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  • January 2019
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Why GM can’t survive

Obama actually did it. He sent the automakers packing when they presented yet another “trust me, I know what I’m doing” proposal to justify wasting another big chunk of taxpayer payola.

What does this really mean, and why did the big O say no?

From what I’ve managed to gather, there were three main reasons for the “no”:

  1. The Bond holders weren’t taking a real hit
  2. The union demands were still unrealistic
  3. The automakers plans for becoming competitive were insufficient.

Lets look at them one at a time.

1. The Bond holders weren’t taking a real hit

People buy bonds because they are considered a fairly safe investment. However, they are only “fairly safe”, not risk-free. With the tanking of the auto industry, many of the bonds issued by them are going to be defaulted on. If the bonds are defaulted on, the people and organizations that bought those bonds will lose part of their investment.

Apparently, GM felt that asking their bondholders to take a significant hit was A Bad Thing, and wasn’t willing to stick it to them. Of course, in bankruptcy, bondholders pretty much always lose. That is because bonds are investments not loans. That means that the buyers are accepting the risk that the issuer of the bonds may default. Now, I don’t know about you, but from my vantage point, Even the most cursory glance at GM makes me think that any investment (stock, bond, whatever) in GM since the mid 70’s would be pretty high risk. As an entity, US automakers have been in a nosedive since the oil crisis of ’73, and personally, I would consider slot machine a better risk than US automakers.

Conclusion: if you own GM or US automakers bonds, its time to suck it up, and admit that it was simply a crappy investment.

2. The union demands were still unrealistic

Well, this isn’t really any surprise. The Unions have supposedly negotiated “as far as they can”. This means that US autoworkers are still ensured salaries that grossly exceed market value, that they have a level of job security that exists no where else in the world, and hta if their job goes away, they will still continue to get paid – working or not. The insane pensions plans that were negotiated over the past 20 years have not been adjusted, so uinion workers continue to collect benefits that  were based on a totally fictitious revenue model. Of course, they are also unsustainable, and they alone are capable of driving an otherwise healthy company into bankruptcy. When applied to an organization as poorly run as the US automakers, these pension plans become simply laughable.

While it is unfortunate that the union workers will probably be the ones to reap the results of the pie-in-the-sky labor practices at the automakers, the simple truth is that they’ve been grossly over paid, over benefited, and over over pensioned for a long time. Any losses that they suffer now will never begin to match the overcompensation that they have received for the past 40 years. Unfortunate, but just like Karma, it all balances out in the end.

3.The automakers plans for becoming competitive were insufficient

Lets get real folks. These are the companies that brought us the hummer, ands till think that it is a marketable and valid product. They have missed every major market shift since 1960, and have barely been able to follow the lead of foreign manufacturers (who, by the way continue to grab more and more of the market share). In other words, US automakers have been in a slow fade for more than 40 years. When they have faced catastrophic failure, the fed has stepped in to bail them out, but they have never recovered, and continue to slide.

In order to really recover, the automakers need to accept the fact that they are in need of a complete overhaul. From how they design and manufacture cars, to how they finance themselves, to how they negotiate with unions and labor. In other words, they need rebuilding from the ground up. In the business world, this raises a very interesting concept known as the “build or buy” decision. It’s a pretty simple concept: is more efficient to buy what you need from another vendor, or build it yourself.

In this case, the decision is easy: there isn’t another vendor that US automakers CAN buy a solution from (other than another huge infusion of cash from US taxpayers). That leaves the “build” option. Of course, if we are going to build US automakers from scratch, we have to address the question of “do we build from scratch, or do we try to rebuild whats already there”? this is the question that Obama is asking, and so far, the automakers haven’t come up with an answer that even begins to justify continuing to support the failed existing industry.

US automakers are too deeply embroiled in union politics, have too many years of bad management, and are simply too big to be able to react to the problems that they have created. By letting them fail, we will open the US market to new automakers. automakers that are not weighed down by years of poor management, bad contracts, and unrealistic agreements with unions and pensions. Yes, it will hurt. A lot. But only for a while. As new entities replace the dinosaurs, they will be able to produce cars that people want to buy, at prices that are competitive, and with workers that are fairly paid. Those new entities may be the successful foreign automakers, or they may be new US automakers, or (most likely) a combination of the two.

We faced the same crisis with steelworkers when US steel companies were in the same bind (unrealistic pensions, unrealistic unions, and better/faster/cheaper overseas competition). We went through some tough times, but recovered. The US auto industry is in the same state, and unless they are willing (and capable, which is doubtful) of to make drastic changes, they are destined to fail. the only question is: How much more taxpayer are we going to flush down the toilet before we accept that failure is unavoidable?


Automaker bailout and unions

The economic bailout has been a major topic of call-in “news” shows or a bit now. I recently heard a very interesting set of opinions voiced by a worker int eh automotive industry, at one of the companies receiving a large amount of your tax dollars.

His opinion (summarized drastically) went something like this:

  • It is unfair and morally wrong to reduce any benefits/pay/compensation to automotive workers.
  • If the automakers are forced into chapter 11 (bankruptcy) the “executives” will make out like bandits, and the “workers” will get screwed.
  • Chapter 11 would be used by management to screw the unions, who can do no wrong, and exist purely to protect the workers.
  • Any automotive (or other manufacturing company) that sends jobs overseas is Evil, and they are really the ones causing the economic failure.

Now, I have to admit that some of these ideas made me think. I particularly had to ponder the idea that autoworkers and auto unions are the victims of the failure of hte US auto industry. After a lot of thought, I decided to blog as bit. First, some family history: much of my extended family live in the Detroit area, and have worked in the auto industry for generations. Because my immediate family does NOT live/work in the Detroit area, I only know a few autoworkers very well, but their work experiences are worth reviewing. One cousin has spent his entire working career at a car plant on the assembly line – sort of.  The “sort of” bit is the important part.

There have been a number of times when the plan experienced a slow down. That means that the plant was producing more cars than could be sold, so the production was “slowed down”. This is accomplished by reducing the numbers of people working the assembly line, and allowing the line to stand idle for some shifts. Now, in a normal company, this would be accomplished by laying off the workers for that shift. Unfortunate for the workers, but (in theory) when business picks up again, the workers are re-hired. Of course, Unions don’t like this – laid off workers don’t pay union dues. So, instead, when my cousin’s assembly line was “slowed down”, the union contract required that he was simply told not to come to work, but was still paid, still received full benefits, and (of course) continued to pay his union dues. The real kicker is that this situation lasted for almost 5 years. Ever wonder why US made cars are so expensive?

Of course, this type of Union hackage doesn’t fly anymore. After all, that sort of fiscal stupidity is what is driving US automakers into insolvency. Now, instead of being told to stay home, he actually has to come to work. Where he spends the day in an “on-call” room waiting for something to do.  Because he’s actually at the plant, he must be working, right? Turns out that “working” means reading the paper, playing cards, and sleeping. Mostly sleeping because he figured that there was no reason to not pick up another job and get paid to sleep at the car plant…. Did I mention that he owns a huge ranch outside of Detroit, lives   fully-paid for mansion, and buys a new car every year? Tough times for those union autoworkers, eh?

Which bring us to another concept that I have a hard time with: overseas factories.  Of course, unions hate these because those overseas workers don’t pay union dues. Of course, those overseas workers also recognize that assembly line workers are pretty much dime-a-dozen, and eminently replaceable. Kinda like the kid that flips burgers at McDonalds.The big difference between the burger-flipper and the automotive Assembly line worker is that the autoworkers have a union, and the union has managed to convince folks that assembly line workers deserve pay comparable to the engineers that design the cars. Of course, the Engineers are highly educated and trained professionals that are not dime-a-dozen and easily replaceable, but hey, this is the USA. Everyone is equal, so that guy that dropped out of high school and got a job pushing buttons on a machine deserves the same lifestyle and salary as the guy that spent years acquiring the skills needed to figure out how to engineer an airbag.

The simple reality is that the decisions we make early in life DO impact our later lives. Deciding to punt school and go work in a factory is accepting the fact that your earning potential should be alot less than the kid that goes to college and acquires some marketable skills. In the countries that we export our factory work to, the people that work in the factories KNOW that they accepting a job that will leave then in the lower echelons of society. In many cases, this is a step up, in many cases, it is simply staying where their parents were, and in many cases, it is a step down. Being a factory worker means that they WON’T be buying a nice, big house, they won’t be buying new cars on a regular basis, and will (in all likelihood) be living on the economic edge for the rest of their lives. Nice? definitely not. But it does make it possible to manufacture goods at costs that make sure they are still affordable.

Here, where an assembly line worker expects (and demands) that they make a salary comparable to the highly skilled employee, we are simply guaranteeing that the products produced will be too expensive to be able to compete with the companies that outsource overseas. We have a couple of simple choices:

  1. Accept the fact that manufacturing jobs are low-paying, and that the people who end up in those jobs (for whatever reason) are destined to not live the “American dream”.
  2. Accept the fact that the only way to economically produce goods is to ship the production facilities overseas to places where labor is cheap.
  3. Accept the fact that goods produced in the USA are simply a lot more expensive, and attempt to apply tariffs or other devices to make up for our inability to compete economically.

Of course, an corollary of all of these is recognizing that unions have followed the path of all organizations. They no longer work to help and support the workers, the work simply to support themselves. Like all bureaucracies, they have matured to the point where the original reason for their existence is a weak side note to their efforts to ensure their continued existence and growth. The only people the unions truly benefit are the union leaders…