The first big crack in retiree health benefits occurred years ago, when steel companies and other “rust belt” companies reneged on their commitments to fund retirees’ health coverage, declaring bankruptcy in the face of intense competitive pressures. Now, the nation’s largest private provider of health benefits to employees and retirees, General Motors, has negotiated a deal with the UAW that significantly reduces GM’s future health care expenses.
For GM and the UAW, which has long resisted even discussing such a cut, it was a matter of mutual survival. GM’s future health care expenses which were estimated to be $77 billion for all retirees (free registration required), will be reduced by $15 billion; these changes will also enable GM to cut annual health care expenses thereby saving about a billion dollars in cash per year.
That’s the “good news”. The bad news is the bankruptcy of former GM subsidiary Delphi, announced earlier this month, will likely force GM to cough up an additional $12 billion to cover Delphi’s commitments to retirees for pension and health benefits.
GM has been hobbled not only by the nation’s most generous employee and retiree health benefits, but also by just plain dumb decisions to invest heavily in trucks and SUVs. My take is these results are related; they reflect a short-sighted approach to the company’s future, an approach predicated not on where do we need to be in 5 or 10 years, but on what do we need to do to generate returns today. With that mentality, strikes, tough labor negotiations, and big investments in efficiency and new technology are undesirable as they reduce cash flow and hurt the income statement.
Consider this – Toyota’s health care costs are estimated to be 1/3 of GMs on a per-vehicle basis. Costs are so low they are not even a line item in their financial reports. That means Toyota can sell a vehicle for $1000 less than GM and make the same amount of profit. Actually, Toyota has a lower cost structure, so margins are higher anyway, but the point is that health care alone accounts for $1000 of that lower cost structure.
Interestingly, retirees seem to be somewhat resigned to accepting the deal. That is encouraging, and perhaps reflects their knowledge that their benefits are still richer than anyone else they know.
What does this mean for you?
What’s good for GM is good for the country – Alfred Sloan’s oft-cited statement is certainly applicable in this instance. If we are to remain competitive in the global economy, we have to reduce the impact of health care costs on our products and services.
Oct
19
