Rick Wagoner, GM chairman and CEO, submitted an op-ed piece to the Wall Street Journal Tuesday defending the automaker’s requests for government assistance.
The full text of the piece is available after the jump, but the gist of his argument is this – the U.S. auto industry is not playing on a level playing field in its domestic market. Things that are tilting the playing field in favor of Wagoner’s competitors are said to be unfair trading practices (specifically Japan’s foreign exchange policies), lawsuit abuse, and health care costs.
The latter is interesting, in that Wagoner contends that U.S. manufacturing companies entered into a “social contract” with labor and government that included the health-care benefits to workers and retirees that are a big part of today’s problems. And so, if everyone in America helped create the problem, GM feels justified in asking everyone to help fix it.
This sounds like a dangerous strategy, from a shareholder point of view. Wagoner seems to imply that regardless of what the company does to restructure, GM will not be competitive without legislative assistance and/or a government policy shift. Whatever positive moves GM makes with respect to restructuring and new products, Wall Street would be justified in waiting for positive news from the federal government before rewarding GM with a higher share price. Given that the initial reaction from Washington has been less than encouraging, GM’s major investors, including Kirk Kerkorian, could be waiting a long time before they see their investment recover.
Full text of Wagoner’s article after the jump.
[Source: GM]
Op-ed The Wall Street Journal
December 6, 2005
By Rick Wagoner
Since mid-October, General Motors has announced plans to cease production at 12 North
American manufacturing facilities and eliminate 30,000 jobs by 2008; trim $1 billion in net material costs in 2006;
and, in cooperation with the United Automobile Workers, reduce GM’s retiree health-care liabilities by $15 billion, or
about 25%, for an annualized expense reduction of $3 billion.
The reason for these dramatic actions is no secret: GM has lost a lot of money in 2005,
due to rapidly increasing health-care and raw-material costs, lower sales volumes and a weaker sales mix – essentially,
we’ve sold fewer high-profit SUVs, and more lower-profit cars.
What is less clear is why things turned sour so fast for GM, as well as for other
American auto makers and suppliers. To put it another way, why are so many foreign auto makers and suppliers doing well
in the United States, while so many U.S.-based auto companies are not?
Despite public perception, the answer is not that foreign auto makers are more
productive or offer better-quality or more fuel-efficient vehicles. In this year’s Harbour Report, which measures
manufacturing productivity, GM plants took three of the top five spots in North America, including first place. In the
latest J.D. Power Initial Quality Study, GM’s Buick and Cadillac ranked among the top five vehicle brands sold in
America, ahead of nameplates like Toyota, Honda, Acura, Nissan, Infiniti and Mercedes-Benz. And GM offers more models
that get over 30 miles-per-gallon (highway) than any other auto maker.
In fact, this kind of operating performance makes GM’s recent financial performance all
the more frustrating. The fact is, we’re building the best cars and trucks we’ve ever built at GM, our products are
receiving excellent reviews, and we’re running the business in a globally competitive manner. Outside of North America,
we’re setting sales records. In fact, for the first time in our history, we will sell more cars and trucks this year
outside the United States than inside, aided in no small part by our market-leading performance in China. So why,
fundamentally, are GM and the U.S. auto industry struggling right now?
Intense competition, for one. The global auto business grows tougher every year, and we accept that. Our ability to
compete has made us the world’s number-one auto maker for 74 consecutive years, and we’re fighting hard to stay on
top.
Beyond that, our performance in the marketplace has not been what we’ve wanted it to be.
While we’ve been strong in truck sales, we’ve been weaker in cars, and, yes, the recent surge in gas prices hurt sales.
While we’ve led in technologies like OnStar, we’ve lagged in others like hybrid vehicles. Rest assured, we’re working
hard to address the areas where we lag. Simply put, we are committed to doing a better job of designing, building and
selling high-quality, high-value cars and trucks that consumers can’t wait to buy. No excuses. We will step up our
performance in this regard.
But competition and marketplace performance are not the whole story. To fully understand
why GM and the U.S. auto industry are struggling right now, we have to understand some of the fundamental challenges
facing American manufacturing in general – challenges well beyond the control of any single company.
There are those who ask if manufacturing is still relevant for America. My view: You bet
it is! Manufacturing generates two-thirds of America’s R&D investment, accounts for three-fourths of our exports,
and creates about 15 million American jobs. And the auto industry is a big part of that, accounting for 11% of American
manufacturing, and nearly 4% of U.S. GDP. Together, GM, Ford and DaimlerChrysler invest more than $16 billion in
research and development every year – more than any other U.S. industry. And GM, alone, supports more than one million
American jobs.
So what are the fundamental challenges facing American manufacturing? One is the
spiraling cost of health care in the United States. Last year, GM spent $5.2 billion on health care for its U.S.
employees, retirees and dependents – a staggering $1,525 for every car and truck we produced. And the figure is going
up again this year. Foreign auto makers have just a fraction of these costs, because they have few, if any, U.S.
retirees, and in their home countries, their governments fund a much greater portion of employee and retiree
health-care costs.
Some argue that we have no one but ourselves to blame for our disproportionately high
healthcare “legacy costs.” That kind of observation reminds me of the saying about no good deed going unpunished. That
argument, while appealing to some, ignores the fact that American auto makers and other traditional manufacturing
companies created a social contract with government and labor that raised America’s standard of living and provided
much of the economic growth of the 20th century. American manufacturers were once held up as good corporate citizens
for providing these benefits. Today, we are maligned for our poor judgment in “giving away” such benefits 40 years
ago.
Another factor beyond our control is lawsuit abuse. Litigation now costs the U.S.
economy more than $245 billion a year, or more than $845 per person. That’s more than 2% of our gross domestic product.
No other country has costs anywhere near this level. And the perverse thing is that, in many cases, the majority of
courtroom settlements go to the lawyers and other litigation costs, not to the injured parties.
Another major concern is unfair trading practices, especially Japan’s long-term initiatives to artificially weaken the
yen. A leading Japanese auto maker reports that for each movement of one yen against the dollar, it gains 20 billion
yen in additional profitability – or nearly $170 million at today’s exchange rate. No wonder Japanese auto makers have
noted their recent record profits were aided by exchange rates. And no wonder the U.S. trade-balance deficit continues
to grow by leaps and bounds.
There are other issues, of course, but my point is this: We at GM have a number of tough
challenges that we must and will address on our own – but we also carry some huge costs that our foreign competitors do
not share.
Some say we’re looking for a bailout. Baloney – we at GM do not want a bailout. What we
want – after we take the actions we are taking, in product, technology, cost and every area we’re working in our
business today – is the chance to compete on a level playing field. It’s critical that government leaders, supported by
business, unions and all our citizens, forge policy solutions to the issues undercutting American manufacturing
competitiveness. We can do this. And we need to do it now.