The End Of An Era For GM Workers
The implied promise of a lifetime job with benefits is no more at America's biggest industrial company
For anyone who had doubts, the other shoe is finally dropping in Detroit. And it's as big as a Hummer.
Over the past 12 months, the news from General Motors has been increasingly gloomy, culminating in a staggering $10.6 billion loss for 2005. But that was just a curtain raiser, analysts have warned. Now, the drama is starting to unfold in earnest, with GM announcing major changes meant to help the listing company start bailing water--and fast. In just three days last week, America's biggest industrial company undertook a number of major moves that will profoundly change the landscape of the auto industry in the nation's heartland. It struck a deal with its biggest supplier, bankrupt Delphi, and the United Auto Workers, to offer buyouts ranging from $35,000 to $140,000 to more than 100,000 workers. To raise cash, GM agreed to unload part of its profitable financial unit, General Motors Acceptance Corp., for about $9 billion. And word leaked that "the General," once synonymous with American prosperity, plans to cut hundreds of high-paying engineering jobs this week, with some of them possibly being offshored to low-cost countries like India and China. "This is a game changer," says Jack Nerad, editorial director at Kelley Blue Book. "GM is acknowledging that things are not going to be like they were before. They're not going to dominate domestic market share."
To anybody who has been paying attention to the U.S. economy, that should sound familiar. From steel to textiles to electronics, American firms that used to dominate their industries have been losing business to competitors importing cheap goods from elsewhere that have turned out to be just as good as the stuff once made here. Some companies, like Dell, have thrived by adapting quickly and focusing on services and features that set them apart. But GM, along with a number of other industrial giants that learned the hard way, is stuck in a time warp that is going to force wrenching change before it can emerge healthy--almost certainly as a leaner, more agile company that may no longer be America's automotive sales leader.
Battles ahead. GM's core problem is that, unlike manufacturing dynamos such as Toyota or Nissan, it builds more vehicles than it can sell at a profit. And that dilemma encapsulates the conflicts bedeviling corporate America--and U.S. workers--as old-line companies struggle to adapt to new realities. GM is locked into a dysfunctional overcapacity situation by generous union contracts that guarantee pay even if there's no work. Those kinds of entitlements, along with other cherished employee privileges, are finally crumbling. Just as pensions are shrinking or disappearing at iconic companies like IBM and United Airlines, and virtually every company is forcing workers to pay more for healthcare coverage, GM has no choice but to slash generous benefits that workers have come to take for granted. But it's going to cost GM dearly. One type of buyout would offer workers a whopping $140,000 in cash--but only if they agree to give up lifetime healthcare benefits, for which GM now foots the entire bill. Since health insurance premiums can hit $10,000 a year for a family of four, fewer than one fourth of GM's workers are expected to take the offer, meaning that tougher, uglier battles with the union probably await. And if Ford and Chrysler join the fray--which is likely, because their labor costs are out of line with global standards, too--the long-awaited moment of truth for organized labor will draw nigh.
For GM, the buyouts are a baby step on a journey through a minefield. Its overall predicament is so convoluted that measures to resolve one problem contribute to another: Even though the buyouts will help reduce the company's bloated workforce, its lopsided retiree-to-worker ratio--already about 2.5 to 1--will go even higher, adding to a crushing retiree healthcare burden. Other problems make profitability seem distant. One of the biggest is a lack of exciting new cars. New full-size SUVs, starting to roll out now, will gain some traction, but with consumers fretting over high gas prices, the carmaker's lineup thins out considerably when it comes to compelling crossovers, sedans, and smaller cars. And despite quality marks that have been improving--and are near the top for some nameplates, such as Buick--consumers have a sour view of GM products. Research conducted by Kelley Blue Book, for example, shows that consumers rate GM below average on a wide range of attributes key to a buying decision, such as value, fuel efficiency, safety, and style.
Then there are nagging questions about GM's finances. The carmaker recently announced that it will restate earnings for the past six years, partly because of its exposure to Delphi's woes. GM has already boosted its 2005 loss, originally reported as $8.6 billion, by $2 billion, not the kind of do-over that wins friends on Wall Street. And other surprises may lurk. The company is still working up an explanation of its altered finances and has delayed filing its 2005 annual report with the Securities and Exchange Commission. The agency is investigating.
With so much uncertainty, there's mounting speculation that CEO Rick Wagoner may soon be escorted to a cushy Cadillac and offered a ride out of Detroit. Wagoner is widely regarded as a financial whiz, as capable as anybody of tackling GM's gargantuan problems. But Wagoner has also presided over many of the recent debacles that have derailed GM. The addition of Jerry York to the company's board, at the insistence of billionaire investor Kirk Kerkorian, who owns nearly 10 percent of GM stock, increases the pressure on Wagoner to make rapid, sweeping changes or go. York is an aggressive reformer who helped engineer turnarounds at Chrysler in the 1980s and IBM in the 1990s. But along with massive change came fresh management. There may still be a few buyout offers on the way in Detroit.
More on GM at www.usnews.com/gm
This story appears in the April 3, 2006 print edition of U.S. News & World Report.