Friday, March 24, 2006

Should I Stay or Should I Go?

On Wednesday, we learned of the agreement between General Motors and the United Auto Workers regarding a buyout plan:

G.M., staggering under the weight of $10.6 billion in losses last year, said it would offer buyouts and early-retirement packages ranging from $35,000 to $140,000 to every one of its 113,000 unionized workers in the United States who agreed to leave the company.
When firms are in financial distress, they need to get their creditors--typically private banks and public debtholders--to write down the value of their claims. If existing creditors are willing (or can be coerced) to do this, then the firm faces a better prospect of getting new creditors to help it finance value-enhancing projects. (I am still waiting to see what these might be for G.M.)

In a standard workout from financial distress, the firm enters an agreement with a bank and then makes an exchange offer to its public debtholders to give them new securities in exchange for their old ones, if a sufficient number of them accept. For an exchange offer to work, it typically has to shorten the maturity or raise the seniority of the new debt relative to the old. Those who opt for the exchange have to be able to "get in line" ahead of those who don't in the event that not all of the firm's creditors will be repaid in full. The more workers who take the buyout, the less money will be available in the near future for those who did not take it, in the event that G.M. doesn't recover.

In G.M.'s case, its labor contracts are so costly and so rigid that its unionized workforce resembles a major creditor, and what they have been offered resembles an exchange offer. So each of the 113,000 workers is making an individual assessment of whether they are likely to receive more money by taking the sure payment now or by seeing what uncertain payments they get when G.M. enters bankruptcy or recovers. As a Reuters story points out:
Several union officials said workers who have been thinking about a career change or those worried about the auto industry overall are the ones considering the offers.

The story also notes that employee reactions are mixed:
Reactions to GM's buyout offers, announced on Wednesday, varied among workers, with younger employees worrying about their future because the offers would not include health benefits, and some older ones getting ready to retire.

But some senior GM workers might just refuse to go.

Terry Brumley, 63, who works at the Corvette plant in Bowling Green, Kentucky, has been with GM more than 40 years.

"I'm not taking the money. I can raise a garden, go to dinner with my wife and go fishing, and still have a job. So why should I retire?'' he asks, adding that he sees himself working for at least another 10 years.

And, to show some of the problems with getting in the habit of offering buyouts, consider:
"Members of high seniority are very interested,'' Eldon Renaud, president of the United Auto Workers Local 2164 in Bowling Green, Kentucky, said. "There were a lot of people that were ... holding on to see if there was going to be a buyout offer.''

On this sort of dynamic inconsistency, more later.


Anonymous said...

IMHO, GM messed up when they offered the "employee discount" to everyone during last summer. This cheapened the employee discount benefit for GM workers, which may mean that GM has to offer the workers something as a substitute for the employee discount in a buyout.

Short-term thinking - games - smoke&mirrors - paymenow

Arun Khanna said...

An update of Michael Jensen's 1990s observation that GM could have made much more money investing in Japanases firms than investing in its own R & D still remains valid. Therefore:
1. GM should outsource designing of all new cars and purchase hybrid technology from Japanese.
2. GM should declare bankruptcy and then move all production to right to work (non-union) states.

Anything else are simply a stop-gap measures.

Robert Schwartz said...

Terry Brumley best take the money. GM will not go 2 more years without Chapter 11.

Arun: 25 years ago GM might have been able buy technology from Japanese companies. Now they are just licking their lips and waiting for the inevitable.

bakho said...

The sharks are circling GM:

Building for Toyota

Fuji Heavy on March 13 agreed to build cars for Toyota at its factory in Lafayette, Indiana, starting in 2007. Fuji Heavy will build between 30,000 and 40,000 Toyota Camry sedans next year and increase output to 100,000 units in 2008, Takenaka said.

Fuji plans to hire 1,000 workers and invest $230 million to upgrade the factory to make Toyota vehicles on one of its two assembly lines.

For Toyota, using Fuji Heavy's plant ``is more effective than building a new factory'' to expand its production capacity, he said. The factory may be profitable in 2006, the first time since 2003, after reducing jobs and depreciation costs, he said.

Toyota, the world's second-biggest automaker, can raise its annual production capacity to make nearly 2 million vehicles at eight North American assembly plants by 2008 by using Fuji Heavy's factory. Fuji Heavy plans to produce 240,000 Subaru and Toyota vehicles annually after the expansion is completed, the company said on March 13.

GM strategy to balance books by cutting production is not going to work. The last time, the US was able to stymie Japanese competition because they were imported. Now that they are made in the US, nothing saves GM. Indiana Republican Senator Richard Lugar was recently spotted driving a Toyota hybrid. Indiana workers won't be complaining when Toyota production will create over 1000 really good paying jobs.

Anonymous said...

I rented a Chevy Malibu somewhat recently. The design of the gas cap was not as good as a Honda Civic.

So I would "leave" GM. It would be very depressing and frustrating for me to repetitively build a product that could easily be improved.