Senior Editor, Edmunds' AutoObserver.com
Monday, March 30, 2009 1:00 PM
The Obama administration has forced the longtime head of General Motors to resign and said yesterday that it would withhold additional federal aid to the auto industry unless the ailing companies undertake changes they so far have been unwilling or unable to make.
The administration effectively rejected as untenable the business plans that GM and Chrysler had submitted to restructure their companies, saying that neither had fulfilled the terms of the federal loans the companies received in December.
Bill Visnic, contributing editor to EdmundsAutoObserver.com, a consumer-focused automotive Web site, was online Monday, March 30, at 1 p.m. ET to discuss the forced resignation of GM chief G. Richard Wagoner Jr. and President Obama's warning to the auto industry.
Bill Visnic: Hello, I'm Bill Visnic, senior editor at Edmunds AutoObserver, a weblog that is part of the Edmunds.com family of websites.
AutoObserver provides news and analysis about the business operations of the auto industry, as well as commentary about the business and its products and technology.
Prior to Edmunds, I was the senior technical editor at Ward's Automotive Group. I have covered the auto industry as a journalist and writer for nearly 20 years.
Flint Hill, Va.: I voted for Obama and am still very hopeful for the administration and the country. BUT I think it's outrageous of him to essentially fire an employee of a private business, and then not let him access his retirement funds, even if the company is getting help from the government. Does this administration ever consider the precedents their actions are setting? Some of them, such as this one, are extremely frightening to me as a private citizen.
Bill Visnic: I hadn't seen the detail about denying Rick Wagoner access to his retirement funds.
I do believe Mr. Wagoner has a bank vault full of GM stock options that at this moment are worthless because the price of GM stock is far, far below that at which his options would be exercisable.
Seattle, Wash.: A post on Robert Barnes board wrote "pay their employees less to match the wages of Toyota and Honda employees: This is a myth. T and H workers take home slightly more and when you consider better GM benefits, it's a wash. The difference is that GM has zillions of retirees it has to support while T and H have none.
BTW, labor costs are 10 percent of the price of a car. If you cut the compensations of GM's workers and retirees in half, you cut the price by 5 percent. Chump change."
Is this true! If so what is the government looking for from labor?
Bill Visnic: "Pay" is a matter of what you're considering.
In the case of the Detroit automakers, the figure you often see of $60-$65 per hour usually is based on wages plus costs, which includes health care, pension, etc.
But in two ways, Detroit essentially has chopped this down to parity with its "transplant" Japanese and European rivals that operate assembly plants in the U.S.
1. New contract with UAW agrees to a "two-tier" wage system that pays new employees an average of about $14 per hour. That's definitely in line with foreign, non-union wages.
2. That contract also provides for a Voluntary Employee Benefit Association plan, or VEBA, that "transfers" the obligation of retiree health care -- a giant cost for the automakers -- to the union. GM, Ford and Chrysler are supposed to pay some $55 BILLION into this fund, eliminating their future obligation to fund retiree health care.
Once these measures are fully instituted, the labor "cost" gap between union and non-union auto industry labor will basically be equal. So it's difficult to imagine what more anybody expects labor to give up.
Dale City, Va.: Much is made of the employee benefits of GM, and how these costs have driven the company into bankruptcy. What percentage of the cost of a GM car is attributed to the cost (income, benefits, payroll taxes) of the workers at GM, not management. I heard it was only 10 percent of the cost of the car. Is the problem that management never funded the retirement programs as they occurred?
Bill Visnic: Yes, the percentage of the cost to make a vehicle attributable to labor typically is assumed to be around 8-10 percent.
That's far from a serious problem, in my opinion. The real problem is there's too much labor in relation to the volume of vehicles the car companies are selling.
That's why each of the Detroit Three companies is closing plants and laying off workers -- for several years, sales, for the most part, have not justified anything near the number of assembly plants and workers the Detroit Three have had in operation. It's the same as if you owned a business that needed maybe 15 employees in its good years, but sales have dropped and now you need only five - yet you keep paying the other 10 employees even though you don't need their help.
That is the real problem with labor costs at the moment.
Alexandria, Va.: Wagoner presided over a real resurgence in the quality and desirability of GM's product, even if the public didn't seem to appreciate that enough. With his ouster and the retirement of Bob Lutz, the company is back in the hands of finance guys -- the same sort who ran the company in the bad old days. Is the "new" GM going to make cars anybody wants?
Bill Visnic: Great question.
I guess for right now, the product will have to take care of itself -- the current problem is one mainly for the finance guys.
But you're right to worry about the long-term effect of taking one's eye off the product. I think it will be vital for GM to promote somebody in the company to be the next product champion -- the "car guy."
Question is whether GM has one. We hear rumors...
Gaithersburg, Md.: Here's my problem: We can be tough on an industry that made mistakes over the years, but which produces something tangible, something American, that needs help, but we can't bring ourselves to being tough guys on a vapor industry, one in which it's employees live in a world of expense accounts, bonuses that line workers couldn't imagine, live lifestyles that make fashion magazines, a world of Rolexes and Mont Blancs and, oh yes, the best of foreign cars. What am I missing?
Bill Visnic: You're absolutely correct, and not missing anything.
I think that's why President Obama said today it's essential to maintain and nurture the auto industry -- it's what helped create and sustain the nation's middle class. End of debate.
Falls Church, Va.: How is the forced resignation of the GM head different from Truman's unconstitutional seizure of the steel industry?
On a more practical level, doesn't this mean that the Obama administration now owns all of the auto industry's problem's? That GM's failure is now Obama's failure?
Bill Visnic: On the contrary, I think the Obama Admin. is doing what it thinks is possible to get away from the auto industry's problems - as quickly as possible!
If these businesses can be straightened-out, it will go a long way towards not only improving the national economy but also enhancing the world's perception of the U.S.'s status as a manufacturing and economic superpower.
But you might be right: for now, the auto-industry's problems appear to be President Obama's problems, too.
Raleigh, N.C.: I'm trying to get some facts here. Let's say, for the sake of argument, that tomorrow the Congress passed a government health-care plan that took health care off of companies' books. A single payer plan, enhanced Medicaid, whatever. And Obama signed it tomorrow afternoon. How would that affect the competitiveness of Detroit vs. the South U.S. foreign companies vs. foreign manufacturers?
Bill Visnic: Yes, but only in sense of how such a system would apply to retired employees, as I understand your scenario.
The big cost that GM, Ford and Chrysler have is their payment of the TOTAL health-care costs for their hundreds of thousands of retirees.
Toyota, Honda, Nissan have practically no retirees, so no such costs. That's why the Detroit automakers established a VEBA fund (in the 2007 labor contract with the UAW) -- the VEBA is targeted to take those retiree health-care costs off the books in 2011.
Athens, Ga.: I see a lot of comments this morning about how Obama is a raving socialist for his actions today in the auto bailout. Not mentioned is how the bond holders, unions, dealers and auto management have been engaging in a game of chicken, trying to use their well known and well practiced bargaining skills to keep from losing what they gained in the past. Has Obama sent a shot across their bow saying enough is enough? This is looking like Reagan's air traffic controller moment to me. Do you agree?
Bill Visnic: Yep, I agree.
Either way it plays out, somebody's going to get the short end of the stick. The question is how much stick do you want to keep.
If bondholders agree to a fraction of the real value, they view it as getting the shaft.
But what is bankruptcy going to be -- but the ultimate "shaft" for all parties to which these companies have obligations? That's why Obama is saying, "get to the bargaining table or things could be a whole lot worse."
Gaithersburg, Md.: What amount of a GM's employees pay is from benefits (health care, pension, etc...) that companies in other countries don't have to pay because their government covers it?
Bill Visnic: I'm afraid I don't know the exact figure, but it's a substantial portion.
In most other industrialized nations, there is at least some degree of "social" cover for the kind of liabilities you mention, particularly health care.
Anonymous: Was the GM chief a sacrificial lamb or was there a specific reason that he was viewed as underperforming ? Are there more heads to roll?
Bill Visnic: "Why" Wagoner was asked to resign is a matter for speculation, but it's probably equal parts sacrificial lamb and inability to effectively guide the company through difficult times.
Wagoner has many good attributes and reputedly a good managerial style. But I would not argue with a point of view that says he must go if, for nothing else, GM's 7 or more points of market-share decline during his time as CEO.
I think the finer points of his decisions as CEO soon will be discussed (check out Business Week or other business-oriented publications), but I believe his tenure will be judged as "mixed," with examples of solid decisions balanced by a full equal amount of management and strategy gaffes -- all this judgment with the benefit of hindsight, of course!
Irvington, N.J.: Can the GM brands (Chevy, Cadillac, Saturn, GMC) function as individual companies? if GM was broken up would that create more competition in the global auto industry?
Bill Visnic: No, I don't believe GM's brands could function at all as individual companies.
Relative sales would be very small and the cost of establishing dealer/parts/distribution networks is enormous, making it almost impossible for any kind of genuine and "clean" break from the mothership.
Woodbridge, Va.: Why isn't the Obama administration forcing the ouster of the CEOs at the banks that are "too big to fail"? After all, we do own a majority of AIG, Citibank's gotten money, B of A, etc. -- but those CEOs seem to be fine.
Bill Visnic: Those guys had the luck of getting money either before the new administration took control or before the public outrage reached its current proportions.
Now, if you wanna give money to a "failed" company, somebody's head has to roll.
I think some of the financial-sector CEOs are far from safe, though. You may begin to see some ousters now that the President has proven nobody should be untouchable or "too valuable to fire."
Alexandria, Va.: What do you think caused Pres. Obama to say he thought GM has a strong possibility for survival but a few weeks ago its own internal auditors said there was doubt it could survive as an ongoing concern? Overly optimistic for the markets or true?
Bill Visnic: It's often difficult to read between the lines of statements such as the GM auditors made -- just as it now is for the President's statements.
I think GM has the manufacturing economies, product pipeline and a strong-enough overall organization to at least survive, and that's what the President meant.
The auditors, however, may have spoken the truth in the narrow way in which they were tasked to evaluate the company. And there may have been some bluster in the statement, too.
Washington, D.C.: You said: In the case of the Detroit automakers, the figure you often see of $60-$65 per hour usually is based on wages plus costs, which includes health care, pension, etc.
I say: Please, please, please stop quoting this very incorrect figure. The average for current employees of the Big Three, including benefits, is actually closer to $25-30 per hour. You only get to $60-65 per hour if you average in the auto industry's obligations to its current retirees. In other words, you are taking the employer's obligations to its current and former workforce in order to come up with the average wage & benefits of its current workforce. That leads to a false, highly inflated wage average.
You can be forgiven for the mistake, though, since much of the media has been repeating the same numbers since they were given by an auto exec at a hearing a few months ago. It has been thoroughly, and reliably, debunked.
Bill Visnic: Thanks for the clarification - but that's what I meant, just forgot to add "retiree."
Trying to answer a lot of questions quickly. I'm glad you're reminding the board about the figures, though, because you're correct. The big, inflated figure of $65 that critics like to drag around is indeed attributable mainly to adding in retiree benefits.
Re response to Dale City: If I read you correctly the problem is that people just aren't buying enough of the product. Is this industry-wide or just U.S. automakers? My understanding is that most companies are experiencing this.
Bill Visnic: Check the sales of Toyota, Honda, just about everybody. They're awful.
And all those companies, and more, are making drastic business decisions and cutbacks, too.
And to answer another person posting here: yes, the problem essentially is similar in Europe. The wrecked global economy has stomped out demand for autos, and the industry had grown too large to deal with such a heavy drop in global sales.
Wrong Mix?: We're told GM had the wrong mix of products. Interesting.
So my question is, if five years ago it started selling fewer trucks/SUVs and more hybrids, would it have been out of business in 2007 or 2006?
Bill Visnic: Ha, that's not too far from the truth.
When gasoline was $4 a gallon, some of the criticism of product mix could stick, but now, not so much.
But I don't think it can be ignored that the Detroit automakers slanted too much of their product-development investments and marketing to large pickups and SUVs, chasing the outsized profits those vehicles delivered.
It would have been more "responsible" and forward-looking to ensure some balance in the product-development investment -- particularly in the notoriously cyclical auto industry, where consumer tastes and other market factors can make demand for certain types of vehicles very transient.
Hampton, Va.: You say GM pays its workers at rough parity with Toyota and Honda, and you're not sure what else anyone could expect them to give up.
I totally disagree. If you look at the labor components of cars, GM cars cost a lot more to build than their peers. Why? Because in addition to their slightly higher union wages, the unions also insist on a bunch of unproductive stewards in every factory. If you roll their costs in with the hourly union laborers, you get the true picture -- and it ain't pretty.
Anyone with access to their annual reports knows you are lying about union vs. non-union labor costs. And that's BEFORE their over-fat benefits.
Bill Visnic: The broad labor-cost figures are available from a number of independent sources. I encourage you to seek those independent reports rather than annual reports or other potentially biased sources.
Minnesota: Just to be a little different. Weren't Ford and GM very well run until gas cost $4.00/gallon? They made lots of money selling high profit vehicles (SUV's). Their biggest problem seems to me to have ignored a part of the business that generated smaller profits? Isn't that "The American Way"
Bill Visnic: You pretty much got it. See answer to another post.
Olney, Md.: "533 USED HONDAS under $10,000." I saw this ad when I was clicking on this link to post.
Maybe this says it all about the dire situation of the U.S. auto industry.
While Rick was a nice guy, GM needs new leadership now. Whether GM is split into two, a solid gold GM with Chevy, GMC, Caddy, and Buick and a toxic GM with what's left, or some other scenario, GM needs to be reorganized and gutted before it can efficiently spend the taxpayer's money.
I own Chevys and my dad owned Chevys. We like them, and want GM to succeed. But things have to change. Think Genesis, that's what Buick has to strive for. Think Sonata, that's what Malibu has to strive for. Think Nano, that's what Cruze has to strive for, Think Prius, that's what the new Chevy hybrids have to strive for.
And besides striving, they have to be made better and cheaper. That's what it's going to take to turn the U.S. auto industry around.
Am I correct? Weeding was done in the industry for ten years from the 1950's into the 1960's. Plenty of consolidation, Hudson Rambler and Jeep into American Motors, Packard merging with Studebaker, later folding. Likewise, various model purges also took place, as examples, DeSoto and Edsel were ditched.
We got over production on a world scale, and consolidation is the only way to save the American automobile industry.
Bill Visnic: Thank you. That's exactly correct. There have been several "rounds" of consolidation in this industry. And this one won't be the last.
I do believe Mr. Wagoner has a bank vault full of GM stock options that at this moment are worthless : But, but... in a few years they might be worth a fortune again. Isn't this like people complaining that their mortgage is worth more than their house -- yet for those who can hang on to their house till its value rises back up, or those who can hold on to their 401(k) portfolios, isn't this just a paper blip?
Bill Visnic: Absolutely.
Stock options are just that -- a "bet" that if you manage correctly (or wait it out) and the stock price rises above the price of your options, you might reap sizeable gains.
That's proper "reward" for management, always has been, in my opinion: incentivize management to create long-term growth and prosperity for the company.
Washington, D.C.: While everyone is focusing on Wagoner leaving on GM, I am far more interested in what is going on with Chrysler (it seems the proposed plan indicates the government thinks GM can survive, but that Chrysler can't). How much of Chrysler's problem stems from the company essentially divorcing itself from its financial arm a few years ago?
Bill Visnic: Most of Chrysler's current issues come from a relatively small size, narrow bandwidth of desirable products and over-reliance on large pickups and SUVs.
The size thing also hurts because it has no real presence in markets outside of the U.S., thus no smaller, fuel-efficient models to adapt for this market -- and thus the need for a tie-up with Fiat.
Washington, D.C.: Whither Ford?
Will they be able to come through this without any government assistance or related restrictions?
Bill Visnic: If auto sales don't pick up in the next few months, doubtful.
Nobody's got enough money coming in. Without revenue, Ford likely will be hurting too, sooner than later.
Pittsburgh, Pa.: Isn't the real question why the GM board of directors didn't fire Wagoner already, or would have soon?
Bill Visnic: Yep, that question's asked all the time.
It now appears a lot of the GM board may be shown the door, too. It's the board's duty to ensure management's doing its job. You could argue GM's board wasn't doing its job, then, right?
washingtonpost.com: This concludes our discussion today with Bill Visnic. Thank you for joining in.
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