Understanding General Motors' Troubles

David Cole, chairman of the Center for Automotive Research in Ann Arbor, Mich., discusses General Motors' recent troubles.

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ROBERT SIEGEL, host:

Dr. David Cole is chairman of the Center for Automotive Research; it's a non-profit group in Ann Arbor, Michigan.

Dr. Cole, these cutbacks at GM are going to create more retirees. Can the GM pension fund meet its obligations in the coming years?

Dr. DAVID COLE (Chair, Center for Automotive Research): I think the pensions are really not the major problem here. This has been booked; money's been set aside for that. What has really been a problem is the excess capacity, the health-care costs. Those are the more dominant factors than pension. But the number of people that they're taking out is pretty much along the normal attrition curve anyway. These are people that they expected to leave, but what they're doing this now with is some very discreet plant eliminations. But if you don't have capacity in line with your market, you have a problem in this business.

SIEGEL: Let's talk about health-care costs first. When GM renegotiated the health benefits its retirees receive, which I believe used to be free essentially...

Dr. COLE: Essentially free. It was a very, very low co-pay.

SIEGEL: ...the columnist George Will wrote that GM was getting back into the automaking business and out of the health-care business.

Dr. COLE: That's right. Well...

SIEGEL: Can GM continue to provide health-care coverage for a million people and be a competitive auto company?

Dr. COLE: I don't think they can provide health care in the same model that they had been historically. You would guarantee somebody a level of care forever. We're moving rather quickly, I think, to a defined contribution in the sense that, `Here's some money to use for health care. When it runs out, good luck.' And that's really realistic and is pretty much happening across the country today.

SIEGEL: Now you spoke also of excess capacity. Beyond cutting back capacity, does GM have a plant to qualitatively change its operations, so that it will regain some capacity or be more competitive in the future?

Dr. COLE: Well, actually GM, from an operational standpoint--and if you look at product development, product quality, plant productivity--is very, very much world class. And what they are is kind of like an Olympic swimmer that's trying to carry some lead weight while they swim across the river, and that lead weight represents, for example, this year almost $6 billion in health-care costs or excess capacity that is just not being used. And, at the same time, they're working very hard on the revenue side, which is developing products that you can sell profitably and people want to buy. And that still is a continuing challenge for the industry.

SIEGEL: But before we leave the question of health costs, one could say that GM accepted the liability to pay all this out in health-care costs by winning some concessions on wages, so that, in effect, this is part of the picture of compensation that it's negotiated.

Dr. COLE: Yeah, it was part of the total compensation. And I think, realistically, when this began was during the time of the oligopoly of the Big Three, where you could kind of do anything you wanted and ultimately pass those costs along to the consumer.

SIEGEL: Should we look at these GM cuts and say the GM of the future will simply employ fewer autoworkers, and the deal they get, in terms of pension or health benefits, will simply not be as good as it used to be?

Dr. COLE: Absolutely right.

SIEGEL: It's not conceivable that there could be some renaissance of the company that would bring it back up--bring back 30, 50,000 jobs over the next few years?

Dr. COLE: I think the basic--there are two phrases that I would use. It's, `Change or die,' or, `Shrink to grow.' `Shrink to grow' means that you get to a profitable, sustainable basis, and then potentially you could grow in the future. But absent a shrinkage, where you have an alignment between capacity and size of the market that you have, you're in deep trouble. And I think GM has to restructure as a matter of necessity. And absent, really, a fundamental restructuring to a new business model, it would not likely survive.

SIEGEL: Well, Dr. Cole, thanks a lot for talking with us today.

Dr. COLE: My pleasure to be with you.

SIEGEL: That's Dr. David Cole speaking to us from Ann Arbor, Michigan. He is the chairman of a non-profit group, the Center for Automotive Research.

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