The automakers are facing a huge challenge. They have to get back to profitability and I don’t think that the public realize how tough this is going to be. There are a number of things that need to be changed that have nothing to do with cars.
Legacy costs are the costs for former employees that no longer work for the company. These folks have insurance and retirement costs that are a real drag on the profitability of the companies. Something on the order of $1800 per car is set aside to pay these costs. These costs are contract language agreements made years ago when the “Big Three” were the masters of the automotive universe; they were making money hand over fist, and needed to keep the plants open to keep feeding the public’s appetite for new cars. They had the money and didn’t see anything in the future that would keep them from being able to make the payments. They also had actuary tables that told them that their employees would live “X” number of years and would cost the company “Y” number of dollars. What the automakers didn’t think about was that medical advances would allow people to live so much longer, new and expensive medical procedures allowed retirees to live much longer than the system planned. As they lived longer and addressed ever more expensive medical procedures, the costs to the automakers started to skyrocket. The pension payments went on years longer than they originally planned. Also, as automation increased, the automakers had excess labor to either retire out, layoff, or retrain, all expensive. The expenses were so high that the automakers set up a program that paid workers to just sit on the bench and do nothing; it was cheaper than the alternatives.
A number of things happened that changed the equation and cut in to profits. One was the rise of foreign automakers; they built relatively inexpensive, dependable autos and cut in to Detroit’s market share. The new cars had better technologies and were better built; they lasted longer, cutting the number of new cars purchased. Because there were more cars on the market, the automakers had capacity that had to be kept busy, so they dropped profit margins to move cars. Sales dropped, profits on cars that were sold were dropped, and income dropped, less money for the car companies spend. Less money to spend met less innovation and less money for stockholders. This led to lower stock prices, lower capitalization, and it was harder to borrow money. I know this is simplified, but these are examples of how many different factors came together in a perfect storm. Now the government is going to start telling the automakers how to run their business.
The government wants fuel efficient, safe cars built. The automakers have tried this in the past, but the costs led to prices that the public didn’t want to pay. The future may get to a point that the numbers work out for the consumer, we’ll see. The government needs to realize that they are temporary managers of the companies and they have never run a car company. Decisions in this industry take years from the decision being made, to the vehicle being in the marketplace. We’ll see how it all comes out.
GOOD LUCK
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