Just How Strapped Are the Big 2.5 Automakers?


Earlier today, reason's Michael C. Moynihan pointed to arguably the GM, Ford, and Chrysler's biggest problem in being competitive in today's auto industry: Labor costs that are on average about 50 percent higher than competitors such as Toyota.

Here's some interesting news on that front. Last year, the Big 2.5 negotiated a contract with the United Auto Workers that radically changes its cost structure. Basically, the companies are no longer paying for health care and pension benefits for new workers (additionally, the companies will pay vastly reduced health care costs for existing workers going forward). They've done this by switching from defined-benefit pensions to 401(k)s, offloading health care costs to the UAW, and cutting wages into something more in line with their competitors.

Here's how calculates the difference for bleeding behemoth GM, which is offering buyouts of older workers (more on that in a second):

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.

More on those GM buyouts, which the company has used in the past:

To try to stem automotive losses that have dogged the company since 2005, the company is making a range of offers, up to cash payments of $140,000 to the remaining 74,000 GM workers represented by the United Auto Workers union.

The goal is not to reduce headcount but rather to bring in new workers at a lower cost.

About 46,000 of the GM employees are eligible to retire today and they can take pension incentives worth between $45,000 to $62,500 to retire.

Whole story here.

None of this is to suggest that GM, or Ford or Chrysler, is out of the woods. Beyond everything related to labor costs, they've got a real product problem that needs a-fixin' fast.

The sort of move above though, however, has made some auto industry watchers optimistic about the longer run. Here's Autoblog's John McElroy:

Another benefit of that new labor contract is that the Big Three are no longer pressured to keep building cars and trucks in the face of weak demand. Under the old labor contract it was cheaper to build cars and slap big incentives on them than it was to not build them in the first place. Now, they can build to actual demand, and they're running on much tighter inventory.

That means they'll be able to slash their incentives. Every $1,000 that General Motors cuts from incentives will drop roughly $4 billion to the bottom line. And GM has an average of $3,500 in incentives!

More from him here.

Unconvincingly, McElroy is in favor of an automaker bailout, likening it to the Chrysler deal back in 1979, after which its "stock shot from $3 a share to over $30, a 1,000% return in just a few years time." He figures if the taxpayers back GM, Ford, and Chrysler this time around, the same thing will happen. Whether the world, especially Chrysler customers, are better off than if the company had actually gone out of business, is not clear at all. (I say this as someone who has owned two Plymouths.)

So will a mere $25 billion now turn into bazillions of dollars later? Eh, mebbe, mebbe not. In any case, it's hardly the taxpayers' job to be guaranteeing companies that, assuming they are really worth a damn, will be bought up by investors with an eye toward undervalued and underperforming outfits. Indeed, to the extent that the Big 2.5 are reforming themselves, they will become attractive to investors.