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Saturday, April 01, 2006

Time to Kill The Golden Goose

With apologies to JimmyB and the Shoprat, is it time for GM to die?

Delphi, GM's largest parts supplier, has offered a bad deal to the UAW to try and stay afloat, and the UAW wouldn't even hold a vote on it. So now Delphi is asking a judge to kill their contracts not only with the UAW but with other unions who are under them, like the United Communications Workers. The unions of course are threatening strike, which will shut down not only Delphi but GM, and affect other automakers who buy from Delphi (about 40% of their sales).

What does this mean for GM, which is already teetering on the brink of bankruptcy? Probably an accelerated trip to the Chapter 11 judge. Many saw their recent buyout offers as a precursor to filing, as a way to show a judge they are trying to shed costs. A shutdown, and the associated costs will probably drive them to that filing sooner.

Personally, I think a GM bankruptcy would be the best thing to happen to the US auto industry since the end of World War II. It would force the UAW to look at real changes to a contract mechanism that hasn't changed in 50 years, even though it's costs are driving the "Big 3" into smaller and smaller market shares.

A good study was done in 2003 (in France, of all places) comparing the big 3 US automakers to their "transplanted" US competition in the area of cost of vehicles. There is a $2600 difference in the cost of manufacturing between the big 3 and the transplants.

Two factors make up the difference in profit (or loss) per unit between GM North America and it's foreign competitors who are working in the US. One is wages, pensions and benefits, $1190 more for the US makers. The other is supply chain costs (where Delphi comes in) of $1415 more per vehicle.

While the Washington Post's business section thinks that GM has been "playing "hardball" with it's suppliers since the 1990's, the above numbers show they haven't played well enough.

Figured into both of those numbers is the 40 manhours longer it takes the domestics to build a vehicle compared to their competitors. Just a reduction in those manhours at current pay and benefits rates would get GM back to being profitable on a per unit basis. (It would cut $1420 per vehicle in costs, GM loses over $1200 per vehicle).

While the UAW will scream for more white collar cuts, and executive cuts, the study didn't figure in those costs because the difference between them at US domestics and transplants is negligible, only a few dollars per vehicle, that won't get them back to profitability.

In the long run, I think the inevitable strike at Delphi, and the disaster it's going to cause at GM is going to be good for the US auto industry. When GM goes before the judge the unions are either going to have to face some cuts to keep the company viable, or face actual unemployment benefits, for quite a while.

In all of this, I've ignored GM's retirees, whom I feel sorry for. However, if the changes don't happen they can ask the guys from US Steel what happened to their retirement benefits when the company folded. While this would hurt, it would hurt much less than a total loss.

The golden goose is dying, now it's time to see if the folks who've benefited from the gold are willing to give it mouth to mouth.

The Chief Brief has a great post up with a comparison of "wages" versus "cost of employment", which lots of folks get confused about.
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Blogger Mike said...

Hi Bob...I've been following the GM story very closly and have come to the same basic conclusions that you've written in your blog. When a ship is sinking because of a thousand holes, it becomes an exercise in futility to only patch a couple of the holes over and over. The unions are indeed going to have to come to reality soon or face the consequences.

1:52 PM  
Blogger Rebekah said...

Well, I don't know much about this, but I do agree. If you're just losing money on something, why try to keep it going?

6:35 PM  
Blogger Crazy Politico said...

Mike, I think that the Union's biggest fear is that this turns into an "airline" type thing, where all of the sudden everyone is declaring bankruptcy to get new contracts done.

Rebekah, it's one of those things where they are kind of stuck in a black hole of losing money. The benefits structure and number of retirees it supports has gotten so large they can't make money.

4:38 AM  
Blogger shoprat said...

The union leadership has known this was going to come for a long time, but rather than prepare for it they decided to try and prevent it. Reality just does not work for their dreams of glory.

9:30 PM  

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