Wednesday, November 23, 2005

GM’s Solution: Too Little, Too Late?

In response to losing more than $3.8 billion in the first 9 months of this year, GM, the world’s largest automaker, announced yesterday that it would eliminate 30,000 jobs by the end of 2008. This is not the first time the U.S. carmaker has taken a very visible, but potentially inadequate action.

In 1986, CEO Roger Smith announced that GM would close 11 plants and lay off 25,000 workers. And in 1991, GM said it would close 21 plants and lay off 75,000 workers. At the time CEO Stempel stated that, “ A leaner, more productive, more efficient General Motors will be ready to face the mid-1990s;” well, not really. Just as these actions were inadequate, GM’s current medicine will be insufficient to move the company to sustained profitability.
GM must first recognize that global competition has changed the economic landscape of the auto industry.

GM’s pay and employee benefit packages must be brought in-line with its global competitors. At this time, GM is saddled with an hourly pay rate, including healthcare costs, that exceeds $60 per hour. Japanese competitors spend less than half of that amount per hour. Furthermore, even when GM lays off workers, it is obligated to pay the workers. So the closures will save little in the short run. Only beyond 2008 will GM accrue any significant benefits from this down-sizing.

The real problem for GM is that each car includes approximately $1,500 of health insurance costs and the average worker’s salary is more than double their Japanese counterparts even after you subtract the cost of healthcare from the hourly rate. Not only are health insurance costs substantial for workers, GM spent $3.6 billion on retiree health care last year.
Over the past 10 years GM’s U.S. market share has fallen from roughly 32 percent to 26 percent. The current announced action will reduce GM’s market share further without a commensurate decline in costs. GM must obtain significant concessions from unions before it is truly on-path to a solid economic recovery.


1 comment:

Anonymous said...

"Ready to face the mid-1990s"? Good one!