they don’t listen to the workforce, and they have all the answers and they keep claiming they’re trying and they’re unsuccessful or they don’t recognize that they need to change and seek new input and new knowledge.

MICHAEL FEINER: It’s the Department of Motor Vehicles.

PAUL SOLMAN: Back at Columbia business school, leadership professor Mike Feiner agrees.

MICHAEL FEINER: It’s a huge, bloated bureaucracy, very slow to change, very slow-moving, big elephant hoofs that take forever to go from one step to the next.

PETER MORICI: The bottom line is, they’re paying themselves, their workers and their management more than the value they’re creating in the marketplace. They can’t sell their cars for a price that will permit them to cover their costs.

PAUL SOLMAN: And that’s because, says economist Peter Morici, consumers won’t pay a premium for poor GM quality.

PETER MORICI: Here’s Consumer Reports and the new Malibu has come in with below-average reliability.

PAUL SOLMAN: Oh, that’s got one of those little Consumer Reports’ circles with a black bottom filled out.

PETER MORICI: With a half a black dot.

This is a Saturn. This is a new SUV. According to this, it is at the bottom of the league in reliability.

PAUL SOLMAN: Oh, that’s got, that’s got a black dot. That’s the one you, you wouldn’t even give to your worst enemy kind of –

PETER MORICI: Well yes. If you buy this car, you really ought to have your, your mechanic on retainer, kind of like a big company does its lawyers.

PAUL SOLMAN: No wonder, says Morici, Toyota may overtake GM next year as America’s favorite car maker.

PAUL SOLMAN: What are you guys looking at?

CHRIS STENGER: We’re looking at Lexuses and station wagons and –

DEBRA STENGER: SUVs.

PAUL SOLMAN: Some SUVs. So SUVs, American cars?

DEBRA STENGER: No, we don’t usually buy American.

PAUL SOLMAN: Why not?

CHRIS STENGER: We’ve had better luck with — with foreign cars.

PAUL SOLMAN: But again, it’s not all GM’s fault. Even though foreign makers have U.S. plants and workers, they retain much of that $2,500 per car cost advantage, says GM’s Kowaleski.

TOM KOWALESKI: That’s a lot that competitors can use to either reduce the price of the car by that much, put added content without raising the price; put that kind of money, multiplied by several million cars a year into research and development, new facilities, other kinds of dealership, dealership development growth, market growth, that’s, that’s a significant burden we carry.

PAUL SOLMAN: The big news, according to GM, is that it’s finally cutting costs: closing unprofitable plants, negotiating a cheaper health care deal with the union.

More over, says Kowaleski:

TOM KOWALESKI: We have had dramatic increases in productivity in our plants in North America over the last five years, coming from having some of the least efficient plants, to now having some of the most efficient plants.

We now have brands on the JD Power Initial Quality Survey that were not in the Top 10 that are now in the top five, top five, top six that are ahead of many individual Japanese brands.

PAUL SOLMAN: Analyst Cole concurs.

DAVID COLE: I think they’ve got a good portfolio coming. For example, we’ve seen things like the Solstice and the Impala and a number of other vehicles that already in the marketplace are doing very well. But the high volume products are just around the corner, particularly the new trucks, which are dramatically improved in terms of fuel economy.

PAUL SOLMAN: In addition, GM’s become the number one producer of cars in China. So there seems to be some signs of hope.

On the other hand, right now, GM continues to decline. And that could cost all of us, says economist Peter Morici.

PETER MORICI: Remember someone once said, what’s good for General Motors is good for America? Unfortunately what’s happening is what’s bad for General Motors, is terrible for America. It’s disrupting the entire Midwestern economy, and it has broad consequences for the industrial competitiveness of American manufacturing.

PAUL SOLMAN: An industrial competitiveness that’s now more evident in the GM museum than on its balance sheet, a museum whose promotion for an upcoming exhibit reminded us just how far the once-mighty can fall.