GM & Chrysler on the Brink -- Part 3

[Barnabas]

Factory workers can't be paid 26 dollars per hour, you can make that same car in Mexico, Brazil, Argentina and pay them 1/5 of that (and it would be a middle class income there).
American automakers have been condemned to unprofitability by their unions.


By the way, bus drivers and truck drivers make good money everywhere as far as I know.

[Vanguard]

So having too high costs is now unrelated to being an efficient company? If your input is so high compared to others in the same industry (meaning, of course, they are wasting less money and have lower input prices per car), how is that efficient?

I can see that my previous example was way too complicated. This time I will stick to essentials.

Let's assume that GM simply stops paying pensions next year. They take that $15 billion dollars and distribute it to current shareholders.

According to you logic, GM has become much more "efficient". They have reduced their costs by $15 billion, but maintained the same output of cars.

But they aren't making cars any faster, or with less materials. They just stole money from the pensioners and gave it to the shareholders.

Stealing money is, I guess, a pretty efficient method of making profits. But there is no economic value to it. Otherwise we have to consider Bernard Madoff as the most efficient money manager in history.

Seriously? So GM can get rid of some of their biggest input costs, while keeping the same output level and their efficiency hasn't changed? Really?!

Yes, seriously. Really.

So if a company found a way to have robots do all of their car manufacturing and were able to halve their labor costs and produce the same amount of output, that wouldn't be more efficient?

That would be more efficient. But not because you halve labor costs. Because you halve the labor required to make each car. You decrease the resources required.

Ideally, in this example, you actually want to increase your labor costs. You should keep the same amount of workers and use your robots to double production. Since fixed costs remain the same, this triples the profit you make on each car*. These increased profits can be divided between the shareholders and workers. Labor costs increase---- as well as shareholder profits.


*I use the term "profit" here in a loose sense ("profit and loss"), for explanatory purposes.

[Imran Siddiqui]

Let's assume that GM simply stops paying pensions next year.

As they are contractually obligated to, it becomes a liability. They aren't making profits.

Let us not forget you said the government was picking up the tab.

Stealing money is, I guess, a pretty efficient method of making profits. But there is no economic value to it.

Indeed. Recall Enron was considered to be a pretty efficient company before it was found out just how they were actually making all their money. Then it was realized they weren't actually efficient (as that profit didn't exist and that extra money was actually due)

[Vanguard]

As they are contractually obligated to, it becomes a liability. They aren't making profits.

Let us not forget you said the government was picking up the tab.

Well, the government picking up the tab doesn't make GM any more "efficient". Only more profitable. Those profits have to come from somebody else. I guess. Maybe. Nobody is sure about anything any more.

Indeed. Recall Enron was considered to be a pretty efficient company before it was found out just how they were actually making all their money. Then it was realized they weren't actually efficient (as that profit didn't exist and that extra money was actually due)

Yes, but GM actually makes products. In fact they make more product than any other company in world.

If you want to measure GM's efficiency, you need to look at more than just how much they lose in a deep recession.

[Vanguard]

So the TARP bailout is sufficient to be considered a Big 3 bailout?

How should I know? They won't explain how it works. I'm not even sure if it will help banks.

[Naked Gents Rut]

For what it's worth, I met a 25-year veteran of the IRS bankruptcy section today. Like every other expert, he thinks Chapter 11 is the ideal solution for the Big Three's problems.

[Dinner]

Originally posted by Imran Siddiqui

The only thing we are concerned with is whether GM makes money as a company. And the reason they are not making money as a company is their high costs.

So having too high costs is now unrelated to being an efficient company? If your input is so high compared to others in the same industry (meaning, of course, they are wasting less money and have lower input prices per car), how is that efficient?

I don't want to get in the middle of you two but 90% of the costs are materials and only 10% is labor. I wouldn't call something that adds up to just 10% in total a huge component. A good sized one yes but not huge. They still have to remain competitive but by 2010 they'll be with in $3 per hour including payments to retirees while something like 20% of the work force will be entirely 401k based without any future pension liabilities.

That's actually moving extremely fast for a large industrial firm. Especially one which just a few decades ago had 850,000 hourly employees (and so have a LOT of retirees they're supporting).