The Collapse of GM.
The creative destruction of General Motors continues, with news of a dramatic buyout offer to be extended to workers at GM and Delphi.

As you might expect, both the Detroit News and Detroit Free Press are running multiple articles on the recent developments.

What follows is a recap of the stories, with some commentary mixed in. There's not as much commentary as I would like, but here's the quick story: this has been a long-time coming. An oligopoly of employers (GM, Ford, Chrysler) and a monopoly of workers (the UAW) have, over the years, created a business climate that extracted superior returns (wages 69 percent higher than for the average for manufacturing jobs) that could not be sustained. A tax system that favors employer-paid health insurance and defined-benefit pension plans, along with environmental regulations (CAFE) pumped up industry costs. An inflexible labor policy delivered through a union contract lead to the absurdity of the "jobs bank," paying people to not work--and delaying the inevitable contraction of the labor force. Meanwhile, the rise of automotive manufacturing in Japan, Korea, and even Mexico have made the "good old days" of the 1950s unsustainable.

Create destructions, friends. The old regime is being destroyed, the new one is not yet created.


First, the Detroit News.

In Remaking GM: Plan is a bold step to solving Delphi puzzle, Daniel Howes offers praise for the company:

This poster child of automotive ineptitude, if the conventional wisdom is any guide, is doing anything but marking time.

What has the company done right lately? Redo its lineup; sold stakes in foreign companies (presumably to get cash and refocus corporate energy); cut white collar staffing; closed superfluous plants; got the UAW to agree to historic (though modest) concessions on health care, and now, offer a sweeping buyout plan.

Not bad for a bureaucracy derided as congenitally incompetent, unable to change or grasp how quickly the world is moving away from it. These look as much like the actions of a distressed company selling everything that isn't nailed down as they do a stressed company doing what it should have done long ago to fix the business.

He warns that the most dramatic change has yet to occur: a drastic reduction in wages at Delphi, GM's former in-house supplier.

The next [deal] will be bigger, tougher and more wrenching for all sides because they won't be giving away money to go away. They'll be taking money away to stay and do the same work for fewer dollars per hour in a post-bankruptcy Delphi. Big difference.

Automaker's downsizing aims to ensure survival points us to the numbers:

by offering a wide range of retirement and buyout options to its 113,000 hourly workers, GM can now move in earnest toward its goal of cutting 30,000 manufacturing jobs and shutting six assembly plants by 2008.

The plan, which could cost up to $4.6 billion, is a way to reduce costs at GM directly, and indirectly. Directly, by reducing headcount. Indirectly, by freeing up slots that could go to workers at Delphi. GM spun Delphi off a few years ago, but still has some financial obligations as a result.

Delphi showdown threatens gives the backstory alluded to above: it's not just headcount at GM that is the problem, it's the financial situation of its parts supplier. Delphi is in bankruptcy, and wants to cut costs dramatically:

The Troy-based supplier, which filed for bankruptcy in October, contends that the $27-per-hour wages inherited in its 1999 spin-off from GM have put the company at a competitive disadvantage with other U.S. suppliers, where wages are $13-$14 an hour.

Sending some of those jobs back to GM--a possibility in the various agreements to date--would save the company some dough. The GM buyout offer is extended to 13,000 Delphi workers, and 5,000 Delphi workers could "float back" to GM.

Oh yes, be sure to catch the line worker who is holding out for a buyout package of $300,000.

Buyout a mixed deal for UAW looks at the financial and political fallout to the union from industry shrinkage. Active membership is at 600,000, down from a peak of 1.6 million. To borrow an old phrase, what's good for GM is good for the UAW, and union leaders have come to recognize that.

Praise, caution greet deal is a "what do the workers" think piece. It points out that a large buyout could help some laid-off workers regain their status as active workers--though given the huge oversupply of labor, that is a questionable statement.

This article points out that some workers who would retire soon anyway--within 3 years--are going to get a nice bonus:

The chance for workers, on average, to be paid $2,900 a month to stay home and do what they want until they reach the 30-year mark will be attractive to many.

About the offers on the table gives the details:
[The] Special Attrition Program offers $35,000 to anyone who retires with at least 30 years of service.

...

Mutually Satisfactory Retirement : This is for employees at least 50 years old with 10 years or more of credited service.

...
Pre-retirement: A sliding payment scale allows workers with 27, 28 or 29 years of service to retire now and receive a monthly salary (between $2,800 and $2,900) until hitting the 30-year mark, then retiring.

Workers who agree to give up any claim to health care benefits will receive cash payouts. Their pension rights will be unchanged.

10 or more years of service: $140,000
less than 10 years: $70,000

For some workers, this could be a very good deal.


To take the deal or not to take the deal: That is the question is a decent rundown of the choices that workers must face. The offer is very good for those close to retirement. But,

If you can't afford to quit working, you need to decide how much of a risk you're running by staying on the GM/Delphi payroll. If too few of your union brethren and sistren take the incentives to leave, your job could be cut and you'd end up in the jobs bank.

Oh yes, the infamous jobs bank. At least that is due for negotiation when the contract expires next year. Think it will be extended?

The article also points out that some people may have to move to less expensive digs to make the offer work for them. For some, that will be an acceptable choice. Others may take their chances.


Editorial: GM buyouts reduce costs, but more reforms needed says

Give the company credit for offering a generous program to convince workers to leave. ... The United Auto Workers should be grateful for this good-faith gesture by the world's largest automaker. GM and Delphi could have insisted on harsher measures.

The editorial points out that the long-term success of the company depends on adjusting to changes in customer tastes, and changes in the union contract--including, first of all, the jobs bank.


Meanwhile, here's the line up at the Detroit Free Press.

For GM, this is merely a first step, by Tom Walsh, runs with a "take your medicine" approach:

Expensive? Incredibly so. Billions of dollars so far, and the weary GM number crunchers are still counting.

Mind-boggling? Absolutely. Paying an army of healthy workers up to $140,000 apiece to just go away?

Yes, it's expensive, mind-boggling and absolutely necessary if GM, Delphi, the UAW and the rest of Michigan's traditional auto industry are to survive and be relevant.

Susan Tompor, a financial columnist for the paper, says that Choice could be risky:

"The loss of benefits, such as life insurance or health care in retirement, can be huge. Many workers may underestimate how much they're giving up."

True, GM wouldn't offer the deal they didn't think it was a way to save money. Then again, the alternative may be bankruptcy and the voiding of labor contracts. Either way, workers are taking a gamble: will the buy-out sums be good enough to tide them over to another job? Or should they hope that their own jobs will hold out long enough until retirement?

Oh yeah, don't forget that you're going to have to pay taxes on that lump sum--perhaps $40,000. She runs through some of the basics such as return on investment and asking questions about future expenses.

The people with the easiest decision to make may be those near retirement (take the money and run) and younger folks (take the money and retool). It's those with 15-20 years of service who face the most uncertainties. Will the job be there 10 years from now? How difficult will it be to find another job? (Forget getting a job that pays as much).

Worker Reactions: Offers look good takes us through a range of thoughts.

Willie Jenkins, 51, is ready to retire with 30 years of service. He says "This is fantastic. I can't wait to get out!"

Speaking of younger workers who aren't sure what to do, he says "" ... if I were them, I'd take it. Because we just don't know if this place will be here next week, or next year."

No, they certainly don't.

Another worker says "At 55, I'm not ready to retire." Perhaps not--especially with a huge tax bill waiting. Another says "It's hard to give up what you've been doing for a lifetime."

Meet "creative destruction," friends.

Timeline of GM, Delphi's travails offers what you'd expect: when Delphi was spun off from GM, when X number of jobs were eliminated, and so forth.

March 2001: 11,500 jobs.
October 2003: 8,500 jobs.
November 2005: 30,000 jobs.

June 2005: "There is no reason at the present time why Delphi has to seriously consider a bankruptcy." -- Delphi CEO Steve Miller.

October 2005: Delphi files for bankruptcy protection.

Questions and Answers offers a rehash of the details. It points out that the "jobs bank" will still go on. It has to; it's in the contract. If you think about it, buy-outs are also a way of paying people to not work. But they are more rational: they are a recognition that the company can no longer support such a large workforce.

Labels: American automakers, Health care, Pensions

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Is There Hope for Michigan and Detroit?
Detroit, and to some extent, Michigan, has been in trouble for quite a while. Is it going to have to get worse before it gets better?

Though the auto industry is not as important to the state and metro region as it used to be, it's still a player. But the prospect for long-term success is challenging, at best.

Auto manufacturing is a mature industry; cars can be made in a lot of different countries, many times at a lower cost than in the U.S.

Costs for retirement and health benefits (and health benefits for retirees) are a significant burden on companies in the industry. If you want to look at the problems caused by third-party payment of health insurance costs, look no further.

The recent bankruptcy of auto supplier Delphi (a company spun off a few years ago by GM, in an attempt to get out from under some of the heavy legacy costs) suggests that current and former workers may have some "downshifting" to do in expectations for pay and benefits.

Who or what is responsible for the mess? There are a lot of possibilities, most of which can be lumped under "stupid management" and "overly generous union contracts." Don't forget federal tax and regulatory policy, which encouraged the third-party payer system for health insurance and the defined benefit approach for retirement planning. Add in environmental and safety regulations that drive up the price of vehicles, encouraging people to delay purchases. Subtract the benefit of those regulations, which raise the barrier to entry from other countries. (Companies in India can make autos, but they won't pass U.S. legal requirements.)

How lawmakers and the public respond to these problems will affect the state and region for years to come. The Democratic governor has dabbled in economic development fads such as "Cool Cities," and her Republican predecessor spent the latter part of his 12-year tenure plumping for government-directed economic development projects. Neither approach is promising.

Unions, of course, are important in the political system of the state, and not just unions in the auto industry. Include the MEA (the teachers union) and other government employee unions, and you've got a lot of people who have an incentive to lobby for traditional policies that may have worked for a while, but cannot last in an increasingly competitive economy. But the pressure for continued dependence and expansion of the regulatory, welfare, government-influenced economy is likely to continue if not increase.

The Rust Belt may rust some more--as has happened in upper New York State. I fear it's going to get worse before it gets better. Old ways of thinking die hard.

Labels: American automakers, Cool cities fad, Health care, Pensions

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