You Think YOU’VE Got Economic Problems

Wanna trade places with the Chairman and CEO of GM, Rick Wagoner?

Imagine that this mess is now your problem:

Worries about whether GM has enough cash to survive caused the company’s stock to plunge last week to its lowest level since 1951. On Monday, GM’s battered shares rose 33% or $1.62 to $6.51 in 4 p.m. composite trading on the New York Stock Exchange. A year ago the stock traded for $43.20.

In a move that promises to add pressure to GM’s short-term outlook, GMAC LLC — the lending arm that finances a bulk of buyers purchasing GM vehicles — said Monday that it is taking a more conservative lending stance in financing, limiting purchase contracts to customers with credit scores of 700 and above. The median score of Americans is 720.

[…]

In June, GM said it intended to close four truck factories in total, including plants in Oshawa, Ontario, and Toluca, Mexico, as well as the Janesville and Moraine operations. GM was consuming about $1 billion in cash a month in the second quarter. Analysts believe it is burning much more now because of production cutbacks in the third quarter and because the financial crisis has slowed auto sales dramatically.

Buckingham Research analyst Joseph Amaturo estimates GM burned through $5 billion in the third quarter. GM had about $21 billion in cash reserves at the June 30 end of the second quarter. Since it needs a minimum of $11 billion to $14 billion to run its operations, some analysts believe it risks running short of cash within 12 months if does not raise additional financing.

GM hasn’t yet said when it will report third quarter results. The company lost $15.5 billion in the second quarter.

Wow.

GM used to be the engine that ran the entire economy. But today, we’re watching it die, day by day.

One could make criticisms about the roles of union protectionism, or global markets, or car building, etc., in the ongoing disaster that is GM in today’s economy. And I’d be first in line to make many of those criticisms.

But even with all that, it’s a damn shame.

Millions of people have either worked at these plants, or worked at companies that supplied parts for them, or worked in the offices next to them.

Entire generations of families have lived and died in the towns where these plants and offices were located, by whatever accident placed them there. Places like Janesville, Wisconsin, which I’ve driven through many times.

Millions more people have been able to go to college and break out of the economic straitjacket their fathers worked in for forty or more years, due to the higher wages the unions were able to secure for the largely unskilled labor of their members. Unions have their faults, but helping multiple generations of unskilled laborers afford middle class homes, and send their offspring to college, wasn’t one of them.

GM is a piece of our social history.

But GM’s future — social, financial, or any other kind — isn’t looking too good.

Maybe the company doesn’t deserve to live on; economic math is brutal, and you don’t get credit for trying, like in some of our dippy schools.

Either way, it’s still a damn shame.

Folks of a certain age recall GM products of the 60s and early 70s with fondness. Pontiac GTO and Le Mans. Olds 442. Chevy Camaro and Impala. Many, many others. Big V8 motors + huge interiors + squishy suspensions + cool looks = awesome cars. And gas was like $.35 a gallon in 1970. What’s not to like?

Those days are so over.

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7 comments
  1. Mike said:

    Personally, I don’t think it’s a union issue so much as they simply make bad products that are expensive to manufacture. They took it for granted for so many years that Americans and others around the world would prefer their product to their Japanese competitors. Now that they’re finally taking things seriously, it’s almost too late. Perhaps only now, union issues prevent them from becoming more efficient.

    I’m not a big fan of unions either, but the past month has certainly left in question the idea of letting capitalism fly unhinged. I say that to mean that corporate execs of a corp as large as GM shouldn’t be left to decide the wages and benefits of employees on their own. They’ll be too selfish and greedy. Their needs to be a ‘checks and balances’.

    Can you even name a good GM product? The Chevy Silverado is good. I’ve always loved Cadillacs and I’m glad they’ve modernized, but the new style isn’t holding up well over time. Other than that, anything you like?

    Their reliability ratings are awful. If you need to hand out vehicles at 0% financing in order to sell, you’re in trouble. If I was Chevy, I’d hire as many execs away from Toyota as I could. That’s sad.

    Can you believe we’ve now nationalized our banking system?

  2. jb said:

    “bad products that are expensive to manufacture” is a nicer way of saying “union labor”. 😉

    More to it, obviously, but the entitlement of union leadership, demanding contract after contract that ignore economic realities, has been problematic for GM’s ability to compete in a very competitive, price-conscious market. I’d heard before that the costs of health plans for the union add $3,500 to the price of every car?

    That’s ridiculous, and for union leadership to fail to recognize what market they’re in, and insist on riding that train straight into economic ruin, there are only two explanations I can imagine: corruption, and idiocy. I’m going with corruption. Plus, union bosses keep their jobs, even when members get laid off, so there is a huge conflict of interest there.

  3. Mike said:

    JB, I’ve been in cars for awhile now. I don’t see GM products not selling because of price. They’re not selling because people don’t want them.

    ‘Bad products that are expensive to manufacture’. I meant that to say… we’re not talking about Q-Tips here. We’re talking about cars. After mortgages, they’re most people’s second biggest purchase in life. It’s expensive to manufacture with or without labor.

    Furthermore, Ford and GM build a ton of their vehicles in Mexico and Canada now and it doesn’t make a difference. Worldwide, they have plants in various other countries as well. Toyota is building a ton of their vehicles here. Last I knew, they were opening a major Tundra plant in San Antonio, TX. For all I know, it’s complete. Fairly soon, Toyota will even be manufacturing the Prius here, something that’s only been done in Japan ’til now. If you were to buy a Toyota, you’re either equally or more likely to be buying something ‘made in the USA’ than you are with a GM product. Toyota makes a mockery of virtually every other automaker on earth. They’re amazing. Their future competition is Korea. Kia/Hyundai is getting very good, very quickly.

    I don’t know what the various costs of labor and their health benefits/401K’s add to vehicles from various automakers. I don’t know what context to put that $3,500.00 number in. But, I do know that even if GM could make Cobalt’s, LaCrosse’s, Aveo’s, and Malibu’s for dirt cheap… people don’t want them.

    So, I agree with you on generally being anti-union. However, that would be far down on my list for reasons why GM is failing. If it weren’t for the Ford F-150 and the Chevy Silverado, both automakers would be in dire straights immediately. Those two vehicles are their lifelines. But, they’re in dire straights already, right?

  4. jb said:

    Back in 2006, GM offered the employee discount to customers, and their sales went up (don’t remember how much, but it was significant). So there is a price point at which customers decided the cars were worth it. And the amount of that discount was approximately $3000-$3500.

    So what this tells me is that those extra costs — which (I’ve read) are way higher than any non-U.S. car company, because our unions are stronger than other countries — were the factor that priced the GM cars out of the market. A simplification, yes.

    Some of the cars aren’t that bad. A friend of mine has an Impala, and it gets decent mileage and he likes it well enough. My son’s girlfriend has one too. I’d even think of buying one if I was in the market.

    Foreign car makers either use non-union labor or have different contracts with the union. Not sure which. Notice how all those U.S. plants for foreign cars are located in the South and West? That’s because those regions of the country are not union-friendly, and provide a much better climate for doing business, and are therefore much more attractive to a company looking to build. Jobs in general are growing only in Southern and Western states. States with strong union presense – Illinois, Ohio, Michigan, Wisconsin, Indiana, much of the northeast US — are not growing jobs, and haven’t been for a long time, because a strong union presence is a strong disincentive to job growth, and causes the economy to stagnate.

    Anyway, this is a deep and broad topic, and there is room for many interpretations. I’m just putting mine out there, but your points are valid as well.

    Hey, look at that, neither one of us called the other a mouth-breather! Imagine that! 😉

  5. jb said:

    Oh, and since you mention trucks, it is definitely true that GM and Ford both relied way too heavily on the high-profit SUV market to provide nearly their entire profit margin. So that was stupid. But given the union situation, and the price points of their cars, I’m not sure they had many other choices.

  6. Mike said:

    You make a really good point about union location. I believe Toyota, Hyundai, and MBZ all have their plants in the south and west, backing up your point. Obviously no business wants to set up shop in an area where unions are going to fight for all they can. I wasn’t sure if the Japanese plants have union labor or not. I know one Toyota plant is here in California. They make the Matrix which has a sister Pontiac model I think it is. I wonder how that works out labor union wise. I wonder if the American automakers are trying to link up at these plants incognito and get out of the midwest.

    Here, I just found a good article about this:

    http://www.edmunds.com/advice/buying/articles/119995/article.html

    I think you’re right that if American automakers are going to compete, it’s going to have to be with less union labor. That’s why they’re heading to Canada and Mexico. However, I also believe they’re in dire need of better design and engineering.

    It’s not just selling price. It’s also reliability. It’s not just what you pay now, but what you’ll have to pay on repairs later… or even another new car for that matter. It’s also the resale value of a vehicle. Toyota, Subaru, and Honda have the best reliability. That factors into price for the buyer as well. So does resale obviously. The American cars are dreadful in these capacities.

    Plus, there’s the technology part. Do you want an American navigation system in your car or Japanese? Where’s your TV from?

    The Americans simply have a steep hill to climb, including the labor issue.

    And yes, while you and I probably disagree on a great many political issues, we can discuss matters without rudeness. Obviously at my site I lash out in my share of name calling. But, I swear to you… and I’ve put this challenge to the ACB crowd many times… you won’t find one person I was rude to who wasn’t rude to me first. (Laughing) … it’s only my response to rudeness that’s in question! I have little tolerance for it. Well, really, I have just about none. Especially, when rudeness is coming from stathead mavens who think leadoff men and good catchers aren’t a priority. Or that any relief pitcher can close.

    Man, how ’bout them Rays! Though, I am sick of the Marlins, D-Backs, and now Rays perhaps? You know, those teams that have no fans but win the world series. I have to admit, I probably will be cheering for the Rays in the series if they hold on against Boston. I’m a sucker for the underdog… even though they’re hardly an underdog at this point. But, they were in last last year.

  7. jb said:

    Good points all. Especially about the quality and reliability of the Japanese models, they’re famous for that. Myself, I like German cars, which are also known for excellent engineering and build quality.

    In fact, I bought only American cars/trucks until 1995, when I bought my first German car (VW), and I haven’t bought anything but German and Swedish cars since. I like cars too, and I agree with your general point that the build quality and engineering of American cars is generally just not very good in comparison to Japanese, German, Swedish, and now even Korean cars. And those of us old enough to remember the 60s and early 70s, and the cheap Japanese cars from back then … my, how the world has changed. A total flip-flop.