The "Treaty of Detroit"

Will General Motors survive?:

Siphoning G.M.’s Future, by Roger Lowenstein, Commentary, NY Times: ...General Motors ... stock is at its lowest level in 50 years, and its market valuation has plunged... The automaker is weighing yet another round of layoffs — and maybe even a fire sale of venerable brands like Buick and Pontiac. ... Bankruptcy is not unthinkable... The immediate cause of G.M.’s distress, of course, is the surging price of oil, which has put a chill on the sale of gas-guzzling sport utility vehicles and trucks. The company’s failure to invest early enough in hybrids is another culprit. Years of poor car design is another.

But none of G.M.’s management miscues was so damaging to its long-term fate as the rich pensions and health care that robbed General Motors of its financial flexibility and, ultimately, of its cash.

General Motors established its pension in the “treaty of Detroit,” the five-year contract that it signed with the United Automobile Workers in 1950 that also provided health insurance and other benefits for the company’s workers. Walter Reuther, the union’s captain, would have preferred that the government provide pensions and health care to all citizens. He urged the automakers to “go down to Washington and fight with us” for federal benefits.

But the automakers wanted no part of socialized care. They seemed not to notice, as a union expert wrote, that if Washington didn’t provide social insurance it would be “sought from employers across the collective bargaining table.”

Detroit was too flush to envision that it would ever face a financial strain. Ford and Chrysler signed identical pacts with labor, so all three automakers were able to pass on their costs to customers. Besides, the industry’s work force was so young that few workers would be collecting a pension any time soon.

But pension commitments last forever. They far outlived Detroit’s prosperity. General Motors got into the dubious habit of steadily increasing worker benefits. In 1961, G.M. was able to get away with a skimpy 2.5 percent increase in wages by also guaranteeing a 12 percent rise in pensions. ...

By the 1980s, it was clear that the Big Three automakers faced a serious threat from Japan. ...

In the ’90s, the consequences of maintaining a corporate welfare state became too obvious to ignore. ...

The sorry decline of General Motors has proved Reuther right: the government is the better provider of social insurance. Let industry worry about selling products.

Unhappily, however, the fate of many public-sector pension plans is even worse than G.M.’s. Responding to the same temptation to offload expenses into the future, public employers have committed to trillions of dollars in future liabilities. ...

Just as G.M.’s shareholders bore the burdens of its pensions, states and cities will have to force taxpayers to sacrifice in the form of service cuts, tax increases or both.

It is too late to restore G.M. to its former grandeur. But if public officials do not show courage by quickly funding the pensions they have promised to their workers, taxpayers will soon find themselves in an even worse crisis than the one G.M.’s shareholders are facing now.

For arguments that management was at fault, see here, here, here, here, and here.

Comments

[Alex Tolley]

I question whether GM should survive. For a company that extolled Hummers and and massive SUVs during the era of cheap oil, they took the easy way out rather than designing good quality, small cars. To be fair, I am talking about GM USA, as their European subsidiaries seemed to be doing, if not well, certainly OK. Now that oil is expensive, the chickens have come home to roost and it is very doubtful if they can adjust to that reality, much as they failed during the 1970's.

Given the realities, maybe it would be better if they effectively exited from the US market and allowed other auto manufacturers to capture their market share with more appropriate offerings. The same applies to Ford and what is left of Chrysler. Then maybe we can get some sanity back into the North American auto market.

As for the retirees, well they will retain Medicare and their pensions will be guaranteed at a lower level by the Feds. Not such a bad deal considering. Maybe the outcry will help shift public thinking over to universal healthcare that much sooner to aid other big companies in similar circumstances.

[mdm]

creative destruction

[Klatoo]

At the heart of GM's problem is the fact that their products stink.They lost the race in design,technology and quality a long time ago to the Japanese,the Germans and,increasingly the Koreans.

That lack of leadership in these vital areas came not from pension problems but the rule of the accountants and the financial people to whom a car is the equivalent of a banana so long as they produce a profit.

As their cars became undesirable to the public at large, the financial wizards at GM resorted increasingly to cosmetic changes.The public quickly sensed that they were being asked to buy crap and walked away from GM in droves.

[Dickeylee]

If in the 70's and 80's they had fully funded their pension plans instead of manipulating the fiduciary rules in Washington so they didn't have to, they wouldn't be in this mess. So now it's the hell with grandma? Since most women outlive their husbands and survive on his pension, they will feel the brunt of Alex's "let the gov't feed em" mandate. Hey granny, Alpo's on sale!

[oakland]

Alex Tolley - are you nuts or 14? I hope people like you are the first in line for unemployment. I hope people like you are the first to lose their homes. I hope people like you are the first to end up homeless and under a bridge when you are old. I hope people like you work for Toyota.

http://www.autoblog.com/2007/11/30/japanese-court-rules-toyota-employee-died-from-too-much-work/

[One Salient Oversight]

Imagine what would've happened back in the 1950s and 1960s if "the big three" lobbied government to provide health care and pension plans. For starters there'd probably be universal health care and government pensions... not to mention three auto companies running a profit.

It seems obvious that it is the management of the auto companies - over many decades - that are to blame. Their political lobbying skills are the best in the world, yet those were not the skills they needed. Other skills, such as foresight, were sadly lacking.

One of the big three has to go. The death of a major American car company may be what the country needs to reform itself. Sadly there will be many unemployed as a result, but, whenever a country or a market needs to be shocked out of its short-sightedness, such events have to occur.

[save_the_rustbelt]

Sitting in the middle of auto company today, both the management and the UAW are at fault, but the biggest blame has to accrue to management - they held the keys.

The auto plans were not generous, the plans were wildly generous beyond anything most workers could dream of.

The UAW pushed featherbedding, protected incompetent and druggie workers, beat foreman and sabotaged cars, and etc.

By the mid-80s the future was clear, but neither party would bend, the cars were poorly designed and service was mediocre.

[anne]

"The UAW pushed featherbedding, protected incompetent and druggie workers, beat foreman and sabotaged cars, and etc."

Reference???

[bakho]

Everytime there is an oil shock, Detroit gets hit.
People have a transporation budget. When gas prices go up, people hold onto the old cars longer and new car sales drop. All the other problems are persistent but get pushed aside in the best of times.

Detroit is especially hard hit this time because the people who are buying cars are NOT buying the big gas guzzlers that Detroit relies on for its profits. Detroit does not make what people want to buy. It will take them a couple of years to retool.

GM has pushed up its delivery of its electric plug in to 2010 (we will see if they make it) and that may help them out in this market. What will the market be for an electric plug in in 2010? It will only take about a 10% drop in gas demand to run the price back down to $2. That would still be a fleet average of less than 30 mpg.

Will the US keep gas prices high as incentive to buy fuel efficient? or go with new CAFE? or will we cycle between conservation and high fuel prices?

[save_the_rustbelt]

Reference???

I grew up and have lived all of my life within 100 miles of more than 30 Big 3 auto and parts plants (many now closed).

Thee are plenty of retired UAW members in my rolodex. When was the last time you had a beer with a couple of retired auto workers?

And if you doubt that, read the Toledo and Detroit newspapers for the past 45 years, as I have.

And read some UAW contracts, health contracts, grievance files, and etc.

[ken melvin]

This is an interesting history. Thanks.

[ScentOfViolets]

My dad worked at a Chevy plant in the early 60's, and he holds no truck with the unions. Said that the members were lazy, didn't show up on time, and a few were habitually drunk on the job.

That said, forty-odd years later, he still hates the management with a blazing white hot passion (though, to be fair, that's his attitude towards many circumstances.) According to him, management treated the workers as if they couldn't tie their own shoelaces. And suggestions for improving the floor operations, even good, sensible obvious ones were _not_ implemented unless a management guy could make the suggestion his own six months down the pike. To say that relationships between the two classes were adversarial is to put it mildly, with a common put-down being that management had college educations, while the workers were frequently high school dropouts. The fact that high school students were regularly encouraged to drop out and work at Chevy was never mentioned.

This is only anecdotal of course. But I would wager that a lot of former employees would have much the same story to tell, if perhaps not in quite so hyperbolic a fashion.

[baileyman]

I used to think Lowenstein was pretty good.

A pension is an insurance program. Management could have immunized their liability. And they could have made cars people wanted. And they could have not shut down the nation's trolleys, etc.

[ScentOfViolets]

Yes, where was Lowenstein in the 80's and 90's? In short pants? There were plenty of discussions, commentaries, studies, etc. about what could happen if things went south for the companies trying to duck their fiduciary obligations for funding pensions and other retirement plans. Not that things would go bad, mind you, but what would happen if they did.

So these companies knew what they were doing, but opted to gamble and kick the can down the road. Any sort of lamentation to the effect of 'who could of known?' sounds awfully insincere at this point. And for the record, 'who could have known?' sounds like a candidate to replace Bart Simpson's 90's riff "I didn't do it." That excuse has become awfully, awfully worn.

[lonesome moderate]

The complete article acknowledges the shortsighted management practices cited in the above comments, while arguing that this was the result of the company being "starved" by having to put so much money into pension and health care plans.

[Alex Tolley]

While GM does have a retiree burden cost that adds cost to it's cars, the real reason for their long term decline is that they made crap cars. The decision to make trucks (Vans and SUVs) might have looked smart when oil prices collapsed in 1986, but this was a band-aid that covered the poor quality of their cars. Toyota and Honda captured the small car market mainly due to making good quality vehicles. These companies suffered an adverse exchange rate at the time. By the 1990's they started moving production to the US, where they then had to pick up health care costs for their workers.

As bakho mentioned, GM has a sop to the electric market in the Volt, a car that is targeted for 2010, but is unlikely to achieve. In the meantime, a number of small car companies will have their offerings available by then. Since the market will be somewhat limited for years, it is probably not much of a handicap to be a small company in this nascent market.

As in the 1970s, the winners will be companies that can offer smaller, much more fuel efficient vehicles. This will include hybrid technology.

This will be necessary because of continuing high gasoline prices and because there will be increasing awareness of GW and "carbon footprints" that will drive the more eco-conscious consumers. As Rick Wagoner believes GW doesn't exist, he will only respond to the cost of gasoline. But since he knows GM historically cannot make profitable small cars, he would only be half-hearted in attempts to fill that market. Now he may not get the chance even to do this.

[lonesome moderate]

There's a semantic distinction here that I think is important. There is no such thing as "management" of any company over a sixty-year time period--what you have are many different incarnations of "management", each lasting maybe ten years and pursuing agendas that have little to do with what the previous managers did.

If all these incarnations of management were bad, then I think the right term to use for the problem is "corporate governance". Referring instead to "management" makes the problems seem more personality driven than they have to be, and limits the chances for reform.

[save_the_rustbelt]

I second Alex. Alex, did you have a 1981 Chevy Citation?

None of the Big 3 seem capable to produce the equal to a Honda Civic or Toyota Corolla. Why? Long story.

[ECONOMISTA NON GRATA]

This is a huge story..... GM was a component that defined America for a century.... It's a sad story about the outcome of incompetence, negligence and greed.

I highly recommend that you scan this http://www.carofthecentury.com/. It was created by Richard Earl, grandson of Harley Earl, the most visionary American since Thomas Jefferson.

Harley Earl's story is one of the greatest stories never told....

Best regards,

Econolicious

says...

My wife's CIVIC is crap. The road noise is so bad I can hardly drive it. The Chevy Cobalt is a better vehicle.

[Dickeylee]

Bought a '07 Saturn Arura and love it. Get 29-30 MPG and havn't had a single problem, not one, with it. This car is good looking to boot. GM can make a good car, the Impala and Malibu come to mind. Too bad they sunk 3-4 years worth of planning and design on the new Camaro, a real gas hog thats going to be.

[Silas]

To everyone who wants to blame GM's failure on anything other than pension promises: YOU ARE WRONG and I can prove it.

Assume temporarily that GM's current management and engineering teams were transformed into supermen, capable of making actually good management decisions and designing good cars -- whatever change you think should be made. Assume further that you could do it at any time, but still keep the unfunded pension obligations.

Your current belief is that such a change would suffice to keep GM from failing. However, even granting you this extrememly favorable assumption, it is clear that it would not save GM. Why? Because if such supermen could exist, they would be bid away by companies not shackled by the massive legacy costs such as Toyota.

QED

[btg]

I blame the american consumer - who is ultimately responsible for the problems facing the canadian auto industry as well.

Americans like their cars to be:

BIG
CHEAP
POWERFUL
AND UGLY

The only real difference between a late 50s station wagon and a recent Big-3 SUV is that they ditched the tail fins and soome of the chrome, and added on 4WD!

Honda and Toyota generally designed their cars for the rest of the world first, and Americans second - the Big were able to build one set of cars for north america, and a second set of cars for the rest of the world. Toyota, and to a lesser extent Honda, were having to go in the same direction as they tried to capture more of the auto market - this is why Toyota's sales have been hit hard as well - because they sell more trucks and bigger cars than Honda.

Let me explain:

BIG: When times are good, consumers want bigger cars and the automakers oblige - rarely when a car is redisgned is it smaller, because surveys usually indicate that buyers want more interio room. Eventually, cars get so big and gross that the do get "downsized" - this happened in the early 60s after the exceses of the 1959 models, and why they had to start offering compacts in 1960, and then subcompacts (Pinto Vega, etc.) in 1970, and then general downsizing starting in 1977 (GM full-size) - and it is happening again.

Even the imports have fallen prey to this - look at how the Honda Accord has grown since 1976 - and how Toyota started building full size pick-up trucks (what ever happened to small 4-cylinder pickups - I only see terrorists driving old ones in the mid-east!)

Essentially - the automakers really needed the government to enforce rules like CAFE to protect them from the fickleness of the US auto-buyers!

CHEAP: The US has always relied on cheap, unskilled labour, unlike the craft-based traditions of Europe and Japan. Basically, American cars have always been made to be cheap to build, and easy to maintain - usually this ended up with them being bigger and simpler (there is still no independent rear suspension on the Mustang). US corporate culture has also been aimed more at cost-cutting than at building quality.... GM still makes a lot of push-rod engines instead of overhead cam ones! Compare a 1973 Cadillac Sedan de Ville and a 1973 Mercedes S Class for the purest examples of the differences between the US and Europe.

POWERFUL Well, the Germans also like and build fast cars for the autobahn, but cheap gas in the US has meant that the market for economy cars is highly volatile, and that the price of the entry-level car was far more important than efficiency.

UGLY - this goes beyod the cliches of the 1950s chrome boats. I blame Kansas and middle America. US cars often are designed to have big agressive grills and lots of other tacked on stuff - like the traditional fake woodgrain that used to be found on TV sets and station wagons alike. When Ford designed the Taurus in the early 80s to be a world-class design - without woodgrain, whitewalls or a vinyl roof, the designers actually were able to face european designers with something that , for the first time in years, they didn't have to make excuses for. Sadly, this was rarely repeated in the years since. Buicks have usually been a major offender, which is why there is the joke that the average age of a Buick ower is "deceased".

The sad state of GM is an indictment of the flaws with the US over the last 50 years - its corporate culture, its politics, its attitude towards the rest of the world, its society as a whole. I wouldn't have imagined this when I was a kid, watching the 1969 moon landing and drooling over muscle cars... but then the same thing happened to the British Empire between 1906 and 1956, the year of the Suez Crisis.

[kthomas]

btg, calm down.

[Bruce Wilder]

General Motors was a simply amazing company in 1950 -- owned by the DuPont family (which bought it in the post-WWI crash, using war profits earned in WWI) and run by a management team assembled by the legendary Alfred Sloan: Harley Earl headed design; famed inventor, Charles F. Kettering had just retired as head of research. G.M., throughout the 1950's and into the early 1960's earned an extraordinary rate of profit. It was regarded as something of a puzzle by contemporary IO economists, because its rate of profit never seemed to revert to "normal". Alfred Chandler and Peter Drucker, among others, learned from studying the giant company's growth and structure.

The critical element in the company's success was its mastery of the enormous scale economies to be exploited in automobile production. G.M. had succeeded where Henry Ford had famously pioneered, but also faltered. Where Ford promised "any color as long as its black", Sloan offered regular design improvements and various models "for every purse and purpose". Where Ford had built the giant, unwieldly River Rouge to integrate vertically into such basic inputs as steel, rubber and glass, Sloan focused G.M.'s vertical integration on the manufactured components, where economies of scale ran to much higher numbers than assembly, such as steering, transmissions and electrical componentry.

G.M. used its proliferation of lines to respond flexibly to changes in demand, and exploited its market share to dominate in areas, where scale economies allowed it to reduce costs relative to its smaller rivals. As prospering Americans traded up in the 1950's, G.M.'s dominance in large-scale production of upscale brands like Cadillac, Buick and Oldsmobile, backed by innovations in auto transmission and high-compression engines, made the company enormously profitable, even as the venerable "hand-made" Packard and DeSoto faded, and smaller rivals old and new, like Kaiser, Hudson, Nash and Studebaker, were squeezed out.

Ford hired the Air Force "Whiz Kids" and reorganized in a conceptual imitation of G.M.'s divisional structure. Both Ford and Chrysler were able to offer models under their brands, which achieved unit sales sufficient to exhaust the economies of scale in auto assembly, but Ford and Chrysler did not match G.M.'s vertical integration in components, where economies of scale were greatest. And Ford and Chrysler's main brands remained downscale in the market; Ford's attempt to introduce the Edsel line as a rival to Buick and Olds, ended in infamous grief in the recession of 1958-59.

The discovery by Nash and Volkswagen, in the late 1950's, that America was developing an appetite for small, cheaper "second" cars and Ford's discovery in 1955 that youth might want an underperforming "sports" car that looked good, received a slow, but sure response from the Big Three in the 1960's. VW's early success with VW Bug was squashed.

But, the seeds of G.M.'s destruction were sown in the 1960's. G.M.'s often arrogant exercise of power had attracted antitrust attention in the 1950's, one product of which was the departure of the controlling DuPont stockholders in 1964. G.M. went from being an investor-controlled company, where ultimate power was exercised from the Treasury Dept. in the New York headquarters, to a management-controlled company, where all power centered in the executive suites at the Detroit headquarters.

The carefully managed internal competition among Chevrolet, Pontiac, Buick, etc. was blunted, and profits very quickly reverted to "normal" as management rewarded itself before the shareholders.

The class conflict between an arrogant management and a rebellious workforce reached its peak in the late 1960's. The quality of manufacture was simply appalling, and became the subject of numerous newspaper articles, including a damning piece (as I recall) in Life Magazine. The killer contract was not 1950, but 1970, when Big Auto and Big Steel both settled, with wage increases that carried union workers in those industries far above the median manufacturing wage. (Up to that time, union wages in autos and steel were higher than, but had always tracked with, the median manufacturing wage; the 1970 contract actually changed the ratio by a lot. Students of comparative advantage will recognize the implications for international trade competitiveness.) Of course, management got the same benefits extended to union workers, and this custom may have influenced negotiations.

The Japanese would exploit the opportunity in both steel and autos. Toyota and Honda would do so with a production system that was flexible on a more basic level of production organization than G.M. Where G.M. had to sell a million Chevrolets to exhaust economies of scale; Toyota could sell 300,000 Corollas and 300,000 Camrys and 300,000 of something else and achieve the same economies. Toyota could adapt its designs to smaller market niches, delivering better quality to that smaller niche. And, Toyota had organized its marketing research to find those quality adaptations, and its production to deliver high manufacturing quality. And, it turned out that delivering high manufacturing quality through greater precision -- tighter schedules, tighter tolerances -- also reduced many other costs.

Where G.M.'s exploitation of scale economies had given it a cost advantage over Ford and Chrysler of roughly $200-$300 per unit in the 1960's and 1970's (in current dollars), by 1980, Toyota and Honda were expanding in the U.S. market, backed by a cost advantage, net of transportation costs, of $700+.

G.M.'s elaborate and complex management structure tripped up the company's attempts to respond intelligently and effectively. Top management -- men, literally, in grey flannel suits, all named Smith or Johnson (I kid you not) -- simply did not know how to modify the great machine, without wrecking it. Chairman Roger Smith, with a huge windfall of profit in the 1980's, founded a new division, Saturn, rather than attempt to modify the operating practices of any existing division. Smith bought Perot's EDS to throw computers at the problem. And, he invested in . . . Hughes, literally fleeing to outer space!!

The internal rivalry among divisions, which had been subtly neutered by the creation of an Assembly Division after the departure of the DuPonts, tended to work against change. Car assembly had been centralized, and so, therefore, car design had to be centralized. A basic car design -- the designs were assigned letter designations, C-body, A-body, B-body -- was assigned to Buick, Pontiac, Chevy and Olds, for the divisions to badge; and the Chevy, Olds, Pontiac and Buick versions of each design would be manufactured, together, all across the country in assembly plants specializing in a particular car design, but not a particular brandname. At a point in time where improving manufacturing quality was absolutely vital, there was no way to establish a relation between actual improvements in plant-level manufacturing quality and the reputation of a particular brand. An attempt to consolidate Buick production at the original home plant in Flint in the mid 1980's, the Buick City project yielded heroic efforts to achieve high quality manufacture, but success resulted in demolition of the plant.

In retrospect, the right thing to do in 1980 would have been to break up General Motors into several car manufacturers and component makers. Its vertical integration no longer served a strategic purpose, and gambling on a diversity of efforts would have allowed some parts to survive and prosper. And, breaking up the whole could have been made to yield financial capital to fund new investments. And, frankly, the UAW would have had to accept less from numerous, competing employers.

Although there was a great vogue in the 1980's for "just-in-time" manufacturing and zero-defects manufacturing, I don't think manufacturing companies in the midwest were ever well-organized to do well by doing good, in implementing such programs. Customers have to be able to choose higher-quality in the marketplace -- where the brand means something, because it is more than a clever brandname, it is associated with a particular way of doing business in a particular place and time. And, there has to be time to establish that association.

[zak822]

GM management offered the UAW generous benefits to keep the union from agitating for higher wages.

The top dogs at GM knew perfectly well that their performance bonus's would benefit from a lack of wage hikes, and they would be retired themselves before the benefits had to be paid.

It was perfect, from a mid-term management perspective.

[anne]

http://delong.typepad.com/sdj/2008/07/denpartment-of.html

July 10, 2008

Department of "Huh?" General Motors Bailout Edition
By Brad DeLong

When GM offered the UAW more lavish benefits, it did so in order to induce the UAW to accept less generous wages. The money that GM paid in the 1990s and 2000s to fund pension and retiree health bnefits was offset by wages that GM did not have to pay in the 1960s, 1970s, and 1980s. Lowenstein appears to want to live in a world in which GM (a) gets a break on its wage costs in the 1960s, 1970s, and 1980s; and can do so (b) without having to pay any money to fund pensions in the 1990s and 2000s.

I don't want to live in Roger Lowenstein's world.

[Alex Tolley]

silas: Your current belief is that such a change would suffice to keep GM from failing. However, even granting you this extrememly favorable assumption, it is clear that it would not save GM. Why? Because if such supermen could exist, they would be bid away by companies not shackled by the massive legacy costs such as Toyota.

Not QED, because your logic is faulty. The superman would have stayed because Toyota does not pay the extremely high executive wages and benefits demanded by American executives. If you recall, this was a major problem when Daimler bought Chrysler.

[Alex Tolley]

BW: "In retrospect, the right thing to do in 1980 would have been to break up General Motors into several car manufacturers and component makers. Its vertical integration no longer served a strategic purpose, and gambling on a diversity of efforts would have allowed some parts to survive and prosper. And, breaking up the whole could have been made to yield financial capital to fund new investments. And, frankly, the UAW would have had to accept less from numerous, competing employers."

Maybe it will be broken up now?

[anne]

"The UAW pushed featherbedding, protected incompetent and druggie workers, beat foreman and sabotaged cars, and etc."

Reference???

"There are plenty of retired UAW members in my Rolodex. When was the last time you had a beer with a couple of retired auto workers?"

Reference??? Making difficult remarks is fine, but refusing to document them leaves them no better than slander.

Me, I would not care to have a beer with drugging, beating, sabotaging, incompetent, featherbedders.

Reference???

[Silas]

Alex Tolley: If these supermen really existed, Toyota would be happy to outbid GM for them. And if it came to a bidding war where both sides had to pull out all the stops, Toyota would, in the end, be the one capable of bidding more, because it could raise all the capital GM could, but not have to dock off legacy costs.

[don]

I am no fan of U.S. auto makers. To me, their biggest sin was to lobby for exceptions for light trucks from the mandated mileage standards. They pushed U.S. consumers into an arms war that has increased overall fatalities for motorists and pedestrians, fouled the environment and contributed to higher oil prices. Their generous benefits come partly at the expense of taxpayers, and they have lobbied strongly to keep the benefits untaxed.
That said, a big part of their problem is a severely undervalued yen, which was also an important part of making Ghosn look like a genius. When the undervaluation was being supported by massive currency interventions, Koizumi deflected U.S. action by putting 300 noncombat troops in Iraq, against widespread domestic (in Japan) criticism. Bush sold Detroit out for the sake of this modest support for his Iraq policy. Currently, the yen is kept low by the yen carry trade, but this trade would be nowhere near as strident if market participants weren't convinced that Japanese authorities stand ready to prevent rapid appreciation of the yen.
Alex Tolley, I share many of your sentiments. Dickeylee, I enjoyed your comment immensely.

[Paul Silas]

Reference???

Does anyone here get the feeling here that Anne is one of those folks who, how do I put this... Does not work or interact with the real world often?

[Alex Tolley]

anonymous: My wife's CIVIC is crap. The road noise is so bad I can hardly drive it. The Chevy Cobalt is a better vehicle.

Consumer reports:

Civic:
http://www.consumerreports.org/cro/cars/models/new/honda/civic/sedan-ex-4-cyl/overview.htm

Cobalt:
http://www.consumerreports.org/cro/cars/models/new/chevrolet/cobalt/overview.htm

Looks like the Civic rates higher to me.

[anon/portly]

"For arguments that management was at fault, see here, here, here, here, and here."

The second and fifth links are to pieces from 2005 and 2006 by James Womack that are complementary to the Lowenstein piece. For example, one of them says:

"But note: I haven't mentioned the creaky factories, vast pension obligations, and cranky unions that commentators on the current situation seem obsessed with. In fact, Ford and GM's factories are now good enough to compete in terms of labor productivity and quality. They just can't support employees with no work in 'job banks' and unsustainable pension and healthcare benefits for retirees as the companies continue to shrink. Union and management both know this, yet no accommodation has been reached on these issues because their conversation has broken down. With zero confidence that management knows what it is doing, a union will try to get what it can now rather than look at the long term. In consequence, unless GM and Ford soon present a plausible path to a brighter future -- combining a better business model with significant short-term pain during the transition -- there may be no long term."

The other says:

"Ford and GM ... need to shed large numbers of employees, but the main way to do that under "life-time employment" union contracts has been to encourage early retirement. This has solved one problem -- too many active workers. But it created a second -- too many retired workers for the active workers to support. .... The bigger question is how to cope with the pension and health care commitments of U.S. companies on the road to financial ruin."

If there's a difference between Lowenstein and Womack, maybe it's that the key management mistake for Lowenstein was short-sightedness on pensions; whereas Womack blames other management mistakes for creating the pension crisis - i.e. without the other mistakes the Big 3 could be selling enough cars to pay the pensions and health care benefits.

I don't get Delong's point (quoted above by anne) that "Lowenstein appears to want to live in a world in which GM (a) gets a break on its wage costs in the 1960s, 1970s, and 1980s; and can do so (b) without having to pay any money to fund pensions in the 1990s and 2000s." When Lowenstein writes that "In 1961, G.M. was able to get away with a skimpy 2.5 percent increase in wages by also guaranteeing a 12 percent rise in pensions," he actually seems to make the opposite of Delong's point (a); nowhere does he seem to make anything like Delong's point (b). What am I missing?

[vorpal]

What's missing here is that the leadership never lead. The workers were pigs at the trough, but they were only doing what the executives were doing. When did the execs ever say that they needed to tighten things up and lead by example?

Perhaps the auto workers were overpaid, but they were merely emulating the behavior of poor leadership.

[roger]

Loewenstein't point seems pretty current to me - to retain a manufacturing base that adjusts to create an innovative product in a global market place - in other words, to retain a comparative advantage - you can't treat the state as an unnecessary bystander, only good for fiddling with tax rates. When the state takes on the burden of health care - as it has of eduction - it gives a strong advantage to a national economy. In other words, the state and the private sphere aren't necessarily at cross purposes unless they are made to be at cross purposes.

However, I am wondering why it is in our interest - insofar as the Government represents the people - that we bail out various banks, but provide tough love when it comes to our largest manufacturers? Does it have to do with the fact that we admire the heroic financial innovators so much? For all they've done for the world? That we don't want them ever, ever to think of shrinking the domestic staff that runs the Connecticut homestead, as it would be too symbolically humiliating for us all? Whereas those lousy, lazy guys making cars surely deserve to be laid off?

It seems to me that we've reached a time in which there is a convergence of interests that suggest we should have an industrial policy in the U.S.: energy cost, global and unpredictable environmental damage, increasing wealth inequality. All of which suggests that we might want to ask what we want from auto manufacturers, and if there isn't a place for the government to facilitate that want.

[lonesome moderate]

My wife's CIVIC is crap. The road noise is so bad I can hardly drive it. The Chevy Cobalt is a better vehicle.

That hasn't been my experience; I've been very happy with my new Civic since I bought it four months ago.

[save_the_rustbelt]

Paul: on Anne, you got it

Anne: I should also mention I worked with drug abuse and mental health programs in UAW country. As well as lots of physicians.

Also, I have evaluated buy-outs and retirement packages over the past 30 years for UAW and management types.

Come live in the Toledo are for 30 years and you won't need much "research."

[save_the_rustbelt]

On the good side, the UAW made progress on race relations many years before many AFL-CIO unions did so.

The UAW still has some gender issues, the Chhysler plant in Toledo is in the midst of a major sexual harassment scandal involving both hourly and management personnel.

[don]

anon/portly: Does this help? Because benefits are tax exempt, but deductible by the company, the company can give workers a bigger after-tax pay increase with a smaller net reduction in its own profits by paying less in wages and more in benefits. The policy was a bad long-run trade-off, because they misgauged the present value of cost of the benefits. Now, they appear to want the wage saving they got by offering the greater benefits, but to escape the costs of having used this strategy.

[Bawdyscot]

I am with you, btg. Everyone wants to blame "management" or the "unions", but what about all the consumers who just had to have bigger and more powerful SUVs and then they just drove them around town, never seeing the mud or crossing a stream which is why they were designed in the first place. Any SUV built in the '90's or early '00's was not designed to go down the interstate doing 90mph.

I live in rural Arizona and have to have a large 4WD vehicle. It always burned me up to hear someone chastising all SUV owners as bad people when the real problem was consumers who bought them when they weren't ever going to use them as they were designed.

[Bruce Wilder]

The critical point about pensions is that those pensions were underfunded promises.

I can promise a 35 y.o. worker $4 in retirement benefits at 65, if I'm willing to sock away $1, when I make the promise. That's the wonder of compound interest.

That's not what G.M. promised (I'm guessing). They, in essence, promised to be still in business in 30 years hence and able to pay those benefits (or some of them) out of then current benefits.

Maybe they pretended to sock away $1, investing in their own operations. If so, or not, today, they are making the retired workers into equity shareholders in a losing operation.

To complain of "legacy costs" at this late date is just a rationalization for treating the UAW as a shareholder, and a holder of some low-quality preferred at that.

[mik]

That hasn't been my experience; I've been very happy with my new Civic since I bought it four months ago.

With all due respect to your 4 months experience with Honda cars, I had 5 Honda Accords for the last 25 years ( there are 3 drivers in the family).
Excellent cars for not much money. Makes it easy to buy when time comes, just find a well-priced Accord.

From what I hear, Toyota and Nissan have quality comparable to Honda.

I have never driven a big 3 car comparable in quality to Hondas. May be I was unlucky.

[Bruce Wilder]

The 1970 contract was a huge mistake, and ought to get more attention. At a time, when General Motors and its fellow oligopolists were earning substantial rents, they elected to share them with the UAW. And, there was strong awareness, at the time, that management was caving, in large part, out of self-interest. Everyone's pay and benefits would go up at once, union and non-union.

The rents largely disappeared around 1980, although there were some tricks played with light truck CAFE standards and tariffs, and the import quotas, to deliver some extension of rents in the 1980's. They were not invested well.

The tie between executive pay and union pay no longer exists, and since the shareholder stake has been whittled down to nothingness, and the white collar workers already victimized, the UAW stake has to be whittled down, as well.

At this point, liquidation would be the best course. If a venture capitalist wants to assemble the best assets and launch a new car company, there might be some basis for that. But, really, the time to say good-bye to all that has come and gone.

[Bruce Wilder]

My general impression of measured quality is that some G.M. and Ford operations have managed to achieve Japanese (Toyota or Honda) at various times, without sustaining those levels permanently. There's a lot of self-sabotage by management, reverting to the old ways. Buick City was the most tragic example I know of. The workers were making truly heroic efforts to save not just their plant, but Flint -- their city -- and by every objective measure they were succeeding, producing superb cars (from the standpoint of manufactured quality). This was a fine example of the exact opposite of the reports of UAW sabotage STR, good Republican, passes on. And, management rewarded the effort by demolishing the plant, leaving Flint a sad rump, much worse off than when Michael Moore made "Roger & Me".

[TwiztedLiberal]

All lies and smears.
All lies and smears.
All lies and smears.

[JeffF]

"I live in rural Arizona and have to have a large 4WD vehicle."

Weird how people lived in Arizona before there were large 4wd vehicles.

[wally]

"When GM offered the UAW more lavish benefits, it did so in order to induce the UAW to accept less generous wages."

Well, they always paid incredibly high wages compared to most other industries, so I guess they lost on both ends. Just like the mortgage industry, the investment banking industry and others, the auro industry is a good lesson that social responsibility is not an optional add-on. It is essential part of long-term survival.

[Ex-Worker]

Lowenstein's article relates to his recent book looking at public pension overcommitment and the role of politicians in bankrupting their domains.

GM's management acted like politicians promising unaffordable long term benefits in order to get the short term benefit of reelection or labor piece.

Poor management and aggressive unions were collaborators in the current disaster that is the US industry.

[Bawdyscot]

Yeah, JeffF, they had horses. And after the time of horses, they got stuck, until the 4WD vehicle came into being. Try going down a 9 mile dirt road in the pouring rain trying to stay out of the bar ditches in a Toyota Prius. But I bet that would be a piece of cake for the likes of you, eh?

[kthomas]

"....social responsibility is not an optional add-on. It is essential part of long-term survival."

Beautifully said.

[mdm]

The pensions had to have been on the company's balance sheets. Management and investors had to have seen them.

[mdm]

Management was myopic to the evolution of the industry and the consequences of freer trade. You can't be myopic when you have long-term liabilities like pensions.

I'm curious as to why investors didn't see this sooner.

[Michael Cain]

Lowenstein's article relates to his recent book looking at public pension overcommitment and the role of politicians in bankrupting their domains.

In coming years, it will be interesting to see how the federal bankruptcy courts respond to state and local governments' claims to be bankrupt. There's little case law in this area. Personally, I expect that many state constitutional and statutory limits on taxation will be tossed by the feds, and the local jurisdictions will be required to set tax rates sufficiently high to generate the revenue to cover their obligations.

[Dickeylee]

Bruce Wilder hit the nail on the head, GM management started looking out for themselves, and themselves only. But isn't that how corporate America operates as a whole nowadays? Top management-CEO, COO, ExVP, etc...-take all the credit when times are good, huge bonuses, options, lifestyles of King Midas with NY penthouses, summer homes in the Hampton's or Cape Cod, corporate villa's in-well, you get the picture. So what happens when tough times hit? Golden parachutes! Or if Bankruptcy comes along, why, they need another bonus to stick around because of all their knowledge.
I mean, is this whats taught in Business School nowadays? It's become the Republican mantra for the last 25 years, screw everybody else, I've got mine.

[lonesome moderate]

Dickeylee--it's just the people in management doing what's in their interest, nothing more or less. I agree with you that this is endemic throughout corporate America (as do most of the other posters here). This is what I meant when I said the problem was not "management" but corporate governance--we badly need some kind of reform to make more information about the true state of a company available to stockholders, and to better align the interests of management with the long-term interests of their company.

[btg]

My hat goes off to Bruce wilder for his history of GM and other comments on the subject... however:

"The internal rivalry among divisions, which had been subtly neutered by the creation of an Assembly Division after the departure of the DuPonts, tended to work against change. Car assembly had been centralized, and so, therefore, car design had to be centralized. A basic car design -- the designs were assigned letter designations, C-body, A-body, B-body -- was assigned to Buick, Pontiac, Chevy and Olds, for the divisions to badge; and the Chevy, Olds, Pontiac and Buick versions of each design would be manufactured, together, all across the country in assembly plants specializing in a particular car design, but not a particular brandname."

This goes back to the late 1940, if not earlier. For example, all of the big GM models were redesigned in 1959 because they did share the same basic engineering - prior to this, they had an X-frame. This was partof the economy of scale approach - all GM models could share parts like door hinges or wiper motors is all the brands were reseigned. In 1955, both Pontiac and Chevy came out with totally redesigned models, with V-8s. Occassionally the top 3 brands in the pecking order (Buick, olds and Cadillac) got the new bodies a year before the other 2 brands.

What did GM in was that, in the 1960s, with several lines of cars (full-size, intermediate, compact, ony car, etc.) the cars could not change substantially from year to year, and there was less to differentiate each model other than the engines - which eventually ended up being shared as well (Pontiac had an OC 6 in the Firebird in 1967 - but in later years the engines in the Firebird were all chevy engines). Eventually, by the 1980s when GM introduces 4 badge engineered full-sized cars all with front wheel drive, it was pretty obvious to any consumer that there was only a minor cosmetic difference between cars.

GMs problem had to do with the pecking order - that each brand would be aspired to so that Buicks were "Doctor's cars" and Chevy's were for the Blue collar guys. In the early 1960s, when GM had 50% of the market, they were largely competing with themselves, but with the introduction of the intermediates and compacts, and after even Buick was given a variation on the chevy Nova after the 1973 oil crisis, GMs branding/pecking order no longer fit the market and the times. GM should have teamed up Chevy and Olds dealers, and Buick/Pontiac dealers, like the Canadian dealership network, but they only started to do that in the last few years (without Oldsmobile, of course, and with Saturn still on its own).

partsof GMs problems is that with each year, it loses dealers because sales are declining, which in turn drives sales even lower. There was a good article inthe NY Times a week or so back about one of the last Buick-only dealers in Ohio. Very sad what GM has come to.

[mrrunangun]

Once management seized control of the company from the owners, it was in the best interest of every individual who gained control to maximize his own payout at whatever price to the future of the company, a future in which he would not share. Paying off the unions was just part of that strategy followed by every CEO.

To make capitalism work for the country rather than the management of companies, poison pills should be outlawed so that poorly managed companies can be acquired by better management. In addition, board voting power must not accrue to inside directors and the board of directors must be responsible for its own members' succession and retired board members be paid out like a pension over 20 years based on the company's success or failure. From my limited experience, I have seen that it is extremely easy for a CEO to take over a board and in 65% of the S&P 500 the CEO is chairman of his own board. This arrangement is an invitation to the CEO to loot the company and the invitation is often accepted on large and small scales and in for-profits and non-profits as well.

[EoH]

In the early days of modern marine navigation, it was illegal for a sailor to know his ship's position, or to question or speak back to an officer. GM is still run that way.

Whatever GM's management promised its workers, it was deferred compensation for lower current labor costs. Concessions avoided delays and stoppages and longer, more thorough negotiations. It was management's highly-paid job to forecast how those decisions would affect them in the future. They seem to have done as good a job at that as they did in improving the quality and fuel economy of their fleet.

Management reaped short-term savings for decades, and took current bonuses based on future savings, knowing that the Piper wouldn't have to be paid until they were enjoying the three B's (boats, booze and babes) in Sanibel.

GM was a victim of its own success. But however burdensome it claims its cost structure is today; whatever aid local, state and federal governments - facing plant closures, job losses and painful restructuring of their tax base and communities - offer GM, it will still take all its production offshore.

[cm]

Bawdyscot: When looking at the TV ads for oversize vehicles that are targeted at the male audience, I think it is pretty clear for what the vehicles are designed (if you get my drift). And that's not offroad "utility" use (even though some models cover that space).

I'd say most recent SUV models are not offroad capable (insufficient axle clearance to begin with). They are designed as road cruisers.

[anne]

"The UAW pushed featherbedding, protected incompetent and druggie workers, beat foreman and sabotaged cars, and etc."

This could even true, so could the opposite, but a comment of such note must be considered false till we are shown otherwise. I assume the comment false till then.

[Steve]

Why is it when someone says the Big 3 builds junk, you always hear some story like "The Ford/Chevy/Dodge I bought back in 1986 was a piece of junk". What may have been then, is not neccesarily the same now. Re: Pontiac G6/Saturn Aura/Malibu, or the Corvette, Caddy CTS-V.....even the Mustang, which give you more performance per buck than anything made in either Japan or Germany

Go ahead and keep running down the perceived value of Big 3 built cars, I was able to buy a slightly used Cadillac Seville STS for less than the price of a new KIA, or SMART car.......and it is about five times more car than either one of those tin cans.

[Jon H]

"Why is it when someone says the Big 3 builds junk, you always hear some story like "The Ford/Chevy/Dodge I bought back in 1986 was a piece of junk". What may have been then, is not neccesarily the same now."

Ford/GM/Chrysler have spent the last 40 years telling us about all the things they couldn't possibly achieve.

It shouldn't surprise you that people believe they can't engineer their way out of a wet paper bag. That's what the big 3 have been telling us for decades.