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Facts about automakers
Yermack estimates that the aggregate capital investment in GM and Ford since 1980 has led to a net reduction in capital of $465 billion...This is what I find particularly disturbing: with that $465 billion, “GM and Ford could have closed their own facilities and acquired all of the shares of Honda, Toyota, Nissan, and Volkswagen.”
Here is more. And here are facts about GM wages.
Posted by Tyler Cowen on November 18, 2008 at 12:27 PM in Data Source | Permalink
Comments
You get the $73.50 in Big 3 wages by adding all the legacy cost to the pay of the current employees.
How many think this is a fair comparison?
Posted by: spencer at Nov 18, 2008 1:17:24 PM
@spencer: considering they do the same thing with the other automakers they're comparing to, and considering that those costs are also management's fault in that they didn't adequately *fund* those obligations in advance (like their competitors did), yes, it's eminently fair.
FWIW, yes it was stupid not to fund the benefits, and instead throw off those "free" wage savings earned from promising such benefits, as bonuses and dividends. It was also stupid for unions to agree to such deferred compensation with no clue how it would be funded or any well-defined status with respect to the other creditors.
Cause GM will be perpetually superprofitable, right?
Aside: how would you react to an entrepreneur who took out a $10 million business loan to buy capital equipment, but instead dumped that money in his partners' Swiss bank accounts, and then complained about how unfair it is that his competitors don't have his "legacy (i.e. interest) costs"? Because that's exactly the position the Big Three are in.
Posted by: Silas Barta at Nov 18, 2008 1:43:58 PM
Government will certainly have the incentives to intervene, in order to –supposedly- save jobs, regions, or whatever other questionable reason they may have. That’s a fact. We may have a better chance trying to influence how they intervene. So far, some have argued that the capital injection to the auto industry will be a loan, not a gift. That is sort of fine so far. My proposal is that the loan goes to Toyota and Honda, so they can buy GM and Ford. I know. I am dreaming.
Posted by: Mario Villarreal at Nov 18, 2008 2:03:54 PM
Government will certainly have the incentives to intervene, in order to –supposedly- save jobs, regions, or whatever other questionable reason they may have. That’s a fact. We may have a better chance trying to influence how they intervene. So far, some have argued that the capital injection to the auto industry will be a loan, not a gift. That is sort of fine so far. My proposal is that the loan goes to Toyota and Honda, so they can buy GM and Ford. I know. I am dreaming.
Posted by: Mario Villarreal at Nov 18, 2008 2:04:55 PM
Silas, you are completely right and I agree completely.
But that does not change the point that the $73.50 wage is a massively misleading data point.
Posted by: spencer at Nov 18, 2008 2:05:37 PM
DO NOT BLAME UNIONS.
I will repeat, without shouting: do not blame the unions.
No-one forced the automakers to negotiate such good deals. They did it because they could pay their workers excellent wages and still pay dividends. The workers, just like the companies' CEOs were just negotiating the best deals they could. It is a management issue, not a labor issue.
American cars have a built-in price advantage of some amount. That is, given similar products, an American would likely spend an extra amount of money to "buy American" and to "find the union label" on their cars.
But the bottom line is this: every cost associated with the manufacturing of a vehicle is direcly attributable to management's decision to pay the cost. It is not the unions' fault.
Posted by: Allan at Nov 18, 2008 2:10:40 PM
@Silas - can you expand on your analogy about the entrepreneur who took out a $10 million business loan and instead dumped that money in his partners' Swiss bank accounts?
I don't think I understand the concept of "legacy cost"...
Posted by: Matt B at Nov 18, 2008 2:24:05 PM
@spencer: Yes, it's misleading for the *implied* meaning, that workers now are currently making that much. But make a different relevant comparison and they're still overcompensated. You are correct that they should adjust for that given the purpose of the comparisons, but not all comparisons are trying to show that.
@Matt_B: I'd be glad to expand on that analogy.
When the entrepreneur gets the loan, he's expected to use it to enhance his businesses productivity, so that it's more than enough to make the loan payments. So if he views the loan as "free money" and squanders it as a gift to his buddies, he doesn't quite deserve our sympathy. The "legacy costs" -- the interest he owes because of that promise -- were entirely of his own making.
Likewise: GM got workers to accept lower wages in exchange for deferred pensions. GM likewise should have used those savings to create a fund from which the pensions could be paid. However, like the entrepreneur, they viewed those wage savings as "free money" and threw it off as bonuses and dividends. Their "legacy costs" (pensions coming due)were entirely avoidable and entirely of their own making. Their foreign competitors wisely funded their benefits in advance and so don't have to deal with them today.
Clear now?
Posted by: Silas Barta at Nov 18, 2008 2:48:58 PM
I know several lifelong Ford autoworkers at the Hegewich plant. They don't make $70/hour. Not even close to $70 an hour.
Posted by: mickslam at Nov 18, 2008 2:55:04 PM
When the new labor agreement signed between the UAW and GM kicks in on january 2010, GM's labor costs will be comparable to the foreign automakers. GM has eliminated defined benefit pensions for new hires and substantially cut wages for those new hires who make about $14 an hour starting out. By 2012 around 40%+ of GM's workforce will consist of these new hires at lower wages. If the auto market recovers by 2010 to around 14-15 million units a year GM can survive.
A bailout now might even allow GM and Chrysler to merge. Chrysler only has 66k employees and more than half of those could be bought out and replaced with new workers. With the companies no longer responsible for retiree health benefits after Jan 1st 2010 you could get enough cost savings and cuts in capacity that the companies could emerge as viable entities.
Posted by: bill at Nov 18, 2008 3:11:46 PM
This tidbit is interesting - does anyone know about these "state laws":
"GM has about 7,000 dealers. Toyota has fewer than 1,500. Honda has about 1,000. These fewer and larger dealers are better able to advertise, stock and service the cars they sell. GM knows it needs fewer brands and dealers, but the dealers are protected from termination by state laws. This makes eliminating them and the brands they sell very expensive. It would cost GM billions of dollars and many years to reduce the number of dealers it has to a number near Toyota's."
http://online.wsj.com/article/SB122688631448632421.html
Posted by: Mr. econotarian at Nov 18, 2008 3:12:03 PM
Do they get benefits? Medical/dental? Matching 401k? Pension? (Now in jeopardy, but still part of comp just as my supposed bonus this year is part of my comp discussion with HR).
Hourly rate might not be the most useful metric.
Posted by: meter at Nov 18, 2008 3:13:00 PM
Bill, I plead ignorance on the new plan you cited. You didn't mention legacy costs, which is sort of the whole problem. If GM were able to transition current employees to this plan that would help, but they still have pension and medical benefit commitments to people who are no longer working.
Posted by: meter at Nov 18, 2008 3:16:48 PM
@Allan
While I understand (but don't agree with) the philosophy behind the arguement that the union leadership was just doing it's job negotiating benefits for it's constituency, I strongly disagree with the idea that Big 3 cars have an inherent price advantage because people want to Buy American or support the union label.
My experiences, as both a consumer of Big 3 vehicles and as a business man trying to do business with the Big 3, has taught me to retrun the contempt for them that they have shown me. My first major purchase as an adult 30 years ago was a Chevy that fell apart slowly over it's first year of use and one of my first sales calls when I opened my business was to a Ford facility right across the street from my office. In both instances I learned that even though I was an American, I was going to get an inferior product and a money losing business relationship. Frankly, if US auto companies didn't care about me, why should I care about them? Multiply my experiences by a 100,000 and you might understand the reluctance of those outside the industry to fund it's continued failure.
For me, buying from the Big 3 involves me taking a risk. I would have to get a price break to take that risk and buy the union label. Sorry.
Posted by: JJZ at Nov 18, 2008 3:21:23 PM
Meter,
Under the new terms of the agreement with the UAW GM will have no legacy costs after 2010. Instead it will be the responsibility of the Union which will be managing a VEBA fund. GM has about $16 billion that they have set aside for future liabilities. They will probably kick in another $20 billion. Once they do that they will have no legacy costs going forward. This will eventually allow them to rightsize the business, buy out older existing workers and replace them with younger less costly ones and possibly be profitable.
The most important thing about this new UAW agreement is that it finally gives the automakers a degree of cost certainty. They will not be subject to ever increasing medical liabilities would certainly bankrupt the company.
Posted by: bill at Nov 18, 2008 3:25:40 PM
"DO NOT BLAME UNIONS."
I totally blame unions. Toyota has no unions and no problems. Unions heavily constrain the possible options companies have. I also blame FDR because he is the one who forced unions onto GM. And I blame Democrats for their current support of unions. This fiasco illustrates that unions are anti-social organizations that work firmly against the public interest. The destroy the wealth of society and corrupt its government. They are also undemocratic as is demonstrated by their desire to freely abuse and intimidate workers using Card Check Laws. And in the third world countries like India it has been unions that have stalled economic liberalization. I blame unions for keeping India and many Third World countries extremely poor.
Posted by: assman at Nov 18, 2008 3:26:27 PM
I'd call it Tucker's revenge! :).
Posted by: Mr. Beefy at Nov 18, 2008 3:26:51 PM
DO NOT BLAME UNIONS.I will repeat, without shouting: do not blame the unions.
No-one forced the automakers to negotiate such good deals. They did it because they could pay their workers excellent wages and still pay dividends. The workers, just like the companies' CEOs were just negotiating the best deals they could. It is a management issue, not a labor issue.
But the bottom line is this: every cost associated with the manufacturing of a vehicle is direcly attributable to management's decision to pay the cost. It is not the unions' fault.
Actually, people *DID* force the automakers to negotiate such good deals. The UAW has enough political power that the big 3 pretty much had no choice than to sign the deals. Aside from all the legal restrictions that keep the auto companies from dumping the unions when they ask for too much, in places like Michigan the UAW goes to their friends in the government, and the government quietly makes an offer that they can't refuse to the auto companies.
The auto companies don't operate in anything resembling a free market... in places like Michigan, the auto industry has long been de-facto state managed industry (at least in terms of labor deals).
I know several lifelong Ford autoworkers at the Hegewich plant. They don't make $70/hour. Not even close to $70 an hour.
$70 an hour is how much it costs Ford, if you include pension/benifits/insurance, etc.
Posted by: Cheeze Lover at Nov 18, 2008 3:38:57 PM
.You get the $73.50 in Big 3 wages by adding all the legacy cost to the pay of the current employees.
How many think this is a fair comparison?
Of course it's not a reasonable comparison. If you want to know if GM, etc. are as efficient as the foreign manufacturers you have to compare variable costs, and not include fixed obligations like retiree benefits.
I've seen these numbers thrown around without explanation a lot. At best that's careless.
Posted by: bernard Yomtov at Nov 18, 2008 4:01:42 PM
$73/hour? Does anybody here seriously believe that the average UAW employee is making $45/hour in benefits? Cuz that's what that dude is claiming. I call shenanigans.
Posted by: buermann at Nov 18, 2008 4:14:12 PM
"By 2012 around 40%+ of GM's workforce will consist of these new hires at lower wages. If the auto market recovers by 2010 to around 14-15 million units a year GM can survive."
This assumes a fairly massive and sudden die-off of about half a million retired auto workers, which is only likely if the B3 actually go bankrupt and all those people lose their healthcare benefits.
Posted by: buermann at Nov 18, 2008 4:19:55 PM
No-one forced the automakers to negotiate such good deals.
Actually, that's not true -- somebody did force them, and here's how it worked. It's actually diabolically ingenious (in a game theory sort of way). When contract renewal time came around, the UAW picked one of the three automakers as the 'strike target' (usually the most profitable one at the time). If the target company didn't want to accept the UAW's terms, it could take a strike and a production shutdown -- but the other two automakers would be working overtime selling cars and stealing its business.
Not very surprisingly, the target company was not eager to take a strike that might ultimately benefit the whole industry but at great cost to itself (and great benefit to its competitors). Instead the target company would try to customize an agreement that was easier for it to swallow than its competitors and then hope that the UAW's imposition of the contract pattern on the others would leave them at a disadvantage.
Posted by: Slocum at Nov 18, 2008 5:27:41 PM
How about: no one forced the automakers to lobby against nationalizing the healthcare costs of their retirees like the competition did.
Posted by: buermann at Nov 18, 2008 5:41:05 PM
Buermann
Detroit has been a big advocate of national health insurance. GM has openly supported it on many occasions.
Unions and management contributed to the problem but CAFE standards did them in.
The Japanese, the UAW, and management are the most common demons blamed for Detroit troubles but I think it is about time we talked about the real cause of this nightmare: government regulation. The CAFE standards have done more to hurt Detroit then all the UAW contracts or all the poor managers put together. CAFE standards forced Detroit to build cars that they could not profitably build. A fundamental fact is that the Japanese were always going to be better then Detroit at building economy cars.
Ford used to lose money on every Escort it sold and needed to make up the difference on other more expensive cars. Why? Because it was the most cost effective way for them to meet CAFE standards. That is a failed public policy.
Japanese imports, because they had a different cost structure and had better skills at building small cars, could easily increase production to meet American demand for small cars; if the demand had been there. And we as a society would have been much better of if we had just let the Japanese build more Civics, Corrollas, etc to meet any American demand that existed and leave Detroit alone to build the kind of cars Detroit was good at building: pick ups, SUV's and large family cars.
If Detroit had invested in mastering what they did well, instead of being forced to invest millions into cars that they could not turn a profit building, don't you think they would have been able to produce a better product line overall? At greater profit. Instead Detroit was mandated to build cars that the American buyers did not want to buy in large numbers and that Detroit could not build profitably.
If Congress had really wanted to increase fuel economy, they would have increased gasoline taxes. Higher gas prices would have increased the demand for fuel efficient cars and Detroit might have been able to adjust to a real change in American preferences. But even if Detroit didn't adjust, it would have been in the American publics interest to just let Honda build more Civics to meet demand. But the politicians were afraid to raise gas taxes so they placed a burden on the auto companies, a burden that eventually broke helped break them.
Detroit and the UAW have made great strides to rewrite their labor contracts. Starting in 2010, we really would have seen a new cost structure for UAW plants. The future had some potential. But to get there, Detroit needs financial help now. All things being equal, I would let bad firms go out of business. I would let the Detroit auto companies go into bankruptcy and force them to restructure. But in todays credit markets, nobody would lend them the money to restructure. GM would be the first forced to liquidate. I think that would be a disaster for the economy and a terrible waste of resources. I think we should loan them the money to try and get over this hump.
However the Democrat offers of help are worse then no help. The Pelosi/Franks/Reid/Sierra Club solution is to give them money and then demand that they build cars that they cannot build profitably.
That is like demanding that Michael Jordan play baseball instead of concentrating on basketball. The Washington crowd wants what it wants. The Japanese plants in America have more then enough capacity to meet the American demand for small cars and then some. Having helped to destroy an American business that provided good jobs to middle America for almost a century, Democrats cannot help but plunge in the final deadly blow.
If I was the Republicans, I would approve the loan and reverse the CAFE standards and save a lot of good jobs.
Posted by: DanC at Nov 18, 2008 6:00:00 PM
DanC,
I would, quite seriously, be interested in hearing more about why Detroit lacks the skills to build small cars profitably, while the Japanese have these skills. What inherent difference is there, or are you merely talking about different financial structure?
I'm surprised by the assertion that there is some radical difference involved.
Posted by: Bernard Yomtov at Nov 18, 2008 6:23:10 PM
