By ERIC PLANEY
SPECIAL TO THE VINDICATOR
Sunday morning, my good friend Tony Paolone (another former Y-towner living in New York), his fianc & eacute;e Jackie, and I woke up early and went to beat the crowds at the New York Auto Show. We figured that everybody would be at Easter Mass, celebrating religious renewal. Well, in my observation at the auto show, I am happy to say that the little Lordstown-built Chevy Cobalt may be the small-car that could eventually lead to a renewed General Motors.
As a banker who banks U.S. auto suppliers, I have the fortune of being around cars, the people who build cars, and the suppliers who rely on the Big Three for their livelihoods. And let me tell you, the mood in and around Detroit this year is not pleasant. The realization that the U.S. automakers, particularly GM, have to restructure their whole way of operating is something that the industry was in denial over -- until two weeks ago. Then, GM announced that 2005 will be well below forecasts, and the market responded by pounding GM's share price. Its credit ratings are now one level above "junk," meaning that if Moody's or Standard & amp; Poor's downgrades the company one more time, its cost of doing business will increase, and therefore will increase the probability that the company could actually file for bankruptcy in the future.
Facing a huge hurdle
What does this mean for people in states like Ohio and Michigan, who have so much of an economic connection to GM? It means that the long-term health of the economies of these states may require short-term pains. The biggest problem facing the General is that it cannot make a car as cost-effectively as Honda or Toyota because of the company's legacy costs. I keep hearing the statistic that every GM car built has an additional $1,500 to $2,000 in embedded employee costs that foreign makers do not have. These costs include GM's high pension benefits and its health care costs. Because of these high costs, GM is forced to keep pushing cars out to generate cash. When they do that, as Bloomberg auto expert Doron Levin points out, they flood the market with too many vehicles, and thus kill the value of that vehicle for resale. This is a vicious cycle, because as Americans who continue to use debt to finance their vehicles will realize, the value of their Suburban is a lot lower then what they still owe on it in year three.
It is imperative that GM executive management and the national UAW get to the table to rectify this situation ASAP. In the short term, a restructured package is going to take away some of the current benefits employees have. Nobody wants to hear this, but that is the reality of it. The other alternative is a massive closing of factories that may cut costs but at the expense of many more jobs. In the long run, both management and the UAW should be using their political size to muscle in health care reform in Congress. The increased costs and decreased benefits that are plaguing all companies in America seem to only be benefiting insurance companies and HMOs. Health care reform is essential to keep auto-related jobs in Ohio.
There are ways that citizens and auto-related employees can help in the effort. While buying GM (or Ford and Chrysler) is something that Ohioans tend to do well, there is more that can be done. The foremost is active participation in getting Congress to address health care reform. The powers that be tend to wine and dine Congress into doing nothing.Pressure from voters, particularly from the politically important GM states of Ohio and Michigan, can change that.
Being an optimist, I would like to end this column on a higher note. The good news is that GM is addressing the other big problem it has had, namely its vehicles and quality. The Chevy Cobalt is the perfect example. At the auto show, I was struck at how many people were checking out the various versions of the Cobalt on display. Young men were oh-ing and ah-ing the bright red SS coupe, older couples were looking at the tidy sedan. New York is not a GM town, and yet I sensed a buzz around these Lordstown products. Car and Driver magazine called the Cobalt sedan "plainly good," a compliment that has been reserved for the Civics and Corollas of this world.
GM's current management team has on board one of the best car guys out there, Bob Lutz. He has a passion for automobiles, yet also has a sense of what people want. Cadillac is on a great comeback, Buick is launching new cars that can actually take on Lexus, and hopefully the brand that I grew up loving, Pontiac, will have new life as a two-seat roadster, Solstice, is coming out in the fall. GM is on an engineering and design renaissance; it just needs time, marketing, and better perception in the market for it to work.
GM can also come out of its financial woes better than ever. The way in which politicians in Ohio, GM management, and the unions came together to make Cobalt work can be implemented for a greater need: the need to reform General Motors. In the long run, that is vital to the future of Ohio's economy.
X Eric Planey, a Youngstown native, is assistant vice president, leveraged finance, in the Transaction Business Group of the Bank of Tokyo-Mitsubishi in New York City,