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Monday, October 27, 2008

Could automakers take same route as airlines?

When the going gets tough in a particular industry, the companies involved go to the government. When competitiveness has been lost, the non-competitive want to dump their pension plans.

This means they march to the Pension Benefit Guaranty Corporation, known as the PBGC.

Back around 2002 it was the steel industry. The following companies went to the PBGC to unload their pension plan responsibilities: Bethlehem Steel (one of the biggest plans to be terminated), National Steel, Northwestern Steel and Wire, Weirton Steel, Kaiser Steel and more. Many of these companies declared bankruptcy and shut down plants. Whatever was still valuable was sold off or merged into the remaining bigger, stronger steel companies that were still standing.

More recently, the airlines pulled a similar move: United Airlines, TWA, Aloha Airlines and US Airways all terminated their plans and turned them over to the PBGC. The difference in this case is that some of the companies had no intention of closing their doors for good. They took the descent into bankruptcy as an opportunity to trim down, shed liabilities and come back to fight another day.

As the automakers go to Washington to beg for funding for mergers that may or may not make sense, it is only a matter of time before the most wounded among them begins to evaluate the strategy the steel companies and airlines followed: declare bankruptcy and terminate the pension plan, allowing it to be taken over by the PBGC. Emerge from bankruptcy without the onerous and expensive need to support the thousands of retirees that increase the cost of each car produced. Instantly be more competitive with the Japanese and South Korean car companies.

According to the Wall Street Journal, GM alone provides health care and pensions for 480,000 retirees. This will cost the company over $64 billion between 2009 and 2017. In 2005, pension costs were estimated to add $700 to the cost of each car produced with health care costs adding another $1500. With the horrific performance of the stock market this year, the pension fund is projected to be underfunded by as much as $18 billion by the end of 2008.

There are already plans for GM to move their health care responsibilities to a trust managed by the UAW. It will cost them billions of dollars to do so and still they will remain uncompetitive. If GM can't find an entity that supports the merger with Chrysler, look for the company to fly the same route that the airlines took: straight to the PBGC.

Disclosure: none

1 comment:

knappador said...

I see the major problem of GM being rooted in their pursuance of SUV's via the tax breaks that were offered for SUV's up to 80k. Basically the big three couldn't compete in small cars because of the huge labor/pension cost per vehicle, but were okay whenever this cost was spread out over a larger vehicle. The underlying mistep hasn't been corrected with new products, but it also wouldn't be viable unless labor costs can be brought down. Basically it doesn't matter how good GM's small cars are because the margins will be wiped out by the higher labor costs.

Also, GM has gone with the Honda model of production, which is slightly slower to respond and higher in setup costs than the Toyota model. GM needs to get more fleet in manufacturing, more lean on pension load, and more focused on competition in smaller vehicles.

World oil production is only going to continue getting outpaced by growth in demand. This is going to produce more and more SUV-like contractions in spending on big cars and more spending on more economical transportation as time goes on. The general trend is set. I believe you're right that GM has no way to survive with its current UAW burden. GM is stuck between large vehicle market contraction and small vehicle low margins.

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