Thursday, November 11, 2010

A Rational Approach to G.M. Profits

After a post on General Motors' encouraging third quarter profits, my old pal Jim — who swam in the Haskell Community Center pool many times and lived to talk about it — cautioned about getting too carried away by G.M.'s recent good fortune. It's good advice. He recommended reading a story by Megan McArdle in The Atlantic that points out the company born in Flint still has a lot of problems.

To start with, GM hasn’t shed all its legacy costs. The pension plan, which is underfunded by $26 billion, was not terminated in the bankruptcy, as such plans often are, with their assets turned over to the government’s pension insurer, and the beneficiaries frequently forced to accept a reduced payout. Instead, GM’s earnings will face a drag from that underfunding for years to come.

More worrying still is the possibility that GM’s labor woes are not over. Though the bankruptcy brought the firm’s hourly-compensation cost down to within spitting distance of what foreign-owned manufacturers pay their U.S. employees, Bob King, the new president of the UAW, already faces intense pressure to roll back some of the concessions.

Dealing with any new wage demands will be particularly sticky because starting in the middle of this decade, the automakers must comply with new CAFE standards, which raise the required fuel efficiency of cars from 27.5 miles per gallon to 39 mpg, with similar increases for trucks. The administration says the new rules will raise the cost of a car by $1,300, but data from the National Research Council suggest that the real cost could be at least twice that. With those higher costs, GM—which still has a major brand handicap—may have trouble making inroads into the small-car market.

These factors will weigh on investors’ minds as they decide what price they are willing to pay for the initial public offering of shares that GM has scheduled for this winter. For the taxpayers to get their money back, the company needs to end up valued at about $70 billion. This is theoretically possible—but doesn’t seem very likely.
Still, McArdle admits that the bailout wasn't the nightmare scenario she and many others envisioned.
The bailout wasn’t a good idea, and it will probably cost billions. But the government wastes billions of dollars every year, because for the United States, $1 billion adds up to the equivalent of less than one venti latte per American. At least in this case, we got something in return: a functional car company, resurrected from the ashes of the old GM’s bloated carcass. Americans probably won’t notice the few extra dollars they spent on the bailout. But they may eventually be glad when another shiny new Buick Enclave rolls off the Lansing assembly line, and into their driveway.
Not exactly a ringing endorsement, but it was enough for Mickey Kaus to call her a "cheap date" on because she showed even a small level of enthusiasm for G.M.'s prospects after visiting a plant.
If libertarian Atlantic writer McArdle wants to take a trip to Lansing, Michigan, and suddenly be impressed with GM's industrial vigor, deciding that maybe the bailout wasn't such a bad idea after all--well, OK! I once visited a GM plant as a journalist and was impressed with its vigor, and the innovative new car they were about to manufacture. The name of that car? Pontiac Fiero.
That prompted McArdle to clarify that she thought the bailout was still really, really stupid.
But that is not an endorsement of the bailouts, which remain an expensive boondoggle. We could have given every autoworker $100,000, offered retraining and relocation assistance to tens of thousands of employees at their suppliers, and still come out ahead on this deal. Had we done this, we would have helped eliminate some of the overcapacity in the global auto industry, and sent a clear signal to CEOs that they should not emulate Rick Wagoner's pigheaded refusal to prepare for a possible reorganization.
The moral of this story? If you say something positive about G.M. or the concept of protecting U.S. jobs — no matter how tepid — you better be prepared to back it up. Or start back tracking.


  1. If GM turns back into the market leader for the next 100 years, they'll still be scorned by the right because it's not about money at all. It's about a deep-seated and deeply-emotional feeling that the people who were working in those shops weren't worth it, that they were stealing. I'm not entirely sure how McArdle feels about TARP, but I will say that I know a lot of conservative pundits will damn the auto bailouts up and down but equivocate on TARP. Because it probably prevented a depression. But the complete collapse of the domestic auto industry and its supply chain (which is also a huge deal, because auto suppliers supply other industries too) would have been fine, deserved in fact, because Old Jimbo on the Line was making $28 an hour with benes, and Old Jimbo ain't worth that.

    So no matter what you could never "back it up" to the satisfaction of those that oppose the bailout, because the bailout will forever be a giveaway to the bloodsuckers in shiny jackets. Policy bedamned.

  2. I find it amusing and terrifying that both the right and the left are idiotic enough to think that jumping through a few simple hoops to preserve one of the world's most important companies, a preeminent US manufacturer, one of the last of the twenty or so globally leading companies that defined the United States as the world leader in manufactured products and thereby economic power...that such hoop-jumping, necessary only because the company's otherwise-brilliantly-effective managers weren't pessimistic enough to anticipate the extraordinary extent to which the US national leadership would trash the world's economy and scare auto buyers into cancelling their purchase plans, is a bad idea because it doesn't conform to the right's and left's respective standards of ideological purity.

    > "we would have helped eliminate some of the overcapacity in the global auto industry"

    Oh, yeah. What a good idea...let's shut down *all* US manufacturing as a favor to the other countries who like having good jobs for their populace.

    Gotta stay away from Ms. McArdle, that bozo-ness might be contagious.

    > "and sent a clear signal to CEOs that they should not emulate Rick Wagoner's pigheaded refusal to prepare for a possible reorganization."

    Heh. Mr. Wagoner told the truth to the Obama administration spinmeisters and bean counters, that GM was on a provable trajectory to overcome all of its past issues until the global economy was wrecked. The spinmeisters had been blamestorming for whose fault this all might said to be, and the fact that Mr. Wagoner's dramatic turnaround of the company was not yet visible to the public, even though well known in the industry, made him the obvious selection as the Bad Guy.

    Unfortunately for the country, ideologues like Mr. Kaus and Ms. McArdle tend to be grossly ignorant about business management, so they bought the cover story.

    (Pardon me for a second, I need to vent: YOU IDIOTS!!!!!!!!)

    Yes, I feel much better now.

    I'm not sure who to direct this to, but: Can we please trade in our right-wingers and left-wingers for some non-idiot centrists that understand it's a Good Thing for the US to be a leader in manufacturing?

  3. It *is* a good thing for the US to be a leader in manufacturing, but that doesn't mean I'm going to buy stock in it... again.

    I still have my old certificate... if they want to honor that, I'd consider it then.

  4. Umm. I think it is worth pointing out that Ford is also making big profits. Ford didn't go into bankruptcy. And Ford has all of the same dreaded "legacy costs" as GM and Chrysler. So you might think about looking somewhere other than workers' pockets and earned benefits for all the blame.

  5. > "I think it is worth pointing out that Ford is also making big profits. Ford didn't go into bankruptcy. And Ford has all of the same dreaded "legacy costs" as GM and Chrysler."

    Yes, Mr. Mullaly gets mucho kudos for being prescient, pessimistic and/or back-channel-informed regarding the big-bank-real-estate-exposure economic flameout, and for mortgaging practically everything Ford owns just ahead of the credit market freezing up. Thus when sales went off the cliff and Ford was losing money at (proportionally) the same rapid rate as GM and Chrysler due to their mutually high cost structures, Ford had the cash to ride it through until cars started selling again. GM and Chrysler of course didn't.

    But now Ford's cost stance is much higher than GM's and Toyota's. My guess is that eventualy Mullaly will go from hero status to behind the eight ball again, and will have to do something about that cost structure. Either Ford, the UAW, Ford's white collar workers up to the top, and maybe the executive branch and the Congress will have to reach some kind of agreement to make Ford cost competitive, or Ford will have to move more manufacturing to lower-cost countries. Otherwise eventually either GM or Toyota will start deep-discounting again to gain market share, and Ford won't be able to follow suit without taking losses.

    The point of discussing cost structures isn't the ideology of worker and management compensation. It certainly isn't my personal social preference, which would be for a return to the late 20th century and the socioeconomic good things that came from Flint manufacturing workers making excellent money. It isn't even my own personal annual income, which I'd like to be comfortable, thank you very much. It's that we won't have manufacturing jobs at all unless US manufacturing companies are total-cost-competitive with their global market opponents, because (obviously) the old days of only the US knowing how to make stuff and of customers being willing to pay a premium to Buy American are gone.


Thanks for commenting.