The GM Model

Posted by Marc Hodak on August 2, 2008 under Economics | Comments are off for this article

There’s a lot of clucking about GM’s $15.5 billion loss. (That may sound like a lot of golf balls, but it understates the true level of value destruction when one accounts for the opportunity cost of equity.) There seems to be two big questions being debated about all this: (a) whose fault is it? and (b) will GM survive?

Easy one first: GM will fail. It’s not 50% in 10 years. It’s 100% in less than five. In fact, GM has been economically bankrupt for nearly a decade, with liabilities far exceeding productive assets; it simply hasn’t run out of cash yet. Yet.

As to fault, the press seems to be geared entirely as if their readers want to know who to blame. Well, the leading contenders for villain in this game are management and the unions, primarily the UAW. And the correct answer is…

Both. Unions were the irrational response to irrational management in the late 1930s. Once in, the unions steadily undermined GM’s productivity–and their profits–especially, once they were faced with essentially non-union competition. Reduced profits meant cost cutting. Cost cutting meant reduced quality. No, I don’t mean just “Monday morning cars,” although that didn’t help. I mean lower quality everything, including management. GM eventually reached a point where it wasn’t exactly attracting the best and the brightest. Their retarded management was constrained by their retarding union, and the problem became self-reinforcing. GM became an idiocracy.

What we are seeing today is the logical end of a union that didn’t give a damn about the future of the company that hired them. Management, who was charged with fighting for the shareholders, had their weapons taken away from them by the Wagner Act, and replaced with squirt guns and rubber knives. At a point, management simply said, “Screw it. It ain’t worth it.” What became a pointless fight with shareholders in the cross-hairs ended up as a murder-suicide. Once the trajectory became clear, the shareholders bailed out. There was no one left to hurt but future managers and workers. Incumbents on both sides agreed on all kinds of promises that couldn’t be met.

Here we are.