Tuesday, April 26, 2005

GM and Health Care: Don't Look Behind That Curtain

by Tom Bozzo

GM has received plenty of blogosphere attention over its latest round of financial woes, attributed in part to its retiree health benefit cost burden, in part for the optimistic interpretation that corporate America might ultimately find that some more socialization of medicine is actually preferable to the burning airplane about to crash into a train wreck that we presently enjoy.

My assessment of the optimistic view: dream on. If there's an overarching theme to Bush domestic policy initiatives, other than buying the support of core constituencies through government debt issuance, it's the transfer of risk from institutions — corporations and government — to individuals. This is a common theme of U. of Oregon's Mark Thoma over at the excellent Economist's View (see, for instance, this early post).

While corporate health care bills may yet have some major firms crying uncle, the likely response under the present direction is a cocktail of health savings accounts plus mandatory purchase of private insurance to cover major medical expenses. (That's the Gary Becker plan for universal health care, in a nutshell.)

But I digress. I don't actually believe that GM's health care costs, however large or fast-growing, are the real issue. Rather, invoking the health care crisis strikes me as a bit of strategic misdirection from GM's main problem, which is that much of its product line remains second-rate and its forward-looking product strategy is an incipient disaster.

An Automotive News story from this morning makes the basic case: GM's North American revenues for the first quarter were off $3.7 billion compared to the previous year's quarter. GM's health care bill for 2005 is expected to increase by $400 million.

Back a few months ago when Pub Sociology's Brayden King and I were really excited about executive pay issues, I raised the question of whether GM vice chairman and design guru Robert Lutz was worth his $6.5 million annual pay. Could be, I suggested, if famed "car guy" Lutz's influence could eat into the huge discounts needed to move GM's metal, it could be. Since then, Lutz has been stripped of his direct responsibility over GM's North American product lines, though he is still charged with global product strategy or something like that. Overall, the verdict on Lutz is turning thumbs-down.

Here's a snippet of Lutz's vision thing from last Saturday's New York Times:
"Everybody thinks high gas prices hurt sport utility sales," said Robert A. Lutz, the vice chairman of G.M., in an interview last month. "In fact they don't."

Mr. Lutz said most buyers of big S.U.V.'s were highly affluent. For "the median income of, say, a Suburban or a GMC Denali buyer, probably the best demographics of any vehicle we have, or a Cadillac Escalade, you're looking at people with a household income of $150,000 to $200,000," he said. "Do they care whether their gasoline bill goes from $20 a week to $40 a week? The answer is no."
While my household income isn't in the territory of the prime Escalade demographic, it's far enough along that I can say that you can't take $1000/year out of my pocket without attracting my attention. I also caught, via the Daily Kos Cheers and Jeers, a great Bill Maher quip:
Of course, the Hummer is made by General Motors, the owner of other gas-guzzling F***-You-mobiles like the Escalade and the Suburban. And they just lost a billion dollars in one quarter. Because it suddenly got a lot less sexy to drive one of these fake macho vehicles now that it costs a hundred bucks to fill it up...
And as it happens, while GM's truck sales are faring better than its car sales overall (see here for the gruesome details), its insanely profitable midsized and large SUVs are faring poorly, with Yukon and Suburban sales down 25-30% and even the Escalade mildly off over the year-earlier quarter.

Even GM's relatively desirable car models, such as the 'Art & Science'-themed Cadillac cars (for which I confess to harbor a certain attraction), can't — unlike the foreign competition — command anything like their MSRPs: the fine print of a recent ad for lease deals on the well-regarded CTS and STS models made it clear that a few thousand dollars' discount is typical, in line with GM's $4000-plus average incentive per vehicle sale.

According to the Automotive News article, GM loses around $2,000 on a typical mid-size car sale. Based on its average incentives, it follows by advanced math that if their cars were more nearly marketable at something close to their asking prices, GM's bottom line would benefit enormously. Taking the car lines to break-even would add something like $3 billion to GM's net income. If GM could live on Honda or Toyota incentives, they could actually make money on cars!

Lutz's contributions to that goal, however, appear grossly inadequate. A lot of effort has been lavished on a handful of low-production "halo" cars, like the new GTO (a flop) and small convertibles for Pontiac and Saturn. Even if successful, those cars can produce only so much contribution to the company's overhead on their own. Without a stronger backup cast, it's hard to imagine customers drawn into the showrooms for the Solstice and Sky forgetting to stick their hands out for rebate checks when they settle for a G6 or an Ion.

GM's near-term hopes really are pinned on the next-generation large SUVs, due in about a year. Should oil prices not moderate, look out below.

Meanwhile, the marketing signlas are dire. Trying to move a warmed-over Century with an ad campaign suggesting that hot babes dream on about them is just a cry for help. Plus, as Jeremy notes at the link (and with apologies to readers of a certain age), the geezer rock and geezer car demographics are rapidly converging.

Still, there's no reason that good product can't turn things around. I don't especially care for the Chrysler 300, but it sells. Even Boeing, whose commercial business was looking dire and whose management seemed to want to deal with anything else, now seems to be getting significant traction with the forthcoming 787.
Great post. Especially noting $400MM is drop-in-the-bucket compared to an annualised $14.8B decline in income.

Don't be too sure about the health care question, though: GM actively lobbies in Canada to maintain the national health (realising, in part, that otherwise their workers are more likely than the average Canadian to be exposed to a dangerous work environment) and would assuredly do so here if they thought it would do any good.
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