Tuesday, March 10, 2009

The Decline and Fall of General Motors

By Douglas Kohn

There was a time when the saying “What’s good for GM is good for America” used to hold water. No longer. GM has been destroyed not by its inability to sell cars and adapt, but by Big Government and Big Labor. It has not been significantly undercut by foreign competition alone and the quality of GM and other American cars, though not up to par with Japan’s cars, are significantly better than most of the cars coming out of Europe or emerging car companies in India and China. GM fell because of mismanagement and labor unions, not subpar demand for its products.

In 1977, GM dug its own grave. It signed a contract with the American Auto Workers Union, guaranteeing full benefits to each employee for the rest of their life after retirement. Sounds like a good, fair deal for everyone but this was deeply flawed. It is not that GM should not pay generous pensions and benefits, it is that they essentially unilaterally lowered the retirement age. After only 30 years of working at GM, a retired worker was entitled to all these benefits and luxuries. This means that if someone began working out of high school at age 18, they could then retire at 48. First of all, why should GM’s retirement age be any lower than that of governments around the world? It is simply economically unfeasible.

The other reason that GM became unable to meet its costs is that the cost of healthcare in America skyrocketed in the last generation or so. It came to the point where roughly $2000 of every vehicle sold by GM went to pay health benefits of employees and pensioners.

If GM had had the proper foresight and not entered into these bogus contracts, it would have been hurt by the current recession but probably not forced to go to the government for a bailout. This would be in spite of a boom in oil prices.

How do I know this? Because in the last few years GM’s sales of cars were increasing until the beginning of the current recession. The American market was mostly saturated and GM was the market leader, but it was rapidly increasing its sales to developing countries. Nations in Latin America and Russia were rapidly increasing purchases of GM vehicles as their emerging middle classes gained a taste for SUVs.

Congressional Republicans like to point to Toyota and BMW as models of how car manufacturers should manage their businesses when producing in America. Fair enough. GM’s workers, including compensation, were being paid the equivalent of roughly $70 an hour. Toyota and other foreign car manufacturers were paying their workers approximately $37 an hour. All of this is understandable but completely ignores the fact that many states where foreign car manufacturers operate gave subsidies to those companies to open factories.

So consider this. Government intervention allowed those foreign car manufacturers to operate in America and create jobs. GM is essentially now requesting the same subsidy. I am not writing this piece to take a position on either the issue of subsidies or bailouts but simply wish to state the reason why GM collapsed and the circumstances of other car companies. Unions may have once been a good thing, but they have no place in 21st Century economies.

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