What Ails GM

By George F. Will
Sunday, May 1, 2005

Who knew? Speculation about which welfare state will be the first to buckle under the strain of the pension and medical costs of aging populations usually focuses on European nations with declining birthrates and aging populations. Who knew the first to buckle would be General Motors, with Ford not far behind?

GM is a car and truck company -- for the 74th consecutive year, the world's largest -- and has revenue greater than Arizona's gross state product. But GM's stock price is down 45 percent from a year ago; its market capitalization is smaller than Harley-Davidson's. This is partly because GM is a welfare state.

In 2003 GM's pension fund needed an infusion from the largest corporate debt offering in history. And the cost of providing health coverage for 1.1 million GM workers, retirees and dependents is estimated to be $5.6 billion this year. Their coverage is enviable -- at most, small co-payments for visits to doctors and for pharmaceuticals but no deductibles or monthly premiums.

GM says health expenditures -- $1,525 per car produced; there is more health care than steel in a GM vehicle's price tag -- are one of the main reasons it lost $1.1 billion in the first quarter of 2005. Ford's profits fell 38 percent, and although Ford had forecast 2005 profits of $1.4 billion to $1.7 billion, it now probably will have a year's loss of $100 million to $200 million. All this while Toyota's sales are up 23 percent this year and Americans are buying cars and light trucks at a rate that would produce 2005 sales almost equal to the record of 17.4 million in 2000.

In 1962 half the cars sold in America were made by GM. Now its market share is roughly 25 percent. In 1999 the Big Three -- GM, Ford, Chrysler -- had a 71 percent market share. Their share is now 58 percent and falling. Twenty-three percent of those working for auto companies in North America now work for companies other than the Big Three, up from 14.6 percent just five years ago.

The Big Three have cut 130,394 North American hourly and salaried workers since 2000, while the "transplants" -- foreign automakers with American assembly plants -- have added 27,183. In the first quarter of 2005 the Big Three operated 64 assembly plants, down from 70 in five years, during which time the transplants' factories have increased from 19 to 23, with more coming.

GM says its health care burdens, negotiated with the United Auto Workers, put it at a $5 billion dis-

advantage against Toyota in the United States, because Japan's government, not Japanese employers, provides almost all health care in Japan. This reasoning could produce a push by much of corporate America for

the federal government to assume more health care costs. This would be done in the name of "leveling the playing field" to produce competitive "fairness."

But remember: Employer-provided health insurance is employee compensation. It became important during World War II, when there were wage controls and a shortage of workers. Because wages could not be bid up, companies competed for workers by offering the untaxed benefit of health care. If GM's $5.6 billion were given not as untaxed workers' compensation in the form of health care but as taxable cash compensation of equal after-tax value, it would cost GM substantially more than $5.6 billion. Which means that soon -- GM's UAW contract is up in 2007 -- GM's workers may have to give back a value of at least $1,500 a year.

However, GM will have to recognize that health care costs are not a comprehensive alibi for its woes. Its array of brands is too large and anachronistic: Will American buyers ever again regard Chevrolet, Pontiac, Buick and Cadillac as ascending rungs on a status ladder?

GM can still develop splendid cars: Today's Cadillacs may be the best American cars ever built. But every dollar GM spends on health care cannot be spent on developing cars -- hybrids, for example -- more enticing to buyers than some new offerings such as the Pontiac G6 and Buick LaCrosse.

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