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.
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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.
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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.