Monday, July 14, 2008

Too much heart, too little vision

July 14, 2008

By Roger Lowenstein
WHO shot General Motors?

The company's stock is at its lowest level in 50 years, and its market valuation has plunged to US$5.9 billion (S$8 billion), less than that of the Hershey candy-bar company.

The American carmaker is weighing yet another round of layoffs - and maybe even a fire sale of venerable brands such as Buick and Pontiac. General Motors (GM) once manufactured half the cars on the American road, but now it sells barely two in 10 vehicles.

Bankruptcy is not unthinkable for Detroit's former king. The immediate cause of GM's distress, of course, is the surging price of oil, which has put a chill on the sale of petrol- guzzling sport utility vehicles and trucks. The company's failure to invest early enough in hybrids is another reason for its poor state of affairs. Years of poor car design is yet another.

But none of GM's management miscues was so damaging to its long-term fate as the rich pensions and health-care system that robbed it of its financial flexibility and, ultimately, of its cash.

GM established its pension in the 'treaty of Detroit', the five-year contract that it signed with the United Automobile Workers (UAW) in 1950 that also provided health insurance and other benefits for the company's workers.

Mr Walter Reuther, the union's captain, would have preferred that the government provide pensions and health care to all citizens. He urged the carmakers to 'go down to Washington and fight with us' for federal benefits.

But the carmakers wanted no part of socialised care. They seemed not to notice, as a union expert wrote, that if Washington didn't provide social insurance it would be 'sought from employers across the collective bargaining table'.

Detroit was too flush then to envision that it would ever face a financial strain. Ford and Chrysler signed identical pacts with labour, so all three carmakers were able to pass on their costs to customers. Besides, the industry's work force was so young that few workers would be collecting a pension any time soon.

But pension commitments last forever. They far outlived Detroit's prosperity.

GM got into the dubious habit of steadily increasing worker benefits. In 1961, GM was able to get away with a skimpy 2.5 per cent increase in wages by also guaranteeing a 12 per cent rise in pensions. Such promises significantly burdened the company's future. As workers lived longer, the cost of fulfilling pension commitments rose accordingly. And health-care costs exploded.

By the 1980s, it was clear that the Big Three carmakers faced a serious threat from Japan. But GM and UAW were locked in a mutually destructive embrace.

GM, fearing the short-term consequences of a strike, continued to grant large increases in benefits - creating an intolerable gap between its costs and those of its foreign competitors. Union officials feared to face the rank and file without a big contract.

In the 1990s, the consequences of maintaining a corporate welfare state became too obvious to ignore. In that decade, GM poured tens of billions of dollars into its pension fund - an irretrievable loss of opportunity.

What else might GM have accomplished with that money? It could have designed new cars or carried out research into alternative fuels. Or it could have acquired half of Toyota - a company that the stock market now values at close to US$150 billion.

GM acknowledged in its most recent annual report that, from 1993 to 2007, it spent US$103 billion 'to fund legacy pensions and retiree health care - an average of about US$7 billion a year - a dramatic competitive and cash-flow disadvantage'.

During those 15 years, GM paid only US$13 billion or so in shareholder dividends. The company has been sending far more money to its retirees than to its owners.

After falling US$20 billion behind on its pension plan earlier this decade, GM doggedly put money into its plan to catch up. It has also agreed to invest more than US$30 billion in a fund to cover future health-care expenses. But these efforts have starved its business.

The sorry decline of GM has proved Mr Reuther right: The government is the better provider of social insurance. Let industry worry about selling products.

Unhappily, however, the fate of many public-sector pension plans in the United States is even worse than GM's. Responding to the same temptation to offload expenses into the future, public employers have committed to trillions of dollars in future liabilities.

In New Jersey, a huge pension liability has created a budgetary nightmare for the state. The city of Vallejo, in California, burdened by police pensions, recently filed for bankruptcy.

Just as GM's shareholders bore the burdens of its pensions, states and cities will have to force taxpayers to sacrifice in the form of service cuts, tax increases or both.

It is too late to restore GM to its former grandeur. But if public officials do not show courage by quickly funding the pensions they have promised their workers, American taxpayers will soon find themselves in an even worse crisis than the one GM's shareholders are facing now.

The writer is the author of While America Aged: How Pension Debts Ruined General Motors.

This column first appeared in the International Herald Tribune on July 10.

[The company is not the best provider of social insurance. Neither is the govt. For retirement plans, the employee the individual is the one that has the most at stake and therefore the most incentive to plan for his retirement. The govt role is to protect the employee and ensure that the employer does not exploit the employee. In Singapore, the govt also has schemes in place to ensure that employees do not shortsightedly spend their savings away. So there is the CPF.

At the low end, there is Workfare incentives, where low wage workers will get govt contribution to their CPF. At the upper end, there is Supplementary Retirement Savings where the high-income earners can save more for their retirement.]

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