Detour

This week G Richard Wagoner Jr., Chairman and CEO of General Motors, wrote an op-ed called “˜A Portrait of My Industry” attempting to address the root-causes of GM’s abysmal performance in the past few years. In essence, he is writing a defense for all three US auto-manufacturers. Mr. Wagoner writes…

GM has lost a lot of money in 2005, due to rapidly increasing health-care and raw-material costs, lower sales volumes and a weaker sales mix — essentially, we’ve sold fewer high-profit SUVs and more lower-profit cars. What is less clear is why things turned sour so fast for GM, as well as for other American auto makers and suppliers. To put it another way, why are so many foreign auto makers and suppliers doing well in the United States, while so many U.S.-based auto companies are not?

So far so good; maybe the top executives with the big three US auto manufacturers have their eyes wide open and are formulating a plan to take on this issue effectively and head-on. Chairman Wagoner continues…

Despite public perception, the answer is not that foreign auto makers are more productive or offer better-quality or more fuel-efficient vehicles. In this year’s Harbour Report, which measures manufacturing productivity, GM plants took three of the top five spots in North America, including first and second place.

Huh? Is he actually touting manufacturing productivity as a strength of GM? He can’t seriously be taking this line of argument! A look at the 2005 Harbour Report (No free-link available) reveals that Toyota is now the most efficient automotive manufacturer in North America. There is still a considerable gap between Detroit and the Japanese-owned “transplant” assembly lines, however. GM, which Harbour described as “the best of the Big Three,” required an average 34.33 hours of labor to produce a vehicle last year, compared with just 27.90 hours for Toyota.

It certainly doesn’t sound like GM has a competitive advantage in this area. It takes them nearly six hours longer per vehicle to produce their product. That’s 75% of a regular time shift on a production line. If that extra time was spent making the GM car a more attractive, safer, more economical, and/or a more reliable car than it would be time well spent. However, I don’t know a single person that thinks GM is better at any one of those things than the Japanese. The story gets worse.

One of the new study’s most illuminating figures had nothing to do with productivity. General Motors average revenue per vehicle was only $20,659 while Toyota was $26,514 per vehicle. Compounding matters, Japanese profits per vehicle were significantly higher than GM, with a per car profit of $1,433 at Toyota , $1,250 at Honda , and $1,603 for Nissan. Ford had the highest figure among the Big Three, at $620, while GM lost $2,311 per vehicle in 2004.

GM lost 2,311 per vehicle last year! I know I dropped out of my economics PhD program without earning a degree, but I am relatively sure that this is not a sustainable long-run strategy to increase shareholder wealth.

In the meantime Chairman Wagoner earned a salary of $2,200,000 and a BONUS of $2,460,000 last year. How do you get a bonus of any kind when you lead a for-profit organization into returns on investment like that?

Apparently Chairman Wagoner has his head in the sand. He doesn’t see any of the above as the main reason GM is doing so poorly. First he uses the reliable canard of health-care costs. Mr. Wagoner writes…

So what are the fundamental challenges facing American manufacturing? One is the spiraling cost of health care in the United States. Last year, GM spent $5.2 billion on health care for its U.S. employees, retirees and dependents — a staggering $1,525 for every car and truck we produced. And the figure is going up again this year. Foreign auto makers have just a fraction of these costs, because they have few, if any, U.S. retirees, and in their home countries their governments fund a much greater portion of employee and retiree health-care costs.

Don’t get me wrong, I love bashing American labor unions as much as the next guy, but no one held a gun to your head to sign the health coverage contracts with the union. Even a person with the most basic math skills can calculate that this is not one of the fundamental reasons for GM’s poor performance. GM loses $2,311 per vehicle. If we were able to waive a magic wand and eliminate all health-care costs from GM’s liability sheet, they would still be losing $786 per vehicle.

I imagine the magic wand GM has in mind is to socialize health-care. Does he actually think that if the government took over health care costs that the cost to GM would be less than it currently is? He wants the only organization more inefficient than his own to take over one of his biggest costs in hopes that marginal health care costs will go down! Ha, where was this guy educated? He must have fallen asleep in his economics classes as an undergraduate.

To illuminate this falsehood in another way; If GM sold its average car for the same price as Toyota (an addition of $5,855 per car) they would eliminate their marginal operating loss and make a profit of $3,544. This would more than cover the large executive bonuses and employee health-care liabilities.

Mr. Wagoner actually is magnanimous about GM’s health-care costs…

Some argue that we have no one but ourselves to blame for our disproportionately high health-care “legacy costs.” That kind of observation reminds me of the saying that no good deed going unpunished.

Let me give you a little advice Mr. Wagoner. If you want to do a good deed for your employees, shareholders, and society…operate a profitable car manufacturing company that fulfills promises made, and doesn’t make promises it can’t possibly keep. In short, do what you say you are going to do, and don’t lose sight that a for-profit organization benefits society best when it makes a profit. GM didn’t enter in these union contracts to do a good deed, they made a business decision that the costs was justifiable and possible to cover.
Mr. Wagoner continues his excuse making by blaming lawsuit abuse and unfair trading practices for GM’s woes. As if lawsuit abuse in America doesn’t effect Japanese companies producing vehicles in the US. It is laughable to think that

Japan’s long-term initiatives to artificially weaken the yen.

somehow makes Japanese domestically produced cars more productive than US domestically produced cars. With all due respect Chairman Wagoner, you need to get your head in the real world. Few domestic buyers would buy an American car at the same price as a similar Japanese car. American cars are not seen as attractive, as reliable, and as economical as the Japanese automobile. If you make a good looking car, with state of the-art technology (no that does not mean On-Star as Chairman Wagoner touted in his op-ed), at a reasonable price, that is reliable up to and over 100,000 miles…and do that year after year. The US auto industry will continue to be viable. This means that you have to constantly innovate. Chairman Wagoner was proud to say GM will be rolling out Hybrid cars in the next few years. He doesn’t realize that unveiling five year old technology that your competitor has had a major advantage in for years will not score you points in the consumers mind. Innovate, create new technologies before you competition, or you will be, at best, mediocre in your field. Innovate or die. Simple but true.

More On This Subject: More on this subject can be found here, here, here, here, here, here, here, and here.

Update: Thanks for noticing Prof. DeLong.

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Your’e the man Will!

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