Who shot General Motors? The company’s stock is at its lowest level in 50 years, and its market valuation has plunged to $5.9 billion, less than that of the Hershey candy-bar company. The auto maker is weighing yet another round of layoffs — and maybe even a fire sale of venerable brands such as Buick and Pontiac.
General Motors (GM) once manufactured half the cars on the American road, but now it sells barely two in 10. Bankruptcy is not unthinkable for Detroit’s former king.
The immediate cause of GM’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 GM’s management miscues was so damaging to its long-term fate as the rich pensions and health care that robbed the company of its financial flexibility and, ultimately, of its cash.
GM 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 auto makers to “go down to Washington and fight with us” for federal benefits.
Detroit was too flush to envision that it would ever face a financial strain. Ford and Chrysler signed identical pacts with labour, so all three auto makers were able to pass on their costs to customers. Besides, the industry’s workforce was so young that few workers would be collecting a pension anytime soon.
But pension commitments last forever. They far outlived Detroit’s prosperity.
GM got into the dubious habit of steadily increasing worker benefits. In 1961, GM was able to get away with a skimpy 2.5% increase in wages by also guaranteeing a 12% rise in pensions. Such promises significantly burdened the company’s future. As workers lived longer, the cost of fulfilling pension commitments rose. And health care costs exploded.
By the 1980s, it was clear that the Big Three auto makers faced a serious threat from Japan. But GM and the workers’ union were locked in a mutually destructive embrace. GM, fearing the short-term consequences of a strike, continued to grant large increases in benefits — creating an intolerable gap between its costs and those of its foreign competitors. Union officials feared to face the rank and file without a big contract.
In the 1990s, the consequences of maintaining a corporate welfare state became too obvious to ignore. In that decade, GM poured tens of billions of dollars into its pension fund — an irretrievable loss of opportunity. What else might GM have accomplished with that money? It could have designed new cars or resea-rched alternative fuels. Or it cou-ld have acquired half of Toyota — a firm that the stock market now values at close to $150 billion.
GM acknowledged in its most recent annual report that from 1993 to 2007 it spent $103 billion “to fund legacy pensions and retiree health care — an average of about $7 billion a year — a dramatic competitive and cash-flow disadvantage.” During those 15 years, GM paid only $13 billion or so in shareholder dividends. The company has been sending far more money to its retirees than to its owners.
©2008/The New York Times
Edited excerpts. Roger Lowenstein is an American journalist . Comments are welcome at firstname.lastname@example.org