Talk in the marketplace about Detroit and Washington has been percolating about giving General Motors (GM) and the auto industry in general a bailout a la the TARP for the banking industry. GM is on the verge of running out of money. Cash received from auto sales, down dramatically from last year, will not cover the cost of running its business. GM has a monthly cash burn rate of $2 billion or more per month and only $16 billion in cash left on its latest quarterly balance some of which needs to be held in reserve.
GM blames the current economic environment on its woes. Year-over-year sales at month end October saw a 45% decrease, worse than almost all of its competitors. Toyota (TM) for instance, which will soon overtake GM’s market share in the space, saw sales decline a significant but less severe 23% over the same period. But GM’s execs are not being genuine. GM has never been a great business.
Warren Buffett in 1991 gave a speech to Notre Dame students and faculty. In it he compared two businesses - Company Agony and Company Ecstacy. Company Agony lost its investors more money than virtually any business in the world while the other, Company Ecstasy, did nothing but make money.
The difference in the two businesses was Company Agony, which in Buffett’s story was American Telephone and Telegraph, had all kinds of employee benefit programs, stock options, pensions, the works. The business operated under heavy regulation, was heavily unionized and extremely capital-intensive. In fact, shareholders had to continually reinvest in the company simply to keep it going.
Company Ecstasy on the other hand, Thompson Newspapers, didn’t have elaborate compensation programs and never needed to reinvest in the company. It simply wrote a story and produced it by putting ink to paper. Thompson was able to raise prices, which raised earnings, and there was nothing to do with the money except to return it to shareholders or purchase more profitable businesses.
In advising his audience about which kind of businesses to work for, an Ecstacy non-capital intensive business or an Agony capital-intensive business, Buffett said:
One is a marvelous, absolutely sensational business, the other one is a terrible business. If you have a choice between going to work for a wonderful business (Ecstasy) that is not capital intensive, and one that is capital intensive (Agony), I suggest that you look at the one that is not capital intensive.
The same can be said for investing in capital intensive businesses. Investment in a capital intensive, Agony business like GM where market share [chart below] is eroding, which began well before an economic recession, labor costs are the highest in the industry at $73 per hour [$30 higher per hour than Toyota’s], the workforce is heavily unionized and it makes products consumers don’t want (i.e. gas-guzzling SUVs), doesn’t seem like a smart move to me. If an investment in GM never made money in the past, what would be different now? I venture to say, nothing.
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This article has 70 comments:
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investor88
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727 Comments
Nov 16 10:00 AMI was scratching my head minutes earlier when I read a seekingalpha article which says Japan pay rates for auto workers are actually higher than Detroits' - I have to thank Benjamin for pointing out that Detroit's usd73/hr is actually more than double Toyota's usd30/hr.
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eternitus
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52 Comments
Nov 16 10:00 AM-
Richard Wendling
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45 Comments
My Website
Nov 16 10:09 AMIf you want to make cuts, one cut managements salaries and stock options and two, cut workers pay down to the $17.00 an hour rate that the so called foreign companies are paying their workers now.
Richard
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John D
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38 Comments
Nov 16 10:19 AM-
Nelson
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1 Comment
Nov 16 10:32 AM1. Replace the CEO of GM. He has lost $80 Billion in the last 10 years.
2. Move ahead the UAW contract to start 2009 (that would have kicked in in 2010)
3. Change the health benefit and per hour pay for the UAW to be in line with Toyota, Nissan in the US, immediately.
4. Force the shutdown of plants in the next 90 days to align with capacity.
5. No executive bonuses for 2009 and 2010.
6 Chrysler balance sheet must be transparent, if it wants a bailout.
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anarchist
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140 Comments
Nov 16 10:42 AM-
Lazaris
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12 Comments
Nov 16 10:43 AMI am so sick and tired of hearing that GM's labor force makes $70 per hour, that is such a load of crap, and you know it.
I got another clue for you, GM was building what the consumer wanted...everybody and his brother wanted an SUV or a truck as their second or third vehicle, and GM made millions of them for them. It was not GM's fault that gas went to $4.00 plus and all of a sudden all those people that wanted that SUV coudn't afford to drive it anymore.
The UAW has already agreed to a 50% cut in wages for new employees , and the UAW will be taking over the retiree health care, so GM's labor and legacy costs have already been addressed.
Unions helped create the middle class in this country, which is disappearing just as fast as the Bank Bail-out money is.
When all those autoworkers are making $14.00 per hour, thats all the less that they will be able to spend where all you labor and union bashers work.
All this talk of "don't bailout GM" or "where is it all going to end" is nothing but a not so veiled attack on the workers and the unions in this country.
The Republicans are so bitter about losing the election, that they are going to take it out on labor unions, by blocking a GM bailout.
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howie1114
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1 Comment
Nov 16 10:58 AM-
IXLR8
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26 Comments
Nov 16 11:27 AMToyota has sut down its $2 Billion assembly plant where they assemble Tundra pick-ups. The new Lexus SUV's sales are down 50%. Seen the new Toyota Sequoia SUV? Me neither.
Now, there is even talk about Toyota dropping plans to assemble the Prius in the US. But, Benjamin says, Toyota is smart and GM is dumb.
Remember, Benjamin, GM employs more people in the US than all the imports combined.
If GM's labor costs are $73/hour, that's because they are paying the pensions and health care for 700,000 retirees and their families. GM's and Toyota's individual workers are paid approximately the same.
If you would prefer, cancel the pensions, and let them be funded by the Federal Pension Guarantee Corporation, which itself is $50 Billion underfunded to handle its present obligations.
I hope that Benjamin never needs a loan to pay for his house or car or to help his parents with their retirement or health care expenses.
.
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IXLR8
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26 Comments
Nov 16 11:31 AMPS GM MUST be selling the vehicles that people want to buy.
No manufacturer (Ford or Chrysler) or assembler (Toyota, Honda, Nissan, Hyundai, Mercedes, BMW, Mazda, Mitsubishi) sells more vehicles than GM each year.
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Haigh
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5 Comments
Nov 16 11:39 AMTaking money from the productive sector and channeling it into a business that has a proven track record of failure is a sure way to perpetuate a recession/depression and sustain the downward trend in America's standard of living.
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Mister Jimmy
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77 Comments
Nov 16 12:28 PMwww.gm.com/experience/.../#
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sportsmadness78
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3 Comments
Nov 16 12:36 PM-
sportsmadness78
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3 Comments
Nov 16 12:41 PM-
Bob Lunn
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88 Comments
Nov 16 12:41 PMWe were told that tax payers money was being provided to these financial institutions to "increase the flow of liquidity". That was the "spin" put on the bailout. Now look at what the financial institutions are doing with the tax payers money. They are sitting on the sidelines waiting for companies to fail, then they swoop in and purchase those companies at fire sale prices. They are not using the tax payers money to increase the flow of liquidity, they are using the tax payers money as a financial windfall to purchase other companies. The Fed lowered the prime rate. How much of that rate decrease "trickled down" to JOE TAXPAYER? It kind of puts the phrase "October surprise" into perspective. A final fleecing of the American Tax Payer is in progress.
If you want to see what a financial burden on tax payers looks like, let the automotive manufactures go bankrupt. Check out what happens to tax revenues across this country as all of the jobs associated with the United States automotive industry are lost. Check out how many jobs in your city are lost because the US automotive dealerships and secondary parts suppliers go bankrupt.
Where do you think you are going to service your US vehicle? What do you think your US vehicles new car warranty is worth? Where do you think the cities and states are going to get the revenues needed to run our schools, public health, and police services? If you are in the market for a new car, would you purchase a $20,000 plus vehicle who's warranty is backed by a company that is in bankruptcy? What do you think the State and Cities are going to have to do to make up for the tax revenue loss associated with the loss of all those payrolls?
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sportsmadness78
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3 Comments
Nov 16 12:46 PM-
Mister Jimmy
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77 Comments
Nov 16 01:01 PM-
ex GM emp
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9 Comments
Nov 16 01:05 PMDo a little research next time, bro.
On Nov 16 12:41 PM sportsmadness78 wrote:
> Mister Jimmy you are right they cannot haul stuff in a Prius, but
> Toyota's trucks get similar gas mileage and are just as rugged. But
> their company has a better reliability rating. You dont see Toyota
> stock at $3 do you? Your arguement is simply weak.
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User 299220
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1 Comment
Nov 16 01:06 PMIts Losers like you that have screwed this country - yeah the bankers too - but especially pro-union losers. Thats why we will never be competitive - thats why we have DINOSAUR industries in this country. Shame on you SHAME ON US. How about NO BULL*HIT Bailouts for anyone. Time to let markets do what they are designed to do - FLUSH EXCESS AND inefficiency down the toilet - and if its takes down the whole country in the process TFB. I'm a free market capitalist - not a union socialist loser who relies on handouts. This country was built on the former and will be screwed by the entitled rights of the latter. Enjoy what YOU and people who think like YOU have done to America.
On Nov 16 10:43 AM lazaris wrote:
> What you are saying Benjamin, is that "company Ecstacy" paid there
> employees very little, gave them no benefits, basically treated them
> like crap, and made loads of money on the backs of their hard working
> employees, and you are saying that is a good thing?
> I am so sick and tired of hearing that GM's labor force makes $70
> per hour, that is such a load of crap, and you know it.
> I got another clue for you, GM was building what the consumer wanted...everybody
> and his brother wanted an SUV or a truck as their second or third
> vehicle, and GM made millions of them for them. It was not GM's fault
> that gas went to $4.00 plus and all of a sudden all those people
> that wanted that SUV coudn't afford to drive it anymore.
> The UAW has already agreed to a 50% cut in wages for new employees
> , and the UAW will be taking over the retiree health care, so GM's
> labor and legacy costs have already been addressed.
> Unions helped create the middle class in this country, which is disappearing
> just as fast as the Bank Bail-out money is.
> When all those autoworkers are making $14.00 per hour, thats all
> the less that they will be able to spend where all you labor and
> union bashers work.
> All this talk of "don't bailout GM" or "where is it all going to
> end" is nothing but a not so veiled attack on the workers and the
> unions in this country.
> The Republicans are so bitter about losing the election, that they
> are going to take it out on labor unions, by blocking a GM bailout.
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Tiedofthis
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5 Comments
Nov 16 01:11 PMOn Nov 16 12:36 PM sportsmadness78 wrote:
> I once had a GM product but it was unreliable and became the EXXON
> Valdez when leaking oil. Since then for over 8 years, I have owned
> a Toyota Camry. I will never buy domestic again. The Toyota has been
> trouble free and when I take it in for maintenance, I never get the
> run around like I did when I owned a GM product. GM is inferior in
> quality and the big three have had 30 years since the 70's to get
> this right. They deserve a good ole spanking for not giving the consumere
> a good product. The only way I know how to make my arguement that
> I can control is not to buy GM and stick with my Toyota until Detroit
> changes its toon. Anything under 30mpg is a disgrace.
How many miles per gallon does the Tundra get or one of Toyotas SUV's? WHAT A DISGRACE!!!!! Get you facts straight, Toyota makes gas guzzlers also because people were buying them when gas was cheep and they wanted their piece of the pie. Or are you one of the people in the United States that forgot what the Japanese did to us in WW2, maybe once they control all of our manufacturing they can build our tanks and fighter jets and sell them to us at a discount at a time of war, WAKE UP PEOPLE!!!
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ex GM emp
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9 Comments
Nov 16 01:18 PM-
Tiedofthis
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5 Comments
Nov 16 01:25 PM> Mister Jimmy you are right they cannot haul stuff in a Prius, but
> Toyota's trucks get similar gas mileage and are just as rugged. But
> their company has a better reliability rating. You dont see Toyota
> stock at $3 do you? Your arguement is simply weak.
I see Toyota got their truck pulled from Consumer Reports, was that for their great reliability? Have you seen the quality reports published in the last few years for GM, Ford, and Chrysler?
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Longinvestor
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17 Comments
Nov 16 01:29 PM-
Tiedofthis
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5 Comments
Nov 16 01:35 PM-
Tiedofthis
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5 Comments
Nov 16 01:35 PM-
Jack B.
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22 Comments
Nov 16 01:49 PMAlso by the way, how did the free Market allow the OIL companies to rape us ????? I assure you that the Unions of this country have done no where near the Damage your"Free Market OIl "companies have done.
I used to think like you and I supported the Republican party,(like General Motors Management has). But guess what I am so sick the BOGUS gas, and Oil shortages, I am going to try and have the government take them over like in Mexico. SO much for your Free Market BS. Losing GM will put this country into a tailspin and it will crash.
Nice thought 29920. People like you are why we are in this mess to begin with. Are you another selfish Billionaire that is getting Bailout money???? You sound like it.
On Nov 16 01:06 PM User 299220 wrote:
> Hey Lazaris,
> Its Losers like you that have screwed this country - yeah the bankers
> too - but especially pro-union losers. Thats why we will never be
> competitive - thats why we have DINOSAUR industries in this country.
> Shame on you SHAME ON US. How about NO BULL*HIT Bailouts for anyone.
> Time to let markets do what they are designed to do - FLUSH EXCESS
> AND inefficiency down the toilet - and if its takes down the whole
> country in the process TFB. I'm a free market capitalist - not a
> union socialist loser who relies on handouts. This country was built
> on the former and will be screwed by the entitled rights of the latter.
> Enjoy what YOU and people who think like YOU have done to America.
>
>
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Jack B.
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22 Comments
Nov 16 01:53 PMOn Nov 16 12:41 PM Bob Lunn wrote:
> How is the burden on the tax payers for a twenty five billion dollar
> bridging loan to US automotive manufactures greater than the financial
> burden of SEVEN HUNDRED billion dollars being provided to the financial
> institutions. The very same financial institutions who's irresponsible
> behaviour was a major causal factor in the creation of the current
> financial meltdown. The very same institutions that took advantage
> of the recklessly irresponsible behaviour of the government that
> removed regulatory controls on those financial institutions, and
> who is currently bailing them out.
>
> We were told that tax payers money was being provided to these financial
> institutions to "increase the flow of liquidity". That was the "spin"
> put on the bailout. Now look at what the financial institutions are
> doing with the tax payers money. They are sitting on the sidelines
> waiting for companies to fail, then they swoop in and purchase those
> companies at fire sale prices. They are not using the tax payers
> money to increase the flow of liquidity, they are using the tax payers
> money as a financial windfall to purchase other companies. The Fed
> lowered the prime rate. How much of that rate decrease "trickled
> down" to JOE TAXPAYER? It kind of puts the phrase "October surprise"
> into perspective. A final fleecing of the American Tax Payer is in
> progress.
>
> If you want to see what a financial burden on tax payers looks like,
> let the automotive manufactures go bankrupt. Check out what happens
> to tax revenues across this country as all of the jobs associated
> with the United States automotive industry are lost. Check out how
> many jobs in your city are lost because the US automotive dealerships
> and secondary parts suppliers go bankrupt.
>
> Where do you think you are going to service your US vehicle? What
> do you think your US vehicles new car warranty is worth? Where do
> you think the cities and states are going to get the revenues needed
> to run our schools, public health, and police services? If you are
> in the market for a new car, would you purchase a $20,000 plus vehicle
> who's warranty is backed by a company that is in bankruptcy? What
> do you think the State and Cities are going to have to do to make
> up for the tax revenue loss associated with the loss of all those
> payrolls?
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JohnL
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11 Comments
Nov 16 02:18 PMLet me get this straight: the UAW pushes up wages for their members, fights against right-to-work laws, wants a weaker dollar, tarriffs and other trade barriers to hinder the import of foreign cars. All resulting in higher costs for the cars that the rest of us Americans buy. And this has been going on for decades. Now, when the whole scam stops working, you want the rest of us to bail you out? And you have the nerve to claim that your union wages have somehow helped us all? Does believing that twisted logic help you sleep at night?
Thanks, but I can't afford any more of your help.
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Lazaris
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12 Comments
Nov 16 04:33 PMHey John,
Do you think that after the UAW takes over the retiree health care, the wages go down to $14.00, and some benefits are taken away, that the price of that vehicle will go down one dime? Do you really think that a penny of all that cost savings is going to be passed on to the consumer? Dream on, all that cost sav