Monday, December 15, 2008

The Big Three - Flailing or Bailing?

Well, it should come as no surprise, 'The Big Three' automakers are in dire straits. Working with outdated business models and unrealistic labor costs, Ford, General Motors and Chrysler are fighting for their collective lives.

Once a prominent industry in American capitalism, the auto industry seems to have lost its way. The litany of arguments as to why are endless. But, it all boils down to competition and cost structure.

The North American Peace Treaty et al allows corporations to compete in a more competitive manner. The evolution of barriers to trade has morphed itself into the 'global village' concept. One world = one market.

Did US automakers miss this memo? The various trade treaties, tariffs, etc. were passed to help keep down labor costs and make for a more consumer friendly & affordable products. American ingenuity and sales should be in the forefront for the world to see. Ideally, lower costs should lead to more competitive pricing and hence, sales. However, this doesn't appear to be the case.

The UAW continues to have a strangle hold on management. Yes, they have given concessions over the years and aren't the powerful regime of yesteryear. But, several key items still persist.

One of the biggest taboo topics pertains to job banks. This UAW menagerie from 1980's allows workers to retain a salary, as opposed to being laid off. The original intention allowed for employees to be 'retooled' and implemented at a later date. But, retaining almost all of their salary during 'unemployment' simply increases manufacturing costs.

Another embedded cost pertains to legacy costs. The cost of each retired worker adds to the unit cost of each vehicle. With retired workers living longer, this expense can only increase and not decrease. I'm all in favor of retirement pensions, benefits, etc., but you have to draw the line at some point.

What exactly are lifestyle drugs? Viagra is costing General Motors $17 million dollars a year. Naturally, the cost is added to each and every car, truck & SUV. The blue wonder drug is considered a covered benefit for both retired and salaried employees.

Apparently GM recently raised the copay for erectile dysfunction drugs to $18 under a new UAW agreement. But, the fact still remains... health care costs add about $1,500 to the price of each vehicle. GM provides coverage for roughly 1.1 million employees, retirees and dependants and continues to be the largest purchaser of Viagra.

Let's cut to the chase: American automotive ingenuity still remains top shelf. The Ford Mustang and Chevrolet Corvette are two prime examples. Having an entire industry file bankruptcy would be chaotic to the already ailing US economy. However, something has to be done to make all three manufacturers more competitive in the global market. With all due respect to Ford who seems to stand head and shoulders above the other two, everyone has to become more competitive to survive.

And let's be clear... executive management can curb their compensation packages as well. This is a three way street!

Graph courtesy of Cato Institute.

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