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Monday, May 16, 2005

Forbes: Big 2 Underrated

Steve Forbes, in the May 23rd issue of his magazine, writes that Ford and GM are underrated, financially. He argues that better products are coming, and that the balance sheets are not bad.

The woes of the U.S. automotive industry have been well covered by the media. The problems are all too real, but the negativity has been overdone.
...
Ford Motor Co.'s common stock and its income securities have been way overhammered by the fallout from General Motors' well-publicized woes. If Ford is an example of a large, sick company, may there be more of them. Ford will make money this year. More important, its cash flow is positive. That is something to emphasize: Ford will take in more cash than it spends--this in a year that'll be pretty tough for auto manufacturers. The company already sits atop more than $23 billion in cash--that's more than $12 a share. Debt? The obligations of Ford's financial arm are well covered by the stream of payments from auto buyers. The automotive part of the company has debt of $17 billion, and maturities are prudently stretched out for years to come.

Make no mistake, under Bill Ford's leadership future designs of Ford vehicles will be exciting, cutting-edge, à la the brisk-selling Mustang and the GT sports car.
...
General Motors? If management does for the rest of GM what it did for once-tired Cadillac, then GM is in for sunnier days.

So far, I am with him. The media, and certain web pundits, hammer on F and GM incessantly, as if they are stuck in a loop. It is nearly obsessive-compulsive, the frequency of criticism from all directions. Enough to make a guy like Bob Lutz lash out at the media.

However, when Forbes gets to the practical advice on how to handle the huge cost disadvantage of the American automakers, he loses his marbles, a little.

What about Detroit's onerous health care and pension obligations? The answer is for unionized workers to switch over to Health Savings Accounts (HSAs). They'd still enjoy catastrophic coverage, and much of their high deductibles would be covered by cash payments to their individual tax-free accounts. Auto manufacturers would save a bundle on healthcare premiums, and most workers would see HSAs as a positive step up from their current plans: If a worker is blessed with good health, he would build up a nice pile of cash that belonged to him. A variation on HSAs could be offered to retired workers.

The United Auto Workers will fiercely resist such a change--initially. There may even be labor strife before the union accedes. But leaders and members know in their gut that the current situation is untenable. With an HSA-type solution they'd get as much of a win/win situation as is possible under the circumstances.

As for pensions, a bit of improvement in the financial markets will provide enormous relief. Longer term--after the introduction of HSAs--the next battle will be to get 401(k)-like plans for new unionized factory workers.
I have a great deal of respect for Steve Forbes, however, I think he must have been drinking Michael Jackson's cool-aid. HSAs? Personal retirement accounts? For the UAW?!?

The UAW will never agree to HSAs. They would have to turn their backs on decades of labor paternalism. The union promise to their people is this: "join our union, keep us in power, pay your dues, and we'll make sure you are taken care of". HSAs would no doubt work, by causing people to consume less healthcare, since some of the cost will come directly out of their accounts. However, in an HSA, the user has to manage the billing himself, even negotiating prices with doctors. I just don't see the UAW going for it--and I don't blame them.

A 401(k) like retirement account for auto workers is a little more likely, but they probably won't offer much choice for the worker. From the UAW web site:

The UAW believes that 401(k) plans can provide a valuable supplement to defined benefit plans. But, as vividly demonstrated by the Enron and WorldCom debacles, these plans provide less retirement security for working families. Workers are not guaranteed any specific benefits under 401(k) plans. Instead, the benefits are subject to the risks of stock market fluctuations and may turn out to be illusory. Significantly, the PBGC does not guarantee benefits under 401(k) plans.

To prevent a recurrence of the Enron and WorldCom abuses, the UAW believes there is a need for reforms... to ensure that there is prudent diversification of plan investments by participants in 401(k) plans.

And even if the UAW agreed to change to individual retirement accounts instead of a traditional pension plan, the companies would still have to keep paying existing retirees. There is no way around the problems of a shrinking company.

13 comments:

Anonymous said...

If GM does for the rest of its divisions what it did for Cadillac, it will have 9 great brands...all competing against EACH OTHER and cannibalizing each other's sales.

Memo: GM can't AFFORD to make NINE DIFFERENT BRANDS competitive in the first place, and even if it does the end result is cannibalization of its own sales, like a snake eating its tail.

The Auto Prophet said...

You are right, GM doesn't have the cash to completely re-build all of its brands.

What it needs to do is build some exciting cars off of a few common high quality platforms. Get the styling and interior right.

NextGenAuto said...

If you're talking about product, both of the Big 2 need to step up on the quality image.

If you're talking about the financial end, Ford has the most potential out of the two of them and their stock tends to be a bargain. Of course, the risk is if they fall on hard times they'll be in trouble. But they're are some healthcare/labor costs that will eat both companies alive. Unions should be partners in the success of the companies because ultimately if you have a paying job you will be ok. This union nit-picking over benefits/pay can drive companies into the ground... Both sides, union and management, must be open and honest and be will to make concessions to keep a company in the black and keep it on a path to success.

The Angry Engineer said...

Ford's short-term financials do indeed look better. However, if I'm not mistaken, they still carry just a bit more bond debt than GM, they've got less gross revenue, and their market share is dropping even faster. I'd be reluctant to say that one company has better long-term financials than the other - they're both quite horrid in my opinion.

With regards to the UAW, they said it all when GM asked for concessions on health care - the union doesn't believe that the situation is "dire enough" to justify re-opening the contract. Now, by the time that '07 rolls around, I'm sure the situation will indeed be dire enough to catch even the UAW's attention. In the meantime, the rank-and-file might want to spend a few minutes investigating what happened to steelworkers, and maybe think of ways to avoid that fate (hint: the solution doesn't lie with inaction).


HSAs don't come to the aid of GM's bottom line for another decade or more - the same for 401(k) accounts. That's approximately 9 years too late.

Besides, health care for currently-employeed workers only represents 25% or so of GM's total health-care costs ($1.5B or so), so a re-negotiation isn't likely to even shave a billion dollars off GM's yearly costs. In other words, it's only a couple of drops in the bucket, especially compared to the $16B in debt that comes due this year for GM.

I don't think that Forbes has ever been quite right since that whole incident on SNL with Rage Against The Machine. He should go back to shilling for the flat tax and leave the messy work for others.

What next - advice for the Big 2 from Donald Trump? After all, that jackass is quite an expert at bankruptcy.

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