Today's column on General Motors (GM/NYSE) by Holman Jenkins, Jr. is the second excellent piece on the company appearing in The Wall Street Journal opinion pages this week:
The real test is whether the buyouts will allow GM to close its notorious "Jobs Bank," where some 8,000 workers currently receive a full wage and benefits even though they aren't working. That would free up $800 million a year in dead waste. More: It would fundamentally transform GM's decision-making about how many cars to produce and how to price them.
GM also seems to be making progress in raising cash by selling off its GMAC financing arm, and last year it wrung modest copays and other health-care disciplines out of the UAW worth $3 billion a year if the company has done its projections right. It's also trimming white-collar ranks and benefits.
Then Jenkins writes this:
The company is not out of the woods yet, and never will be really out of the woods. GM operates in an extraordinarily competitive marketplace, beset by hungry competitors and excess capacity. But capital is being freed up. The most interesting stage of the turnaround is coming next: How much of this capital to put at risk by investing to upgrade GM's product line, especially its lagging sedans?
His bit about GM never really being out of the woods is true. The company is in a tough, capital-intensive business that includes Toyota -- probably the best-run auto company in history. But overcoming or matching Toyota in North America isn't part of my rationale for owning GM stock. Now let's get back to Jenkins' column and the question about what GM will do with its freed up capital:
The answer will tell us what kind of turnaround CEO Rick Wagoner, with new board member Jerome York at his elbow, is shooting for. Will he play it safe, going for incremental upgrades and matching innovations already introduced by competitors? Or will he go for broke? Not an easy choice given that GM's reputation with auto shoppers may not support the premium products and prices that GM would dangle in front of them. Even more so because the company will continue to be in the news in unflattering ways for the foreseeable future, including over late-breaking accounting scandals (though these may not amount to very much in the end).
Mr. Wagoner has struck many as the right CEO to see GM through tortuous negotiations with labor and the political class, and to suss out the complicated financial tradeoffs in managing its giant fixed labor burdens. Is he the right guy to greenlight product gambles that may ultimately decide whether all his efforts pay off and GM rights itself for another decade?
Here, Jenkins actually avoids the current journalistic fashion of dumping on Wagoner:
Over the years Mr. Wagoner, a product of GM's finance department, has been a reliable voice of balanced caution, noting GM's need to minimize capital risk while issuing safe, commodity products that can be relied upon to generate cash flow to meet GM's crushing income and benefit guarantees to the UAW. Though Mr. Wagoner reportedly was a strong backer of Cadillac's gutsy turnaround, he worried publicly that it "ate up a lot of capital." Last year he told Barron's: "It's true that in a portfolio like ours, trying to hit a wow!-type product is a risk, so part of our strategy is to build good cars that are pleasing, but are not at the edge."
Then he points out that Toyota, despite what many think, has produced remarkably few "wow!-type" cars over the years. Jenkins says there's a second bottom line here for GM -- getting rid of the Jobs Bank. Why? Because the Jobs Bank gives GM the incentive to underinvest. Equally bad, it also gives the company the incentive to overproduce, to churn out cars commanding just enough market price to meet GM's fixed labor costs even if they fail to generate profits.
Don't underestimate the importance of this factor. Dumping these cars on the market, especially through cheap fleet sales, undermined the pricing and image of all GM cars, then undermined it again when these fleet vehicles reappeared on used-car lots a year or two later. Optimizing production volume under GM's crazy labor guarantees was such a puzzle that an economist in the company's R&D department even published a research article on it in 1995. A year earlier, GM had actually found itself hiring temps and paying overtime to meet demand for hot cars even as it paid 8,300 UAW workers at other factories to stay home.
Jenkins' piece ends with this:
As the company began to spell out in a briefing Monday, unwinding its jobs-for-life commitments would enable GM to alter this basic approach to the car business. Bluntly put, GM would be able to build fewer cars and charge more for them.
That, of course, is no substitute for having cars on hand that can reasonably compete in the marketplace on style and features, but it would give GM a flexibility -- normal for most businesses -- that it hasn't enjoyed since the Jobs Bank was created more than 20 years ago.
P.S. For a thoughtful consideration on whether or not GM could make it on having 20% market share in North America, see this from Doug McIntyre's blog.