GM's Prescription for Profitability

GM and many other U.S. Companies have followed a prescription that is taught at all major business schools that are supposed to lead to long term profitability. The formula looks like this:

• Outsource work
• Reduce workforce
• Sell off business units

This formula always works: In the short term. When labor accounts for 30-40% of the business costs, a 25% cut in employment results in an immediate 10% gain to the bottom line.

Outsourcing work also has an immediate positive impact. Often, by outsourcing, companies like GM can get an immediate 20% cost cut. Again when 60% of your costs are in-sourced this is a powerful lever. But each time you pull the outsourcing lever, it is less and less effective.

There is a delayed cost increase with the outsourcing. Often, overhead costs do not keep pace with the outsourcing so the remaining business becomes even more expensive leading to more outsourcing. Additionally, as more work is outsourced, both knowledge and power shifts to the suppliers and supplier costs actually begin to creep up.

Finally companies sell off entire parts of the business for a one time gain. In the past decade, GM sold off Delphi and Alison Transmission. Each time the company justifies this by saying "this isn't our core business".

The results speak for themselves. The prescription works in the short-term but destroys the company over the long-term.

What's Wrong With GM? It must be their workers!

We have heard it over and over again. GM is failing because of the unions. No unionized company can compete. Do GM's problems really lie with the UAW? The answer is no ... and yes.

Let's look at the high costs of labor. According to GM's annual report they are paying the unions $73 per hour in wages and benefits. This has been picked up by newspapers and news outlets. If this were true it would be outrageous. My company has a pension plan and full medical benefits. They are kind enough to let me know the cost of each. My medical benefits run around $13,000 per year for my family. That comes to around $6.50 per hour. My retirement plan costs the company around $10,000 per year or approximately $5 per hour. Vacation costs around $1.50 per hour. The average union wage is between $25 and $32 per hour. At $32 per hour this comes to $45 per hour.

So how does GM come up with $73 per hour? Well the $73 per hour includes costs of retiree pensions and retiree health care. All this is borne by the current workers in the $73 rate. Those costs should have already been charged to previous years. What it means is that GM did not set the money aside over the past 30 years. They sacrificed long-term viability for short term profitability and now GM is bearing the burden of their short term thinking.

Even when you evaluate GM's labor costs that include post retiree benefits, it accounts for a meager 8% of GM's total costs. GM must have bigger problems than just labor costs.

The problem that GM does have with the unions is that neither trusts the other. Seventy-five years of animosity has bred a relationship that prevents the trust needed to work together to solve GM's problems. Labor is the answer to developing the long-term productivity but the productivity gains have to come with more job stability. These gains are worth billions per year but the real fear of job loss from productivity gains prevents the steps needed to realize this potential. Can trust truly be the answer?

Four Charts - GM's Scorecard

These four charts tell the story of GM over the past decade. While Rick Wagoner has pulled in a total of $67 million, GM has continued on its downward trend.

Rick's Red Herring - Health Care Costs

I have been watching Rick do interviews for several years. It seems that he never fails to talk about the health care cost disadvantage at GM. The number that he uses is $1,600 in health care costs in each car that GM sells. This number has been repeated by business reporters and pundits. I decided to check the facts. In 2007, GM's health care costs were $4.6 Billion. That is a huge number but when you look at health care costs as a percentage of total costs it come to 2.1% of total costs. Additionally 2/3 of the health care costs are for retirees.

Lets do the math.

GM built over 9,000,000 cars in 2007 when you divide the $4.6 billion in health care costs you get $511 per car. If you only include US manufactured cars the cost per vehicle is increased to $1022 per vehicle. It is still far less than the $1600 that Rick has used consistently over the past several years.

So we've done the math and we are doing exactly what Rick wants us to do. Focus on health care. GM's 2007 annual report mentions health care 91 different times. The annual report doesn't mention poor management even once. If GM's health care costs were zero in 2007 GM would still have lost over $34 Billion dollars. Simple analysis show there are much greater problems at GM than health care.

Rick's Destruction of an American Icon

In an November 19 Wall Street Journal Op Ed article, Rick Wagoner bemoaned the state of his auto industry and stressed the importance of maintaining a strong manufacturing base in America. He talked about how the automotive industry is a vital engine of economic growth and a foundation for economic stability. He discussed the how critical the auto industry was for America to compete in the global marketplace of the 21st century.

I don't think that anyone in America disagrees with Ricks statements. Except perhaps Rick himself. For all of Rick's wonderful words in 2008, his actions from 2000 to 2008 have systematically destroyed the auto industry and the American Dream for hundreds of thousands of Americans.

In his article Rick states at General Motors, we have been responding to fierce competition here and abroad by transforming our business. Over the past decade, we have taken tough actions to cut costs. He even goes so far to equate transforming the business with eliminating the very American Manufacturing base he says is so important. Since 2000, we have reduced our U.S. hourly workforce by 52%, from 133,000 to 64,000, through buyouts and other programs. During the same period, we have cut our U.S. salaried employment from 44,000 to fewer than 30,000, and reduced our U.S. executive ranks by 45%.

Rick's goal is to reduce the total work force from 94,000 to 65,000 by 2012. So I want to make sure that I get this right Rick is asking for $20 Billion from the taxpayers to cut an additional 30,000 jobs. That's $666,000 for each employee that he eliminates. That is a raw deal for the employees of GM and the American people. We all deserve better.

Introduction

I am starting this blog to explore the management "skills" of Rick Wagoner. Perhaps no CEO has presided over a greater devaluation of a blue chip company. I would like to explore whether this is a good manager who is a victim of bad timing or if there is more to the story. ..