Robert Samuelson: Ghosts That Still Haunt GM

Robert Samuelson acknowledges that labor costs at GM have been high. But he believes the source of GM's troubles is poor management:

Ghosts That Still Haunt GM, by Robert J. Samuelson, Washington Post: ...General Motors ... recently announced it would close 12 facilities and cut 30,000 jobs by 2008. Granted, GM is burdened with costly labor contracts and huge numbers of retirees... But GM also inherits a self-defeating management style formed during its glory days. It presumed that superior managers could always anticipate and control change. By contrast, many top managers in younger companies accept that they will face disruptive surprises that could, unless successfully countered, destroy them. The difference has consistently disadvantaged GM. Its latest downsizing is the company's third since the early 1980s. With each, GM has struggled to catch up with changes that it badly misjudged -- the demand for smaller cars in the late 1970s; the superior quality and production techniques of Japanese manufacturers in the 1980s; and now the demand for snazzier cars and ... better fuel efficiency. ...

Alfred P. Sloan Jr.... was GM's chief executive from 1923 to 1946 ... In 1921 Ford had 60 percent of U.S. car sales. GM overtook Ford because "the old master [Henry Ford] had failed to master change," Sloan wrote. Ford stuck too long with the Model T ... even as the car market shifted. ... Aside from fighting Ford, Sloan had to fashion a huge industrial enterprise that would not collapse under the weight of its own complexity. ... Sloan solved this problem by decentralizing operations ... among separate divisions while centralizing policy matters ... at the top. ... Unfortunately at GM, it ... fostered overconfidence and inertia. "Management" became an exercise in ensuring stability. GM's market power made it less sensitive to cost increases, especially labor costs, because these could usually be recovered in higher prices. ... But that is only half the problem. The other half is that GM does not have the vehicles that command good prices. To move in volume, they require steep discounts. This is a management failing that can't be blamed on unions or retirees, and it's now compounded by the impact of high gasoline prices on SUV sales. Within GM, there are pockets of vitality. ... But too often, GM's deliberate management style has produced mediocre vehicles that fare poorly in today's hyper-competitive market. Since its peak, GM's market share has fallen by half. ...

Sloan shrewdly foresaw that too much success could be fatal. It might dull "the urge for competitive survival," which is "the strongest of all economic incentives." Companies might fail "to recognize advancing technology or altered consumer needs." Avoiding these traps, he said, was GM's challenge. There is now talk that GM could go bankrupt. Although that isn't inevitable, even the talk measures how poorly GM met the challenge.

Comments

[calmo]

Are there lemon studies, depreciation studies, brand loyalty studies, studies of financially distressed buyers, that would show that the consumer was increasingly dissatisfied with his purchase?
Not only do you have ~30% of your new car sales tied to distressed buyers who may not be enhancing your product's image but the resale value of these cars is not enhanced by users who have every hope of scoring another deal from GMAC and a declining interest in even washing the beast, let alone keeping up with the maintenance schedules.

[anne]

http://www.nytimes.com/2005/11/24/business/worldbusiness/24continental.html?ex=1290488400&en=caa85a7c7c6d10f1&ei=5090&partner=rssuserland&emc=rss

November 24, 2005

A German Auto Supplier Delphi Might Envy
By MARK LANDLER

FRANKFURT - When Manfred Wennemer talks about the American auto industry these days, he sounds like a driver thankful to have survived a nasty pileup with a few scratches.

His German auto parts maker, Continental, has avoided most of the jolts that have rattled its American counterparts. While Delphi and its biggest customer, General Motors, are struggling to stave off financial problems, Continental's profits are surging and its stock is hitting record highs.

And yet Continental has gotten a taste of the hard times across the Atlantic. It recently laid off a quarter of the 1,200 workers at its tire factory in Charlotte, N.C., and is demanding concessions in benefits from those who remain. It no longer predicts when it will stop losing money in the United States.

"There's a cost burden that no one can manage away," Mr. Wennemer, the chief executive of Continental, said in an interview recently. "The United States has to find a way to solve that."

Fortunately for Continental, the world's fourth-largest tire maker with brands like Uniroyal and General Tire, and Europe's second-largest auto parts supplier after Bosch, the United States accounts for less than a fifth of its $14.7 billion in sales. For Mr. Wennemer, the problems at Delphi, General Motors and in his own American factories merely serve to dramatize the message he drives home day after day.

"We have to reduce our prices to our customers by 3 percent to 5 percent per year," Mr. Wennemer said. "If you don't do this, you shouldn't be in this industry. Not everybody understands that."

This relentless focus on costs has turned Continental into one of the quiet stars of German industry - a global powerhouse that makes tires in Malaysia, conveyor belts in Hungary, and brakes in Brazil. It has also made Mr. Wennemer, 58, a blunt-spoken mathematician with eyeglasses the size of saucers, into one of Germany's most respected chief executives.

"He is a very unassuming guy," said Ferdinand Dudenhöffer, the director of the Center for Automotive Research in Gelsenkirchen. "He always says, 'Look at the other C.E.O.'s, they're more important than me.' But those guys could learn from him."

The success of Continental is remarkable, given the fierce pressure on the American and European auto industries. Although it is in some of the same businesses as Delphi, and supplies the same carmakers, Continental's operating earnings jumped 35.9 percent in the first nine months of 2005, compared with last year. Its stock has risen close to 60 percent in the last 12 months.

If Delphi is forced to auction some of its assets, Continental has already put up its hand as a potential bidder.

"They really want to get into electronic steering," said Thomas Aney, an auto parts analyst at Dresdner Kleinwort Wasserstein in Frankfurt. "Delphi has got a good business in that."

Mr. Wennemer, a onetime cosmetics executive, took over Continental in 2001 after a string of acquisitions left the company deep in debt. His recipe for success, he insists, is not mysterious: create a stream of innovative products and produce them, as much as possible, in low-cost countries....

[anne]

Paul Krugman has repeatedly written and spoken of the $1500 per vehicle health care cost per vehicle for General Motors compared to the $201 American cost and $97 Japanese cost for Toyota. Where is the problem?

[anne]

http://www.nytimes.com/2005/05/13/opinion/13krugman.html?ex=1273636800&en=05bf06abe3995652&ei=5090&partner=rssuserland&emc=rss

May 13, 2005

Always Low Wages. Always.
By PAUL KRUGMAN

Last week Standard and Poor's, a bond rating agency, downgraded both Ford and General Motors bonds to junk status. That is, it sees a significant risk that the companies won't be able to pay their debts.

Don't cry for the bondholders, but do cry for the workers.

Standard and Poor's downgraded GM and Ford sooner rather than later because it believes that the public is losing interest in S.U.V.'s. But the companies were vulnerable because they still pay decent wages and offer good benefits, in an age when taking care of employees has gone out of style. In particular, they are weighed down by health care costs for current and retired workers, which run to about $1,500 per vehicle at G.M.

So the downgrade was a reminder of how far we have come from the days when hard-working Americans could count on a reasonable degree of economic security.

In 1968, when General Motors was a widely emulated icon of American business, many of its workers were lifetime employees. On average, they earned about $29,000 a year in today's dollars, a solidly middle-class income at the time. They also had generous health and retirement benefits.

Since then, America has grown much richer, but American workers have become far less secure.

Today, Wal-Mart is America's largest corporation. Like G.M. in its prime, it has become a widely emulated business icon. But there the resemblance ends.

The average full-time Wal-Mart employee is paid only about $17,000 a year. The company's health care plan covers fewer than half of its workers....

[anne]

http://www.nytimes.com/2005/11/19/business/businessspecial2/19generations.html?ex=1290056400&en=8ef7791af88eeb4b&ei=5090&partner=rssuserland&emc=rss

November 19, 2005

For a G.M. Family, the American Dream Vanishes
By DANNY HAKIM

"If I look at our priority list on the things we need to do to get cost competitive, wage rates are nowhere near the top for us," Mr. Wagoner, the G.M. chairman and chief executive, said in a recent interview.

Not that anyone has much chance of getting a job at these companies anymore. Wages are less important because the industry is so much more efficient than it used to be and has already cut so many jobs.

G.M. plans to cut its blue-collar work force even further, though, to 86,000 Americans nationwide by the end of 2008, about the same number of people it once employed in Flint alone in the 1970's. At its peak, G.M. employed more than 600,000 Americans.

"Frankly in our business, the progress in improving productivity has been dramatic," Mr. Wagoner said. "Over a 10-year period, we have gone from a ballpark of 40-plus hours a vehicle in assembly to 20-plus hours a vehicle."

Benefits are another matter. G.M. pays about $1,500 per car assembled in the United States for health care, more than it spends on steel....

[anne]

http://select.nytimes.com/2005/11/25/opinion/25krugman.html

November 25, 2005

Bad for the Country
By PAUL KRUGMAN

"What was good for our country," a former president of General Motors once declared, "was good for General Motors, and vice versa." G.M., which has been losing billions, has announced that it will eliminate 30,000 jobs. Is what's bad for General Motors bad for America?

In this case, yes.

Most commentary about G.M.'s troubles is resigned: pundits may regret the decline of a once-dominant company, but they don't think anything can or should be done about it. And commentary from some conservatives has an unmistakable tone of satisfaction, a sense that uppity workers who joined a union and made demands are getting what they deserve.

We shouldn't be so complacent. I won't defend the many bad decisions of G.M.'s management, or every demand made by the United Automobile Workers. But job losses at General Motors are part of the broader weakness of U.S. manufacturing, especially the part of U.S. manufacturing that offers workers decent wages and benefits. And some of that weakness reflects two big distortions in our economy: a dysfunctional health care system and an unsustainable trade deficit.

According to A. T. Kearney, last year General Motors spent $1,500 per vehicle on health care. By contrast, Toyota spent only $201 per vehicle in North America, and $97 in Japan. If the United States had national health insurance, G.M. would be in much better shape than it is.

Wouldn't taxpayer-financed health insurance amount to a subsidy to the auto industry? Not really. Because most Americans believe that their fellow citizens are entitled to health care, and because our political system acts, however imperfectly, on that belief, tying health insurance to employment distorts the economy: it systematically discourages the creation of good jobs, the type of jobs that come with good benefits. And somebody ends up paying for health care anyway.

In fact, many of the health care expenses G.M. will save by slashing employment will simply be pushed off onto taxpayers. Some former G.M. families will end up receiving Medicaid. Others will receive uncompensated care - for example, at emergency rooms - which ends up being paid for either by taxpayers or by those with insurance.

Moreover, G.M.'s health care costs are so high in part because of the inefficiency of America's fragmented health care system. We spend far more per person on medical care than countries with national health insurance, while getting worse results....

[anne]

http://www.nytimes.com/2005/10/10/business/10delphi.html?ex=1286596800&en=c95d41baeed3b651&ei=5090&partner=rssuserland&emc=rss

October 10, 2005

With Delphi Filing, Tougher Times for Auto Industry Workers
By DANNY HAKIM

Jonathan Steinmetz, an analyst at Morgan Stanley, said he did not see the Big Three necessarily coming to the same crossroad as their domestic suppliers. The competitive pressures are intense, but not the same, because Toyota and other foreign competitors are building more plants in the United States and paying wages and benefits somewhat comparable to the Big Three's. Automobiles sold in the United States are not yet being assembled in China, though parts are being made there.

What will not likely be sustained, however, are the benefits. G.M. spends $1,500 a vehicle on health care, more than it spends on steel. Every American G.M. worker supports nearly three retirees.

"It's hard to have a deflationary environment for car prices and health care inflation of 10 percent," Mr. Steinmetz said....

[anne]

Paul Krugman:

"According to A. T. Kearney, last year General Motors spent $1,500 per vehicle on health care. By contrast, Toyota spent only $201 per vehicle in North America, and $97 in Japan. If the United States had national health insurance, G.M. would be in much better shape than it is."

Evidently the health care cost difference is important for General Motors, as it is for failing Delphi and successful German vehicle supplier Continental. I find no problem with Paul Krugman or Danny Hakim arguing along this line.

[anne]

The value of the dollar against the Yen is about where it was in 2000 or 1995 or 1990. In September 1985, the Japanese and other economic ministers agreed to foster a decline in the value of the dollar. The dollar did decline in value by more than 50% against the Yen and assorted amounts against other currencies. Since 2000 the dollar gained and fallen against the Yen, but been remarkably stable over the 15 years. The dollar has however gained in value against Europe's currencies through the 15 years.

Japanese and European vehicle makers and parts suppliers have adjusted well to currency swings and stability since 1985, while American companies have at times complained but with little rationale to the complaints.

The problem is not currency values.

[anne]

http://www.nytimes.com/2005/11/24/business/worldbusiness/24continental.html?ex=1290488400&en=caa85a7c7c6d10f1&ei=5090&partner=rssuserland&emc=rss

German vehicle parts supplier Continental can operate splendidly in Germany, no matter the labor wage and benefit costs, and operate well in other countries. But, the company is losing money in American operations. The problem in America is not wages but health care costs.

Of course, management matters. Of course, there is pressure for manufacturing out of Germany or Sweden or Japan. But, health care support by governments through the developed countries makes a distinct difference for company labor costs.

[anne]

Agreed; beyond a benefits cost difference there is no reason why Toyota should have so successful a hybrid engine and General Motors have none through the SUV line in any division let alone for sedans. Management and vision makes a difference.