GM Ford and health care costs
Another insightful view of the debacle at GM and Ford is offered up the The Economist, (subscription may be required) which notes:
"GM says that $1,500 of the price of every new vehicle it sells goes towards health care for past and present employees. The firm's commitments are shockingly vast. It pays the health insurance of some 1m retirees and their dependants as well as its current 200,000 American workers and their families. The deal with the UAW will provide some respite. Though not all details of the deal have been disclosed, the carmaker said it would result in a cash saving of $1 billion a year and would slice $15 billion off the firm's health liabilities towards its pensioners.
(Details of the health care deal emerged yesterday, indicating that for the first time GM employees and retirees would have to pay part of their monthly premiums, along with deductibles and hospital co-pays)
Rick Wagoner, the chief executive, called it "the single biggest cost reduction in a single day in the history of GM", though these cuts alone seem unlikely to be enough. Analysts' estimates of GM's unfunded obligations (before the cuts) are around the $70 billion mark, most of them in relation to retirees' health costs. And the firm has promised to fund a new plan for employees affected by the cuts, costing $3 billion, delivered in three instalments beginning in 2006. So it still has a mountain of cost-cutting to climb…
The Japanese firms have fewer pension obligations and more flexible workforces—and they are largely non-union. Their model ranges are also more attractive to motorists."
Not to mention the Koreans, who can undercut the Japanese.
The central problem for GM and Ford (free subscription required) has been and will continue to be their misguided decisions to make cars that people don't want to buy. Chief among those decisions was the focus on trucks and SUVs, at a time when everyone with any sentient capabilities knew that fuel prices and availability would be drastically impacted by the emergence of India and China coupled with the dearth of new reserves.
But, that extra $1000 per car (the difference between GM's health care costs and Toyota's) would sure come in handy at GM…
What does this mean for you?
A great lesson in business. Those who chose to ignore reality will soon be buried by it.