The Detroit News GM Braces For Sweeping Changes

By Daniel Howes
October 17, 2004

DETROIT, General Motors Corp.'s outward courage in the face of depressing third-quarter numbers - and the promise of more of the same - masks a growing determination to change the way it does business.

Or risk its long-term survival by clinging to an obsolete business model ill-suited for the hyper-competitive global marketplace of the 21st century.

GM isn't in danger of going out of business, not now anyway. Its car and trucks generate cash and garner increasingly high marks for their styling, quality and reliability. GM plants are productivity leaders. The GMAC credit company is solidly profitable. The renaissance of Cadillac is for real. And GM's bets are paying off in the developing markets of China, Brazil and Eastern Europe.

But the steadily rising health care tab for GM's U.S. employees and retirees, expected to total $5.1 billion this year and keep climbing, risks swamping GM's improvements in product development, plant efficiency and cutting the cost of materials. Altogether, GM's obligation to its retirees stands at $67 billion.

It's difficult to overstate just how heavy that burden has become, even for the world's largest automaker. Morgan Stanley estimates that pension and retiree health care costs GM $1,824 per vehicle, compared to $1,460 for Ford Motor Co., $985 for Chrysler and just $186 for Toyota Motor Co.

To those who were listening closely last week, Chairman Rick Wagoner clearly signaled that tough moves are coming soon for GM in the United States, just as they are in Europe, where GM plans to eliminate another 12,000 jobs.

"We've got to move faster in addressing some tough cost challenges like health care in the United States," he said. "I don't think we can accept that the health care problem will be solved gradually over the next two decades. We don't have two decades."

Behind the scenes, folks at the General are girding for some cutbacks. They are likely to include at least three plant closings - two of which were negotiated last year with the United Auto Workers - still-undetermined reductions in the automaker's 38,000-person salaried work force and more consolidation of GM's global functions.

GM said Friday it plans to close its Saginaw Malleable Iron plant, which employs 350 hourly and salaried workers. Baltimore Assembly, home to GM's full-size vans, also likely will be closed. GM's plant in Linden, N.J., is expected to be "idled," a term of art that enables a Detroit automaker to effectively close a plant during the current national contract without violating its "no close-no sell" clause.

Additional plant actions, beyond the production cutbacks previously announced for the fourth quarter, aren't likely anytime soon. Nor is talk, and it's only internal banter, of approaching the UAW just one year into a four-year contract and asking to renegotiate some key provisions covering health care.

Such a request wouldn't get any further than a similar one did in 1991 when a reeling GM then slipping into a wartime recession asked UAW President Owen Bieber for help easing some of the rich provisions negotiated a year earlier.

That's why there's growing sentiment inside GM that the company first will look to reduce its salaried work force and perhaps consolidate operations with lower-cost facilities outside the United States as a way to reduce costs.

Other options are likely to be explored, too: selling assets, such as GM's Electro-Motive Division; continuing to improve manufacturing and product development efficiency; outsourcing selected technical jobs to lower-cost operations in Asia and, perhaps, Eastern Europe.

Plant closures alone won't close the health-care gap and ease the burden. Nor will cutting thousands of salaried jobs, or negotiating health-care concessions with the UAW, or continually streamlining GM's global operations, or even eliminating executive bonuses from now until the end of time.

Unchecked, rising health-care costs could erode GM's financial strength more than they already have, and sap its spending to develop new cars and trucks. An automaker which cuts spending on new products - which GM has so far managed to avoid - is an automaker that is doomed.

There is no single answer to the burden weighing far more heavily on GM and its crosstown rivals than its foreign-owned competition. Rich union contracts are an issue, but they aren't the only issue.

Blaming the union doesn't help solve the problem when union members are needed to build world-class cars.

Yes, the time is coming when UAW leaders will be asked to surrender some hard-fought benefits in exchange for corporate viability. In fact, if things deteriorate as badly for GM, Ford and Chrysler as they have for major U.S. steelmakers and airlines, both sides may have no choice.

But that time, which Detroit's automakers desperately want to avoid, hasn't yet arrived.

That's why UAW President Ron Gettelfinger is publicly touting some form of national health care. Such a system, clearly opposed by the Bush administration, but supported in some limited form by Democrat John Kerry, would address the single biggest challenge facing GM, Ford and Chrysler.

That's also why Wagoner, despite the objections of Republicans in Congress, is continuing a yearlong rhetorical offensive warning of the dangers of runaway health-care costs. They threaten American manufacturers employing American workers in American towns and cities.

GM can't afford to wait for some kind of national solution that may be years away.