A Bit More Hope Than I Thought

GM, as reported by Reason's Hit and Run, has actually already had something of a breakthrough in labor costs, at least for new employees:

The current veteran UAW member at GM today has an average base wage of $28.12 an hour, but the cost of benefits, including pension and future retiree health care costs, nearly triples the cost to GM to $78.21, according to the Center for Automotive Research.

By comparison, new hires will be paid between $14 and $16.23 an hour. And even as they start to accumulate raises tied to seniority, the far less lucrative benefit package will limit GM's cost for those employees to $25.65 an hour.

So this puts GM in the position of shoving experienced employees out the door as fast as they can, to make way for lower cost employees hired under this new deal.  Apparently GM also has more flexibility to manage costs in a downturn.  Good news, assuming they can accelerate a 20 year demographic transition to about 6 months, avoid giving away too much to these newer workers when times are good again, and arrest market share declines with better cars. Oh, and I presume the UAW has not abandoned seniority, which means that in recession-driven layoffs over the next year, GM must being by laying off these much cheaper younger workers.  Layoffs will actually mix their labor cost upwards.

I still don't want to bail them out.  Like numerous other industries, from steel to airlines, there is no reason GM shouldn't have to pass through Chapter 11 on the road to recovery.  However, the argument that GM is turning a corner if we just give them a little help seems to be persuasive with many folks around me, so much so I am tempted to buy some GM stock as a way to go long on my prediction of the creeping corporate state.

Update: On the other hand, this is a sign that GM may be scraping the bottom of the barrel for cash:

Cash-strapped General Motors Corp. said Monday it will delay reimbursing its dealers for rebates and other sales incentives, an indication that the company is starting to have cash-flow problems....Erich Merkle, lead auto analyst at the consulting firm Crowe Horwath LLP, said GM wouldn't delay payments if it had enough cash.

In the third quarter of this year, GM's operations burned through $7.5 billion in cash, offset somewhat by asset sales and financing activities.  But this is really a pre-recession burn rate.  What will the burn rate be over the next 6 months?  There is an argument to be made that $25 billion is not going to last even a year, particularly given the dynamic that layoffs will hit mostly the lower-cost workers, and a Democratic Congress and Administration that is handing over the money may well restrict GM's freedom of movement on layoffs anyway.  I can see the Obama administration now -- don't lay them off, lets put them all in a factory making green energy, uh, stuff.

"I don't even think they've got 60 days," Merkle said. "Their cash position is probably getting pretty weak right now, and it's cutting into those minimum reserves that they need on hand."


  1. HS:

    What do you think of selling GM to China?

  2. dearieme:

    What has China done to deserve such punishment?

  3. HS:

    Buy GM, sell brands and distibution centers to another Chinese company, liquidate, drop health care and have US government take over pension. To give an idea of how much brands can be worth, Hummer was bought for 4 billion dollars. Buick cars easily sell for $190,000 US in China, same with Cadillac.

    $28 billion, the price to take over GM, is not alot of money for China at the moment. It would be a way to enter the US market as they have been seeking to do for a long time.

    Not to mention, foreign companies require a partner in China to do business there. While the profits are equally shared, China does own most of the suppliers, which is a way to hide some of that money. Use that to buy out your partner.

  4. Ian Random:

    I always thought it would be funny for GM to sell itself to the union to pay off the pension obligations.

  5. James:

    Of course anyone within spitting distance of GM is going to be saying "We can't even make it through the end of the year." They want that bailout money before Congress goes home for the year. I wouldn't trust any of these statements more than I would if they came out of Pelosi's mouth.

  6. Dr. T:

    What's missing from the story on new hires is benefits. The more senior workers get $28 an hour in wages and $50 an hour in benefits. If the new hires get the same benefits, then the wage cut to $15 an hour only saves GM 17% on total labor costs per new employee. That's not enough to pull GM out of its pay & benefits pit.

  7. Pedro:

    Dr. T - Follow the first link in the post. It states that GM's cost for new workers is under $30.

  8. HS:

    $30/hr with benefits competing against $0.50/hr with no benefits, you do the math. People starting work at 10 years of age vs. 16 working 80 hrs a week vs 40-50 hrs. Can you say good-bye middle class?

    GM will make it through the end of the year. They will not make it through next year without filing bankruptcy. It almost happened in '92 at the last consumer led recession, the invention of the SUV pulled them out. Oh, btw, there has never been a car company in history that has made it through bankrupcy protection because no one wants to spend that kind of money in a company with that much uncertainty.

  9. Noumenon:

    I don't understand why the cost of health care for retired workers gets added on to the $28/hr workers (giving $72) but not the $15/hr workers. If all the $28/hr workers quit, would the $53 in health care costs just go away?

    I think you gotta spread the health care costs among everyone in the company if you're doing it that way.

  10. HS:

    Maybe... health care increases have been frozen. Also, two seperate pools for health care are formed, one for current and one for new hires. The new hires obviously have less health care cost because they are young while the current employees bear the bulk of the retired employee's health care. Not knowing to the current employees, they'll get screwed at the end.

    This will probably happen to medicare/SS in the future. The current work force will pay for the baby boomers medicare/SS and then get screwed when we are older while the younger work force to be will have their own system.