Why the Strike will be short?
Jerry Flint is the automotive industry columnist for Forbes Magazine. He has a very different take on the current negotiations between General Motors and the United Autoworkers Union.
Specifically, he thinks the VEBA, i.e. “voluntary employee benefit association,” which has been the lynchpin of GM’s position, is the wrong idea.
In a column entitled “Quackery,” Flint calls the VEBA an accounting “gimmick.”
Flint thinks it’s a gift to the UAW.
The VEBA, which would take over GM’s retiree health care costs, is going to cost GM 65 for every $1.00 of health care obligation. That’s 65¢ up-front, paid out right now as a lump sum, instead of $1.00 paid out over a number of years, even decades.
Flint says that the VEBA won’t solve any of GM’s problems.
He is right. There is no free lunch.
Whether it is done by paying out the benefits over time or paying them in one lump sum, GM’s paying them. Either way, GM’s paying the benefits. It has not reduced the benefits by a penny. The right to have a dollar in ten years is not worth $1.00 today, it’s worth however pennies it takes to invest enough now to have a dollar ten years from now. So, a lump sum payment now of 65¢ on every retiree health benefit dollar isn’t saving any money and may, in fact, be overpaying.
But it is still GM paying for these benefits.
GM has a finite amount of money: the money in the bank, the money it can borrow, the money stashed as an overpayment of the employee pension plan, and whatever they could get by selling a new issue of stock. That’s all there is. Sure, you could get more by making a profit, but GM is losing money in the United States.
From that pool of money, GM must fund the creation of new product. The cost of creating a completely new car is stratospheric. $10 billion isn’t an unusual price tag. If you don’t create new products and your competitors do create new products, eventually no one will want your products, even at cut-rate prices.
The $50 billion GM will spend on a VEBA is $50 billion it will not have to develop new cars.
That’s Flint’s core point. He believes GM has lost position in the auto market because it’s new products have not measured up to those of the competition and still don’t. He pans the new Chevy Malibu, the most recent GM savior, and explains why it doesn’t measure up:
“GM doesn’t have enough money to really improve its products. Look at the new Chevy Malibu, on which so much GM hope is laid, and compare it to the new Honda Accord. The Accord is bigger, more powerful and more fuel-efficient. Honda has the money to spend on developing such a car.”
And GM doesn’t.
The VEBA won’t create money. At best, if GM gets the accounting perfectly correct, it is a complete accounting wash: money today instead of money tomorrow, adjusted to account for present and future values.
But that’s only looking at it through an accountant’s eyes.
Flint is looking at it through a salesman’s eyes.
Take that $50 billion and, instead of putting it in a VEBA, actually use it to develop the best cars, not just cars designed to follow someone else’s lead or equal a competitor. Cars designed to beat all comers, to anticipate customer’s desires and fulfill them before the customer has even realized he or she wanted that. That’s what Toyota did with the Prius. It’s what Ford did with the Mustang. You have to have big bucks to do that, because you can’t create markets by playing it safe and waiting for others to do it first. By that time, you’re already behind.
So deployed, that $50 billion could be the key to GM’s future.
Flint even has a story to tell in support of that point: GM paid $2 billion to Fiat to get out of a deal that would have forced it to buy the company. That $2 billion, according to Flint, “was the money that launched the Fiat turnaround.”
It was $2 billion that GM didn’t have because it made a foolish deal with Fiat, back when Daimler-Benz was making a foolish deal with Chrysler and globally integrated auto companies were the fashion of the day among automakers’ management.
It was $2 billion that GM didn’t have to invest in the new Malibu, either.
In “Quackery,” and a follow-up column written after the UAW/GM strike was called, Flint sounds utterly pessimistic about the future of GM, and following his reasoning leads to an even darker outlook for Ford and Chrysler.
Flint sees GM giving away its future, once again, to satiate a union that it can’t live with and can’t live without. No matter the concessions made by the union, a VEBA is a triumph for the UAW. The only reason the members don’t like it is that GM thought of it. Had the union thought of it, GM’s management would have been aghast. Such is the mutually destructive mentality of the principals in the present negotiation.
Corporations create cultures, as do unions. Those cultures shape the perceptions of those who are part of them and, by that, shape their actions. Listen to the UAW members today talk about this strike. It’s a verbal time capsule. But GM management is no better. Another accounting trick. But always a car built to a price, which is why the only thing that matters to them is the UAW’s price.
Flint is right.
GM will cave again.
Because it already did.
And the real moron is Ron Gettelfinger.
He knew they would.
He has to know he’s killing his own union.
But he doesn’t care.
He’s a GM man and a union man.
All he cares about is his pension.
Ditto, Rick Wagoner.
Here’s the link to Flint’s column: http://www.forbes.com/opinions/2007/09/24/gm-uaw-strike-oped-cz_jf_0924backseat.html