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April 10, 2005

GM and Health Care Costs.

Luke Johnson starts well in his analysis of the GM problems:

GM is a prisoner of its past. It has unionised plants and armies of retirees - almost two and half pensioners for every active worker - 420,000 of them in all. And its workers enjoy generous healthcare benefits that are crippling the business. Right across the US there has been a ruinous increase in such costs, so that in 2005 GM will incur health care spending of $5.6bn (£2.95bn). It covers 1.1m Americans, and has become the largest medical provider in the country.

Overall, GM's pension and health insurance burden is more than $2,000 for every car it sells - more than the cost of the steel that actually makes up the product.

It’s possible to go a great deal further. Those pensioners are going to get screwed out of both their pensions and their health care benefits. For they are unfunded, there is no great pot of money put aside to pay for them. As above, they come out of current operating costs. There’s no two ways about it, they’re going to get screwed.

Either GM shafts them now and tells them to go weep in the gutters for their promised benefits, or GM goes bust and the administrators shaft them later and tell them to go weep in the gutters for their promised benefits. Sorry, it doesn’t matter what we would like to happen, doesn’t matter what would be fair or reasonable, those are the only two options. They’re screwed.

The only question left is how badly they get done over. If GM drops the health care benefits it might survive to pay the pensions. I don’t know about you but if I was facing the choice of neither health care cover nor pension and pension but no health care cover, I’d take what I could get.

April 10, 2005 | Permalink

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Comments

Ah but the pension fund is probably covered, at least in part, by the Fed Govt's pension protection scheme, which isn't yet bust. So they might be better opting for the medical cover, unless that's covered too.

Posted by: dearieme | Apr 10, 2005 4:45:29 PM

The pensions are backed up by government insurance and are, to a large extent, funded.

One reason there are so few workers per retiree is that GM has outsourced a lot of its manufacturing value-added. GM's suppliers operate in an extremely competitive environment and overall have very reasonable labor costs.

True, health care costs are a direct burden on GM but health care costs for auto-workers are a cost of doing business everywhere. Someone pays them. This is a source of competitive disadvantage but not a fatal disadvantage. After all, the Japanese assemble cars in the US and face similar health care costs.

The real issue for GM is a gradual loss of global market share due to a less than competitive product line.

Posted by: Charles R. Williams | Apr 10, 2005 4:53:33 PM

Another point. GM retiree medical benefits are contractural obligations. These are not funded but retirees eventually have primary coverage under Medicare. How long will the UAW (union) be willing to bargain for them at the cost of the viability of the business and the jobs of active workers is a good question. If GM discontinues retiree medical benefits it would not be a disaster for most retirees but it would be a heavy blow for some.

Posted by: Charles R. Williams | Apr 10, 2005 4:59:28 PM

After all, the Japanese assemble cars in the US and face similar health care costs.

But they don't have to pay for legions of retirees.

Posted by: ATM | Apr 10, 2005 11:34:27 PM

After all, the Japanese assemble cars in the US and face similar health care costs.

Not true. The foreign car makers have a tremendous advantage.

Health care and pensions at GM were negotiated 25 years ago when all seemed swell. The foreign car makers do not have this historical burden and have never paid as well or granted such high benefits.

Tim adds: As important, the Japanese don’t have a shrinking workforce, paying for a larger ex-workforce.

Posted by: Ken | Apr 11, 2005 8:24:53 PM

GM could shift its production to Cuba! Those Commies would be able to work for $20/mth, Cuba has a huge shortage of cars and the cost of exporting them to the US would be minimal *if* GM can persuade the US Gvt to lift the embargo.
They used to say what's good for GM is good for America!

Its not only GM is it, also Ford, and I guess probably companies like Boeing (?) will increasingly find themselves in this position.

Another *possible* salvation for GM would be for the US govt to end steel subsidies and trade tariffs, this would slash $100s off the production cost of each car - but GM could maintain prices - and use the spare cash to plug these shortholes.
Or maybe (longshot) GM could de-list and become a mutual, giving its shares out to the ex-employees (or current ones?) (who want them) as payoffs instead of their pensions/healthcare? As a mutual company the company wouldnt need to turn a profit and the workers would also be the owners so may take pay cuts.

Or GM could just go bankrupt "do a Rover".

Posted by: Monjo | Apr 11, 2005 10:11:07 PM