General Motors

Lee Hawkins of the Wall Street Journal reports on GM:

GM Cuts Outlook For 2005 Profit: General Motors Corp. rattled financial markets as it slashed its earnings estimates for the first quarter and full year of 2005.... GM faces a 'perfect storm' of health-care and pension costs and rising commodity prices.... GM continues to see its market share fall and inventories of unsold vehicles in North America rise. New models it has touted have failed to grab consumers' attention. It faces increased competition from nimbler overseas rivals, especially Japan's Toyota Motor Corp., and is burdened by heavy costs from health-care and pension obligations to its 1.1 million employees, retirees and their dependents....

In a conference call yesterday, Mr. Wagoner and John Devine, GM's vice chairman and chief financial officer, said swifter and starker changes are needed to restore GM's profitability in North America. 'We made a lot of progress on reducing structural costs, but what we saved on the operating side has been filled in by higher legacy costs,' Mr. Wagoner said, using a shorthand term for the comparatively rich health and pension benefits that are a legacy from the days when GM controlled more than 40% of the U.S. market.... Mr. Wagoner faces significant hurdles in turning GM around. Weighed down by high health-care costs and pension obligations, the company is struggling to compete with lower-cost rivals, led by Toyota... new models that GM executives said would turn the tide for the company have yet to deliver significant enough gains to offset slumping demand for older models. Sales of large SUVs such as the Chevrolet Suburban and GMC Yukon, GM's highest-profit vehicles, have collapsed as gas prices have risen and competition has increased from lighter, more maneuverable crossover wagons that offer many of the functions of a larger SUV....

Mr. Wagoner has overseen strong gains by GM in productivity and steady progress on product quality. But those improvements haven't slowed GM's slide in U.S. market share. The auto maker's share fell to 25% at the end of February, down from nearly 33% a decade ago....

In its warning, GM said it expects to incur a loss of $1.50 a share in the first quarter of 2005, excluding special items, compared with a previous estimate of break-even or better. The company also lowered its full-year expectation to $1 to $2 a share from a previous estimate of $4 to $5 a share, and said that instead of generating $2 billion in cash this year, as previously forecast, it will burn $2 billion in cash. In 2004, GM reported net income of $3.7 billion, or $6.51 a share.

The fiscal year before last GM pulled in about $20 billion, of which $2 billion went to the pension plan, $5.5 billion to health care (for current workers and for the 2.3 retirees for every current worker), $9.5 billion to bondholders, and $0.7 billion to the tax guys--leaving $2.8 billion for the shareholders (on an equity base now valued at some $16 billion).

With stockholders receiving only 15% of the surplus from the business and yet having 100% of the votes, it doesn't look like a stable situation: there are enough flaws in our form of corporate governance to lead me to suspect that someone is likely to try something to redivide the GM surplus pie over the next five years. But it's not clear to me what, exactly.

---

Annual Financials for General Motors Corporation: Fiscal Year-End:12/31
All amounts in millions except per share amounts.
	2003	2002	2001	2000
	12/31/2003	12/31/2002	12/31/2001	12/31/2000
Net Sales	185,524.0	177,324.0	169,051.0	184,632.0
Cost Of Goods Sold	152,071.0	146,793.0	138,847.0	145,664.0
Gross Profit	33,453.0	30,531.0	30,204.0	38,968.0
SG and A Expenses	21,008.0	20,690.0	19,433.0	22,252.0
R and D Expenditures	-	-	-	-
Depreciation and Amortization	-	-	-	-
Income Before Depreciation and Amortization	12,445.0	9,841.0	10,771.0	16,716.0
Interest Expense	9,464.0	7,503.0	8,317.0	9,552.0
Investment Gains (Losses)	-	-	-	-
Total Operating Expenses	30,472.0	28,193.0	27,750.0	31,804.0
Non-Operating Income	-	-	-	-
Other Income	612.0	281.0	-138.0	-319.0
Income Before Tax	2,981.0	2,338.0	2,454.0	7,164.0
Provision For Income Taxes	731.0	644.0	1,094.0	2,393.0
Income After Tax	2,250.0	1,694.0	1,360.0	4,771.0
Minority Interest	-	-	-	-
Net Income Before Extra Items	2,862.0	1,975.0	1,222.0	4,452.0
Extra Items Discontinued Operations	960.0	-239.0	-621.0	-
Net Income	3,822.0	1,736.0	601.0	4,452.0

Comments

[MaryLou]

Health care and pension look like likely candidates, if the shareholders demand a bigger piece of pie.

[Otto]

Yes: Would new management be able to renege on previous pension and healthcare commitments for retirees?

[anne]

Rather an ominous suggestion. After tax earnings are above 7.9% of GDP, which is a record level. There will be considerable pressure on GM to increase earnings and the share to labor current or retired is where the the problem will be found by shareholders. Not a pleasing prospect for union members.

[Bernard Yomtov]

Could someone clarify why GM would be allowed to renege on obligations to retirees, but not to bondholders? I know this is done, but it always strikes me as outrageous.

[matt]

I'm writing this quickly as I try to get the kids ready for bed, but the reason bondholders get first dibs over retirees is because the bondholders are in the position of recovering money that they lent to the company when they purchased the bonds. While retirees worked and became vested in their plan, the debt that bondholders have is superior to the claims of retirees. Doesn't seem fair, but if someone advanced you say, $1000 to keep your business going and one of your workers retired and now s/he and the bondholder have a claim to that $1000, who has the more legitimate claim to the money?

This doesn't mean I agree with the system, but that's how it works, roughly.

The same thing with our foreign debt that is held in Treasuries. If the countries that are buying our bonds, in effect financing our outrageous debt levels in this country, they will be calling in debts that the government previously incurred to keep the machine running.

[Lee A. Arnold]

(Meanwhile, working in our favor at the top: From--
hppt://vvvvvv.blackholenews.safetynet/screwyou:)

PRESIDENT PROPOSES PHONY SOLUTION TO PHONY PROBLEM

Posted Sunday, March 20, 2005 to all the little webfeet by BHNS--Black Hole News Service (Our Motto: The Truth is Out There--but it's underneath the Chandrasekhar limit)

South Coral Oildeck, Florida, March 20--The following is a partial transcription of the President's town hall public relations stunt at the Gymnasium of the Risen Bonespurs:

THE PRESIDENT: ...Now we got a real strategery on Social Security. To begin with, we gotta get you guys whipped up about nonsense, so first we're gonna try a little distraction! Some of you were born yesterday! Your granddaddy got HIS money, but he DON'T KNOW about yours! We made it look like it's all going to smash--but I'm out here to say--did I really say that? Nyuk nyuk. (Laughter.) Here first we gotta get people to acknowledge there's a problem. We got a problem, that's what I'm trying to tell ya, so folks has gotta unnerstannd! We--GOT--AH--PROBLEM. We gotta problem! We gotta: problem problem problem problem!!!! (Large hush.) Now, all your old folkers is safe, don't worry, we're not gonna bilk them, not this time, but Holy Franklin D. Roosevelt! Here's what it is, is: money's all gone, people! ...Nyuk, nyuk. Why, we got this large chart here shows it's goin' downhill in color like a funhouse pyramid! To 2018 !!! ...Now, right around this moment, I always wanna say the word, "bipartisanship." (Applause.) Call all your red blue Congresspurple, as to what are they gonna DO about it! "There will be no political retribution" [real quote] by the Archangel Karl, and we won't lash 'em to a post, nor flay 'em alive. Forget your temporary fixation on 75 years; and transfix yourself upon eternity: We need EVERYONE to get inveigled in this conniving, I mean, er, bring out your ideas! So, ideas, ideas; ...ideas, ideas, ideas!! Clinton and Moynihan had very different ideas, but yeah, let's name those guys too! ...Now, I know everyone here in this sacred gymnasium tests high on "democracy, justice, equality, opportunity" [in that order] so we're jumpin' on down to "opportunity," to complete the travesty! So I got a idea: This is a little idea I like to call "private retirement savings investment accounts, highly controlled by a big bureaucracy with lots of rules and regulations, until the lobbyists get done with it." I mean, uh, "personal accounts." ...It's YOUR money! It's YOUR money! Now, these accounts do not fix Social Security [real quote] but you'll get a higher rate of return, even though every expert says it ain't likely. ...Did I say that? (Laughter.) What I mean to say is, let me choose this carefully, it will "help you do a better job of coming closer to what the government has promised" [latest real quote]. Ya need a PhD to understand it all--it's a little thing I like to call the "compound rate of confusion." ...It's YOUR money! ...It's YOUR money! ...I got ta tell ya, it makes me feel warm inside! 'Cause I LIKE the idea of people thinkin' in their own minds about the idea of thinkin' about the "ownlessship society." (How else can I get three s's together?) I LIKE the idea of people sayin' "this is my own little square of dirt, so please go drill for oil over thataway, kind sir!" (Applause.) I LIKE the idea of growin' nest-eggs in a tree 'til you can chop it down yourself! (Applause.) It'll work just the same as 401k's, IRA's, and Thrift Savings Plans, but don't think about fixin' those, 'cause instead we need another Wall Street slush fund! (Applause.) Plus, it'll cause economic growth...Hell, we just gave the Biggest Tax Cuts in History back to the Richest People on the Face of the Earth, and these assholes couldn't get employment going for three years!! ...Any questions! Yeah, first up, we got Maryjane Cookie. Maryjane, where are ya? Step up to the mike.

MS. COOKIE: Misser Pretzeldent, I er, uh...

THE PRESIDENT: C'mon, sweetheart, ya practiced it five times yesterday. (Laughter.)

MS. COOKIE: Mister President, I'm the den mother for Local Scoobie Troop 101 here in South Coral Oildeck, and the boys asked me to be sure that I tell you--their motto is, "No Secret Homoes!" (Laughter and applause.)

THE PRESIDENT: Heh, heh, I guess everybody's younger than me, heh heh. (Laughter.)

MS. COOKIE: Sir, on behalf of all your athletic supporters we wanna praise you for bringing the idea of Jesus back into the White House, unlike the last heathen savage, may he be accursed forever, and we also thank you for revealing the plutocracy as "Moloch."

THE PRESIDENT: It's my pleasure to serve! (Applause.) Like MY granddaddy always used to say, "The Beast will kill you--but hell, you're gonna die anyway!"

[EXEUNT]

[matt]

that should read "If the countries that are buying our bonds decide to cash them in,...."

[anne]

Darn. I just finished reading Gretchen Morgenson's column. Merrill Lynch is warning investors that the quality of operating earnings is still poor from an historical vantage and declining. Among the 5 companies with the largest gaps between operating earnings and standard accounting or reported earning is Ford.

[anne]

http://www.nytimes.com/2005/03/20/business/yourmoney/20gret.html

What? They Never Heard of WorldCom?
By Gretchen Morgenson

WHAT a week.

Bernard J. Ebbers, founder of WorldCom, got to add felon to his already colorful curriculum vitae. Maurice R. Greenberg, dictator in chief at American International Group, the global insurance giant, was toppled after almost 40 years at his post. The Federal Reserve told Citigroup it could not make any major acquisitions until it cleaned up its compliance act. And General Motors laid a big, scary earnings egg.

Isn't it nice to know these incidents are anomalies and that most American companies are chugging along, reporting good solid earnings?

Sure would be. But contrary to popular belief, the quality of corporate earnings is on the slide again and, as a result, Richard Bernstein, chief United States strategist at Merrill Lynch, is advising investors to tread carefully.

"There is an impression that the quality of earnings has improved dramatically," he said. "That is true relative to the worst levels of post-bubble reporting, but relative to history, the absolute quality of earnings is quite poor."

And getting poorer.

Mr. Bernstein reaches this depressing conclusion by analyzing the difference between the earnings that Standard & Poor's 500 companies have reported under generally accepted accounting principles and operating earnings, the figures companies typically trumpet because they do not include write-offs and other unusual items.

The difference between the two figures, Mr. Bernstein says, is the G.A.A.P. gap.

And it is widening. In the most recent period - the fourth quarter of 2004 - the gap was 13.7 percent. In other words, operating earnings were on average 13.7 percent higher than reported earnings. While that figure is well down from the 40 percent gap reached in 2002, it is much higher than the long-term, pre-bubble average of 6.7 percent.

The result: while stock valuations may not be so high as they were before the bubble burst, the quality of earnings appears to be worse....

[PrahaPartizan]

It would appear that it's about time for GM to split up the business and sell off the auto portion to some foreign buyer, just as IBM did with its PC business. Could GM find a Chinese buyer who might be interested in GM's auto assets. If one throws in the GM research operations, including the fuel cell component, it might make an attractive package for the buyer. The ultimate cycnic in me says that GM first splits up the businesses, allows the auto business to declare bankruptcy (a la the airlines), defaults on its health care promises to retirees, and then sells the scrubbed business to the foreign buyer. The continued decline of the dollar will make this much easier too. The GM shareholders get theirs and the stakeholders get the shaft.

[palolo lolo]

Maybe if enough big companies scream about employee costs,they'll decide National health insurance isn't such a bad idea. God knows they won't listen to people,but money screams to them!

[SW]

Maybe if they spent more time fighting California's emissions standards they'd be in better shape.

[P O'Neill]

One recurring mystery is why it is, with an income statement as fragile as Brad shows above, that GMAC is able to raise billions of dollars at pretty low interest rates to finance people buying cars from a manufacturing side that is not really profitable.

[Elaine Supkis]

GM is preparing to ditch the union contracts and of course, as some suggested, sell it all to the Chinese!

Hey, all industry should kill off union obligations, kill pensions and sell the factories to China!

Then Bush and Condi will try to do a sneak attack on China and we win! Yup. A great plan. Must tell Yamato about it.

[christofay]

There's going to be cam shafting for everyone. If or when GM declares bankruptcy their "legacy" retirement obligations will be passed over to the PBGC, Pension Benefit Guaranty Corp, the government agency which will cut the benefits down. I might be wrong about the letters going into that acryonym.

The value of the common stock probably will depreciate toward zero, so that mainly will be a shaft for the middle class considering the investment vehicles, mutual funds and retirement pool money, are the types of orgainzations holding the common stock.

Of course bond holders should come first. That is money that other people made and saved then lent to a company. If the prmacy of bond holders being paid first is lost, who is going to risk lending money to any company?

Many large U. S. industrial companies have declared bankruptcy or are facing it. Company controlled healthcare and retirement obligations get wiped out or passed to the government. It's our road to Argentina. We're watching people's expected standards of living in retirment go ka-boom.

[pollysi]

When are businesses like GM going to realize that the businesses who don't provide insurance are free riders on the health care system provided by responsible companies? We won't get national health care until the GMs of this country realize how they are being used and decide they aren't going to take it any longer.

[christofay]

P. O'Neil:

Why is GM able to borrow money at such low rates? It's the Bush-Greenspam economic plan. Keep interest rates low so consumers-once called citizens- are encouraged to spend via borrowing. It's what kept the first Bush 2 recession from being deeper unless you lost your job. GM which looked like a pretty good name was able to raise large amounts of money to float their zero interest rate financing the purchase of their cars.

Now those low interest rates can't be sustained without the inflation rate turning dollars into confetti. What kept GM running, low interest rates, is now going in the opposite direction. The second recession or the resumption of the original recession is coming back.

[Duckbill Platypus]

Funny thing is, GM's new products are much, much improved. Cadillacs are genuinely sporty and fun to drive, and with a distinctive style. Here's a surprise....the new Chevy Cobalt, the subcompact (a segment which GM NEVER did right) is actually good, if a bit bland. Though there are some ugly ducklings, they've proven that they can build some very good cars. (tip: good domestic cars depreciate much more than foreigns, so they're a steal used.)

GM needs to eliminate the Buick division and possibly the Pontiac division as well, that would give them a better shot to brand the corporation's cars. I think there is much customer confusion out there as to "who" these divisions are, which spills over to GM as a whole.

[Movie Guy]

Brad

"With stockholders receiving only 15% of the surplus from the business and yet having 100% of the votes, it doesn't look like a stable situation: there are enough flaws in our form of corporate governance to lead me to suspect that someone is likely to try something to redivide the GM surplus pie over the next five years. But it's not clear to me what, exactly."

It's interesting where you put the focus.

I expect that the more pressing issues are the macro implications faced by GM, Ford, DC, and, as a result, the USA.

Not mentioned in the current news stories I read is the fact that GM restructured its DB plan back in the early 90s. I believe that healthcare support ratios were also changed. So, the legacy picture could be worse if all employees were receiving pre-91 levels of support, which the newer employees are not.

GM may trim its labor force by another 28% (as noted also by WSJ).

It's suppliers are already feeling the pain, and they are hopeful that the picture will improve once GM levels its inventories.

"For the first two months of 2005, GM's market share was 25 percent, down 1.8 percentage points from a year ago, according to Autodata Corp."

"GM is expected to seek price cuts from its suppliers. Also, the company recently put its entire advertising business up for bid partly as a way to cut costs."

"On Wednesday, GM notified its 38,000 salaried U.S. employees they will not receive merit pay raises this year. Bonuses based on the company's 2004 performance will still be paid."

"Starting April 1, the company match for the employee savings stock purchase program will drop from 50 cents on the dollar to 20 cents."

In my opinion, GM will turn this corner. They have the tools.

http://washingtontimes.com/business/20050318-102951-7901r.htm

http://i-newswire.com/pr11239.html

http://quote.bloomberg.com/apps/news?pid=10000039&refer=columnist_levin&sid=az6RgXU0Lods

[anne]

Movie Guy

Nicely done :) GM will turn this corner, but there will be significant pressure on labor.

[anne]

Darn again. When the Senate passed its Medicaid bill last week, there were a number of tax cuts included. I noticed that there was a tax cut on Social Security benefits, but did not think clearly enough. The Senate has just passed a proposal that will shorten the financial solvency of Medicare.

http://www.nytimes.com/2005/03/20/opinion/20sun1.html?ex=1111467600&en=dea1dd27904b7958&ei=5070

Washington's Fiscal Meltdown

Before leaving town for a two-week spring break, Congress indulged in its own form of March Madness. The Republican majority in the House and the Senate passed budget blueprints for 2006 that slash domestic spending by upwards of $150 billion over the next five years. Yet they still managed to increase the projected deficit by more than $125 billion over the same period (and by more than $1 trillion through 2015). How is it possible to produce that much red ink while slashing spending? Easy. Just cut revenue by giving huge tax cuts to - surprise, surprise - high earners and wealthy investors. The lawmakers will not make any final decisions until they cobble their separate proposals into one official budget later in the year, but the early signs are all bad - pointing to the least sensible tax cuts for the least needy recipients with no thought to the exploding deficit....

And then there is the 11th-hour tax cut slipped into the Senate proposal. It would repeal an income tax on Social Security benefits that applies to the wealthiest 20 percent or so of beneficiaries and whose revenue is dedicated to the Medicare hospital trust fund. The repeal would accelerate the fund's projected insolvency by four years, to 2015 from 2019. Now there's a plan! Give the best-off elderly a tax break and put all of the elderly who may have to go into the hospital at greater financial risk....

[chris]

Anne:

"Nicely done :) GM will turn this corner, but there will be significant pressure on labor."

Bitter sweet comment. The stock holders are going to feel the pain too. That's the instant repricing mechanism of the stock market. While a lot of Americans will be rooting on as the pay levels come down, there's a large audience of americans who pay attnetion to those over paid union member stories. I think this story like watching pay levels at the over built Airline industry coming down is about our falling standards of living. The workers are going to have to get by with less, some middle class people will have to get by with less as the value of their investment falls.

[anne]

Imagine, the trade for sustaining Medicaid becomes a harsher weakening of Medicare. Whatever are we about?

[anne]

Chris, thank you.

The "nicely done" was for the thoughts of Movie Guy, but the words appear ironic. There was no irony intended, and with you I am entirely sympathetic to the auto workers.

[Bernard Yomtov]

" the reason bondholders get first dibs over retirees is because the bondholders are in the position of recovering money that they lent to the company when they purchased the bonds. While retirees worked and became vested in their plan, the debt that bondholders have is superior to the claims of retirees. Doesn't seem fair, but if someone advanced you say, $1000 to keep your business going and one of your workers retired and now s/he and the bondholder have a claim to that $1000, who has the more legitimate claim to the money?"

Thanks Matt. I do understand about priorities in bankruptcy. What I was asking about was the seeming ability of companies to alter their payments to retirees without going into bankruptcy.

Even in bankruptcy I don't actually think the argument that the bondholders advanced real money and the workers just got vested in a retirement plan holds water. It may make legal sense, but economic logic doesn't support it. If I work for a company which promises me some retirement benefits I accept a lower wage than I would without the promised benefits. So in effect I too am lending the company money.

If the law says my loan is junior to the bondholders's loans then that's what it says, but let's not pretend there's any good reason for that.

Christofay argues that if the bondholders were not senior no one would lend. Not true. Companies have all sorts of debt subordinated in all sorts of ways. And why do the workers lend? Someone has to be junior.

[anne]

Bernard Yomtov

I believe there was a Supreme Court ruling that related precisely to your question. We can find the case, if I remember correctly.

[Andrew Boucher]

"Of course bond holders should come first. That is money that other people made and saved then lent to a company. If the prmacy of bond holders being paid first is lost, who is going to risk lending money to any company?"

Well, lots of people actually. People buy bonds with different classes - one kind of class gets paid off before a subordinate one. The rates are higher on the lower classes, but that's all.

[jm]

If we hadn't tolerated the Japanese government expending hundreds of billions of dollars to force the exchange rate down from the 79 yen/dollar level to which market forces quite properly took it circa 1997 -- a level at which the Japanese economy was finally beginning to be forced to make the structural changes that are inevitable and long overdue -- we wouldn't have this problem. By tolerating the hypermercantilist machinations by which Japan's power elite have defended their positions, we have allowed them to massively distort the entire world economy.

[chris]

Don't miss Stephen Roach of Morgan Stanley writing about the trifecta of econ news last week of the current account deficit, huge, GM's earnings announcement, horrible, and the oil price, high, at http://www.morganstanley.com/GEFdata/digests/20050318-fri.html#anchor0.

How does he keep his job on Wall Street as he seriously is in what is called the reality based community?

[spencer]

The interesting thing to watch about GM may be its impact on what happens to quality spreads in general.
With low rates investors have moved out the quality sprectrum as well as the maturity spectrum so that quality spreads have been at historic lows.

The first market reaction to the GM announcement was a sharp hit to quality spreads across the board. In this cycle quality spreads may be a better leading indicator of economic-stock market problems then maturity spreads.

Cris -- a wall street economist does not have to be right all the time. The brokerage house that pays them wants them to get attention and for buy side houses to trade with them as compensation for the economist.
Some wall street economists make a living always being bearish or always being bullish. They provide a different point of view so they are of value. Others tell investors what they want to hear-- if we just cut your taxes everthing will be great.

Roach has a long and very good career at his firm and has earned the ability to be independent. Moreover, he was very right for an extended period in the late 1990s
and may still prove to be correct with his bearish thoughts.

[Tim Worstall]

I don’t know about you guys but that GM story (which I’ve been aware of for a long time, as with many US steel companies etc) just seems to be telling us of the dangers of running an unfunded pension plan if and when there is a change in the ratio of productive workers to benefit recipients. Aren’t you Yanks looking at that same problem in another part of the economy at the moment?

[enfant terrible]

By what logic are pension contributions and health care costs included in surplus? They are labor costs, just like wages.

[Nicholas Mycroft]

chris-

Hedge funds are now a big source of business for Wall Street, and growing. Hedge funds like volatility and bear markets--that's the investment environment where they trounce the longs. Roach and other doomsdayers delight this part of the buy side, just as Abby Cohen delighted Janus et al in the 90s.

btw I agree that Roach's most recent brief is a must-read.

[MJF415]

GM is in big trouble. In 2003 GM generated virtually all of their net income from financing (GMAC). Last year the figure was 78%--they earned $800mm from manufacturing cars and trucks and $2.9bn from financing operations. Last week they warned that auto operations would lose a couple billion dollars in 2005. GMAC makes their money by originating loans on lousy cars. The stock is at 12 year lows because the rate at which they lose money on cars is overwhelming the income generated from financing them.

By the way, unsecured GM debt is very expensive, about 400 basis points over treasuries; it's trading at junk status which is where GM debt is headed. The GMAC funding cost is very low (about 20 basis points over treasuries) because their funding comes from selling securitized assets.

The auto industry is very capital intensive. You build factories in anticipation of selling a certain number of units. It generally requires capacity utilization rates of around 70% to break even. When your market share falls year in and year out you tend to run well under the break even mark. Inflexible labor contracts don't help. Toyota, GM and Honda product about 80% of their US sales in the United States, but the vast majority of their plants are non-union.

GM market share for the first two months of 2005 fell to 25%; the last time GM was at this level was in the 1930s. They only make money on trucks and SUVs but the new model (T-900 platform) doesnt' hit the street until next year. In the meantime they have to offer bigger and bigger incentives, now around $4500 per vehicle, to sell product. Higher incentives hurt resale values which dissuades people from buying. Raw materials prices (steel, rubber, plastics) have doubled in the last year. So you have negative pricing power and higher input prices hitting a player with the lowest margins out there--not good. The pension plan is in pretty good shape at this point as they contributed heavily during the last several years. GM claims it is now in surplus. Healthcare is where they are getting crushed; $1500 of every vehicle goes to cover healthcare costs. All in all, it's a dismal picture.

[Auros]

Part of GM's problem is that it's ignoring the demands of its most loyal customers. My family are long-time Saturn fans, and we're pissed that they first pushed back the plans for a hybrid ION, then cancelled them, replacing that with a merge with a crappy German-market GM brand, and the debut of an ugly, gas-guzzling roadster.

[Auros]

This is, incidentally, one thing that Mickey Kaus has gotteen precisely right, in his Gearbox blog.
http://slate.msn.com/id/2112138/
(scroll down to the bit on "The Saturn Story")

[section321]

And don't forget that GM is squabling with Fiat over the put Fiat holds for the balance of Fiat shares. Fiat and GM are negotiating, but Fiat does hold a contract which could force GM to purchase the balance of Fiat shares it does not already own (GM currently owns 10%).

Not only would this suck cash out of GM, it would also add to future operating expense.

However, I'm sure GM will invest heavily in the legal services needed to either avoid this outcome or prolong it as long as possible.

Some group of partners is looking forward to a very busy next couple of years... ;-)

[section321]

Oooooops! My bad!

They settled in February with GM paying a 1.55 billion euro penalty.

One of those "unusual items" in the earnings report I guess....

[beebklarg]

Bernard Yomtov,

The security of pension benefits are not, and have not been, a strictly economic matter for a long time. Why? Economically it ALWAYS makes sense to screw the retirees. From the management perspective, retirees starve, you prosper, and you can restructure the deal for current employees. Retiree benefits are always dead weight, which is why pensions should not be related to employment, but a matter for social insurance. ANY security for retiree benefits is a question of law.

Pension benefits for current retirees, companies cannot restructure without bankruptcy or the pension benefit guarantee company stepping in to terminate the plan. This (relative) security is thanks to the high water mark of the regulatory state, ERISA. Thank you, Richard Milhouse Nixon for icing your veto pen.

Retiree healthcare for current retirees, companies are much more free to shed, regardless of what they promised to workers during their lifetimes. This is becuase, under American labor law, striking for the benefits of current retirees -- the union members that sacrificed to give you whatever you have -- is strictly against the law and gets everyone fired.

Another crime of American capitalism, created from whole cloth by federal judges, well codified in the heroic precedent of our legal system.

[chris]

I despise Kaus. The two years before the election the way he was writing he sounded like a W apologist perpetually trying to balance the too liberal press. That blog on Slate is one place where I wish there was an automatic reply to the writer button so I could bounce back some rants. How liberal was the presws that it has to be balanced by the worst prez ever.

If Kaus turns out some good car writing then he should stick with that.

[chris]

"This is becuase, under American labor law, striking for the benefits of current retirees -- the union members that sacrificed to give you whatever you have -- is strictly against the law and gets everyone fired."

Is this true? You can't go out on strike to protect benefits for current retirees but not presently workers.

"The security of pension benefits are not, and have not been, a strictly economic matter for a long time."

What about this one? Does the person mean it's been a long time that pension benefit security was not a concern? Or it was a concern but hasn't been for a while?

I'm running on impressions here. I thought there was a pretty good social compact from the end of the second world war up till the 1980s maybe where industrial workers were enjoying increased earnings and a much better deal for retirement benefits. During the 1980s as Japanese auto competition was making itself clear as a serous contender the economics of our auto companies started to look not as bright. As some of our old line industrial companies hit the 1990s the bankruptcy route as the tough road to ditch retiree benefits started to be used. Now we are entering some high gear phase for this tactic.

It's just the bad side to our developing 2 tier economy. The executives at American Airlines being primo examples where they had the company set-up retention bonuses to reward themselves for not switching to a competitor that just wasn't there while simultaneously trying to negotiate down compensation to the rest of the employees.

[Auros]

Kaus still sounds like a W-apologist today. He's been spouting BS on Terry Schiavo.

I read him mainly to get a sense of what arguments appeal to the conservative independents and Democrats who swept Reagan to power in '80, and voted for Dubya over Gore and Kerry...

But yeah, he's pretty good on cars. :-P

[mjf415]

US auto workers, both white collar and union, are not helpless victims here. Management and designers collaborated on bad designs that are destined for the rental car fleets while union officials demand highly infexible contracts that protect unmotivated employees at comparably unproductive plants, at least temporarily. Now we have the Japanese and Koreans, much more efficient and flexible competitors, taking market share globally. Even in that great open air museum we call Europe are the likes of Peugeot, Renault, and Volkswagen opening new factories in Eastern Europe where labor is cheaper and more flexible.

The government should better regulate the actuarial assumptions of companies that can create an underfunded pension fund. Companies should be foreced to pay the benifits they agreed to, and provision for it accordingly. Whether those benefits drive the company into the ground is a separate issue.

[c]

Koreans and flexible contracts? You must be joking

[calmo]

mjf415 writes:
"The government should better regulate the actuarial assumptions of companies that can create an underfunded pension fund."
And how are they going to live without that 9% expected earnings on that pension fund? Nevermind that it actually lost money til last year. [This is productivity btw --you just write it down in the earnings column. No sweat required and surprisingly that gargantuan bond issue to bring the underfunded pension plan to the 90% level does not register as productivity damage. Even more surprising, the claim can be made and believed, that the pension fund is in 'good shape' now.]
Like Fannie, GM is too big to fail, no?
So why is GE pulling the plug on GM?

[camremi]

i have 10 years with gm, and i wish these old farts with 35 years would get the hell out of way for the new generation. they are scewing up the economy, who spends more money a 65 year old grandma and grandpa or a young employee with a good paying job, there not buying any cars, there buying adult dipars, offer some cash to get these cripples out!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

[nk]

http://www.nytimes.com/2005/06/30/business/30auto.html

http://www.nytimes.com/2005/06/30/business/30place.html

http://www.nytimes.com/2005/06/30/national/30census.html