http://www.latimes.com/business/printedition/la-fi-gm24apr24,1,6722875.story?coll=la-headlines-pe-business
Benefit Burden Puts GM in Slow Lane
The automaker
has ample financial reserves for now. But CEO Rick Wagoner must find a
way to cut pension obligations and retiree health costs.
By John O'Dell
Times Staff Writer
April 24, 2005
Is
General Motors Corp. another Social Security crisis in the making?
As Washington lawmakers debate what to do about the underfunded federal
retirement program, the Detroit automaker is grappling with its own
giant pension and healthcare mess.
And as with Social Security, fixing GM won't be quick or easy.
The problem, in a nutshell, is this: GM doesn't sell enough cars and
trucks to justify its current production capacity. Although closing
more plants and laying off more workers would save some money, it
wouldn't ease the company's benefit burden, which totals nearly $150
billion.
GM Chief Executive Rick Wagoner believes the company
can manage its way out of trouble, but generations of GM executives
have failed to stem a steady decline in market share, which fell to
25.8% in this year's first quarter from 42.3% in 1984. Now, some
financial analysts are even willing to talk about Chapter 11 bankruptcy
as a radical move to buttress GM's eroding finances.
If the
company sought bankruptcy protection, "contracts with the union and
their existing healthcare agreements could be renegotiated, they could
offload their pension obligations [onto the federal government] and
they could get rid of fixed costs," said Paul Newton, automotive
analyst in the London office of economic consulting firm Global Insight.
Wagoner and other company executives dismiss such talk as nonsense, but
that possibility is of prime concern to many of GM's 160,000 U.S.
workers and 440,000 pensioners and their dependents.
Outside a
GM plant in Pontiac, Mich., Fred Spearing, who builds prototype
vehicles, said: "Everybody is walking on eggshells right now out of
fear they will be laid off or even lose their retirement" benefits.
Like the Social Security system, GM has ample financial reserves — for
now. The company has $19.8 billion in cash reserves, more than enough
to fund this year's $5.5 billion in healthcare costs.
But
Wagoner, who declined to be interviewed, must find a way to reduce the
company's so-called legacy costs: $87 billion in pension obligations
and $60 billion in retiree healthcare benefits. He has said that
healthcare costs have reached a "crisis" stage and that GM needs to
talk candidly with the United Auto Workers about finding a solution;
the company also has suggested reducing other benefits.
GM says
it has 2.5 retired workers for every 1 active employee — a ratio much
greater than the forecast for the Social Security program when baby
boomers have retired and there will be an estimated 1 beneficiary for
every 2.1 active workers.
All told, Wagoner said, these costs add $1,500 to the price of each GM vehicle; that compares with about $300 for
Toyota Motor Corp. in this country.
GM needs a considerable amount of outside help, especially from the UAW
— which represents 120,000 hourly GM workers in the United States — to
make a dent in its liabilities, analysts say. For example, the company
would save more than $900 million a year if its hourly employees paid
for the same share of healthcare costs as do its 40,000 salaried
workers, said John Devine, the company's chief financial officer.
UAW officials have said there is room within the existing contract to
deal with those issues without having to reopen the accord. A new UAW
contract won't be negotiated until 2007.
The two sides are
talking: The first session on healthcare issues was held this month.
Wagoner has put Gary Cowger, 57, formerly president of GM North
America, in charge of working with the union.
General Motors
needs "to have a discussion with the UAW about giving up some benefits
for current retirees so there will be something in the kitty to pay for
future retirees who are current workers," said Maryann Keller, a former
Wall Street automotive analyst who runs her own consulting firm. "Short
of that, no one will be getting anything in the future."
GM's
problems today are the cumulative effect of decades of mismanagement
that it has fallen on Wagoner to repair, industry analysts say.
"GM's legacy costs are largely the result of shortsighted thinking
going back 40 or 50 years," said Gerald C. Meyers, a business professor
at the University of Michigan. After World War II, workers demanded
better wages, and automakers "didn't want to pay it out directly, so
they decided to give their workers a lot of benefits instead," he said.
The company's slide began with the 1973 Arab oil embargo and long lines
at the gas pumps. People started buying Japanese economy cars, and the
federal government began demanding improved emissions and more safety
features. GM soon was spending its cash on smog controls and better
bumpers.
In the 1980s, then-CEO Roger Smith started looking
outside the auto arena for profit. He had "the wild idea of
transforming GM into something different than an auto company," Meyers
said. "He got them into electronic data processing and satellite
television and took his eye off the ball."
GM posted a record
$23-billion loss in 1992. Smith had retired two years earlier, and a
fed-up board ousted his replacement, Robert Stempel, and asked longtime
executive John Smith Jr. to take over. He was followed by Wagoner.
Aside from shrinking GM's liabilities, Wagoner's other immediate
challenge is to sell more cars and trucks in North America, which
accounts for about 75% of its global revenue and 60% of its vehicle
sales.
Since 1931, GM has held the title of the world's largest
automaker, but Toyota is poised to overtake it in the next five years.
Meanwhile, in the United States — the biggest auto market — GM
continues to lose ground. Despite the automaker's introduction of 17
models this year, most analysts predict a further sales decline for GM,
while import brands continue to grow.
Last week GM posted a
$1.1-billion loss because of declining North American sales and soaring
healthcare costs, its worst quarter since 1992. The company did not
offer guidance for its results for the rest of the year.
Not
surprisingly, GM's stock has traded near a 13-year low, closing Friday
at $26.74, up 73 cents, on the New York Stock Exchange.
To try
to turn things around, Wagoner took charge of GM's unprofitable North
American auto operations a few weeks ago. The 52-year-old executive
believes that adding promising new models, restructuring the company
and trimming healthcare costs will spark a rebound.
After
decades of downsizing — GM has closed five plants in the United States
and cut its automotive employment by 40% since 1992 — the company still
has the manufacturing capacity to supply 35% of the market, which some
analysts say is too much. "It ought to shrink itself to 25%," said auto
market researcher Daniel Gorrell of La Jolla-based Strategic Vision
Inc.
After eliminating Oldsmobile last year, GM has eight
brands in the United States: Chevrolet, GMC, Cadillac, Buick, Pontiac,
Saturn, Saab and Hummer. Critics say the company is still burdened with
too many average vehicles to command consumer loyalty.
GM
Vice Chairman Bob Lutz recently described Pontiac and Buick as
"damaged" units and said the company would consider eliminating another
brand if sales didn't pick up. He later amended his remark to say the
company might cut various poor-selling models rather than an entire
brand.
Between 1994 and 2004, Pontiac's volume fell 23% and
Buick's sales plunged 43%. Buick is GM's oldest brand, with a median
buyer age of 70; Pontiac is aimed at younger customers and has a median
buyer age of 45. The two brands have languished because they were
saddled with outdated models, analysts say.
"They haven't
been taking many risks" in product design, Bruce Belzowski, an auto
analyst at the University of Michigan, said of GM.
The company
hopes to stem the slide with a new lineup. But its Buick LaCrosse,
Pontiac G6 and Chevrolet Cobalt have some of the highest buyer
incentives of any new models, reducing their profit margins. And sales
of GM's most profitable offerings — sport utility vehicles such as the
Chevy Suburban and the GMC Tahoe — are slowing as gas prices remain
aloft.
The company has relied heavily on rebates, low-interest
financing and discount pricing to lure buyers. GM spent more than
$3,000 per vehicle on incentives last year, the highest in the
industry. All of GM's profit in 2004 came from GMAC, its financing and
insurance arm.
Further, as Toyota and
Honda Motor Co.
created buzz with their gas-stingy hybrid cars, GM's first hybrid — a
Chevy Silverado pickup — was lampooned by some critics for getting only
two extra miles per gallon.
Instead of putting money into the
development of fuel-efficient, low-emission engines years ago, GM spent
it on a misguided expansion in Europe and Japan, said Peter Morici, a
business professor at the University of Maryland. As a result, GM now
has to buy 60,000 low-emission six-cylinder engines a year from Honda
for its Saturn Vue SUV.
Wagoner has acknowledged that GM allotted too little effort to new products in the past but says that's changing.
The 73-year-old Lutz, credited with a string of hit products when he
was president of Chrysler Corp. in the 1990s, was hired out of
retirement in 2001 to pump up GM's product strategy. The company is
"taking the necessary steps to right this ship," Lutz said during the
New York Auto Show in late March.
Lutz-influenced designs will
start appearing with the two-seat Pontiac Solstice roadster this year
and a sister model, the Saturn Sky, in 2006. New GM pickups and larger
SUVs will follow next year and in 2007.
As General Motors
puts its hope in future models to get back its momentum, some of the
rank and file remain worried about the present.
On a break from
her job assembling prototype vehicles at the factory in Pontiac, Jill
Christian summed up her employer's plight: "We are no longer the
innovator; we're the albatross."
*
Times staff writer Jerry Hirsch contributed to this report from Pontiac, Mich.
