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Steven Rattner on the auto union

Jon Cohn has a terrific interview with Steven Rattner, a famed private-equity investor who helped the Obama administration with the auto bailouts (and has a new book coming out). You should read the whole thing, but I thought his take on the role unions had in GM and Ford's troubles was particularly interesting:

The unions were not the major reason why GM and Chrysler got into the position they got into. There are certainly issues around the labor situation, which I’ll discuss in a second, but to lay this all at the feet of the UAW, which I know some management teams have tried to do, is simply not fair. I’ll give you two data points. First, labor only accounts for only about 7 percent of the cost of a car. So, if you cut that to 6 percent, you’re going to make a bit more money, but this is not the biggest expense that an automaker has.

The second thing I would point out to you is that Ford was playing with exactly the same deck of cards. They had effectively the same UAW contract. They had effectively the same manufacturing footprint, up in the upper Midwest area. They had the same kind of dealer network issues that GM and Chrysler had. And yet while Ford certainly struggled for a while, they got through this and have been making good money for some time now.

So, what’s the difference between Ford and GM? I would argue the difference between Ford and GM is management. I don’t know what else to attribute it to. It’s one of the few cases where you actually have two examples that you can put side-by-side and it would be a very valid comparison.

He goes on, however, to detail the "excesses" and "inefficient work practices" that were present in their contracts. He also explains what he thought of Obama's leadership, and says that "to arrive in office facing the issues he faced without Tim Geithner, without Larry Summers, would have been kind of unimaginable."

As I said, it's worth reading the whole interview.

By Ezra Klein  | September 21, 2010; 5:05 PM ET
 
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Comments

"First, labor only accounts for only about 7 percent of the cost of a car. So, if you cut that to 6 percent, you’re going to make a bit more money, but this is not the biggest expense that an automaker has."


Exactly what makes up this 7%. Weren't we told healthcare costs add $1500 per car? What about other benefits (ie pensions) compared to the Japanese, Koreans etc.

Posted by: visionbrkr | September 21, 2010 6:05 PM | Report abuse

The proof of the pudding is in the eating. I suspect we'll never recoup the money put into the auto bailouts; the main reason being the outrageous handouts to the UAW pensioners. They should have gotten no more than they would have from the PBGC. Everything above that was just political payola.

Posted by: bgmma50 | September 21, 2010 6:07 PM | Report abuse

"Everything above that was just political payola."

Yeah, because it's not like GM had agreed to fund pensions instead of wage increases for decades. Sorry your 401(k) sucks.

Posted by: pseudonymousinnc | September 21, 2010 6:12 PM | Report abuse

"First, labor only accounts for only about 7 percent of the cost of a car. So, if you cut that to 6 percent, you’re going to make a bit more money, but this is not the biggest expense that an automaker has."

This doesn't pass the smell test. I remember that back in the day, we were told that health care costs were a sizable chunk of each American car produced, by those selling single payer.

I pulled up some numbers and in 2004, health care costs were claimed to be $1,525 per car for GM. Throw in pension benefits of $675 from the linked article, and we're at $2,200 in just health care and pensions per car. If the average car costs $25,000 to build, we're already at 8.8% before adding in wages. Assuming all other labor costs are equal to pension and health care benefits, we're at $4,400 for labor and 17.6% of the production cost.

http://www.americanprogress.org/issues/2007/05/health_numbers.html

Moreover, not all cars are created equal, and the guys building the Focus and the Cobalt were probably not being paid less than the guys building the F-150 and Silverado. The Big 3 were always beaten up for never producing great regular cars, like the Civics and Accords, especially a few years ago. If a car is going to sell for $15,000, at $4,400 per car labor costs are 29.3% of selling price. If the competition is able to keep labor costs down to, say, $3,000 per car, they can spend a little extra money on their models and still have higher margins (or margins period).

So, it's not all that surprising to see GM/Ford/Chrysler rode high on the SUV/Truck hog and didn't invest much in regular cars until the mid 2000s when oil started to head north - the margins almost certainly weren't worth the investment.

By the way, the average annual operating margin for GM in the 2000s was -0.5%, so it looks like cutting costs by a percent of two might have made a real difference, though I'm not an expert here so maybe it would have been far too little to save the day.

http://www.fivethirtyeight.com/2009/03/gms-problems-are-50-years-in-making.html

I'd agree management is partly to blame.

Management (past management that is) offered the UAW far too much in compensation.

In addition, I haven't read a whole lot of good things in general about management at the Big 3 during the mid 2000s, particularly at GM and Chrysler. So the blame is not only with labor, though labor seems a bigger part of the problem than this guy suggests.

"And yet while Ford certainly struggled for a while, they got through this and have been making good money for some time now."

Ford survived by slashing costs, having enough cash on hand to handle pretty severe losses while also having the good fortune to have gotten some decent product into the pipeline a while back.

Posted by: justin84 | September 21, 2010 6:39 PM | Report abuse

"Yeah, because it's not like GM had agreed to fund pensions instead of wage increases for decades. "Posted by: pseudonymousinnc

GM's promises should be the problem of GM and the UAW, not the taxpayer.

Posted by: bgmma50 | September 21, 2010 7:23 PM | Report abuse

Some old Ford hands who were brought back in (Mac McDonald, I think was a big one) got Ford heads focused on the right issues after 9/11, and the resulting downturn.

They adjusted.

Beating up on the UAW is a national sport though, and if you keep this up Ezra, you may stop getting checks. Your bosses hate the UAW, and would like to focus the ire there.

Posted by: rat-raceparent | September 22, 2010 12:30 AM | Report abuse

Yeah, Ford realised early on that they needed to unify their global operations, and take advantage of success abroad to become competitive at the compact/sedan level.

GM bet the farm on SUVs and pickups for the US market during the early 2000s, and while it finally followed Ford's example, the financial crisis hit right during their transition. (The 2011 Cruze, available overseas for the past year, is the first test of the new strategy.)

Chrysler was in a different position, since it didn't have much from outside the US to bring into the game. Hence the deal with Fiat.

Posted by: pseudonymousinnc | September 22, 2010 12:56 PM | Report abuse

Remember last year when conservatives were arguing bonus contracts were inviolate and taxpayers were just going to have to suck it up?

Posted by: lol-lol | September 22, 2010 2:37 PM | Report abuse

"Remember last year when conservatives were arguing bonus contracts were inviolate and taxpayers were just going to have to suck it up?"

I always thought the argument for paying bonuses was a pragmatic one. You just put $100s of billions into these companies, why risk having the people who know these businesses real well throw up their hands in disgust (I know that's rich) and leave for hedge funds? This is especially the case for AIG, where a few bonuses could keep the people who understood the huge derivatives book on the job for the thankless task of unwinding it at the least cost. On a trillion dollar book, even 10 basis points is worth $1 billion.

Despite the massive screw up, these guys actually are fairly bright and more importantly know their business better than anyone else.

Or consider another situation involving a 30 year old and her 12 year old son getting into an auto accident. The 30 year old might have crashed into a tree while being distracted by the CD player. Let's say that you offer to pay for the car to be fixed, and on top of that she goes and spends and extra $200 to get the thing detailed.

That doesn't mean you then hand the keys to the 12 year old because you're angry the mother ordered a detail on top of the repair work, and, after all, she was a fool for getting into the crash in the first place. It remains the case that the kid is more likely to get into an accident going forward than the mother.

If you don't like how taxpayer money was used, the problem was the bailout itself - the details were always going to be sketchy given who was in charge.

Posted by: justin84 | September 22, 2010 7:13 PM | Report abuse

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