GM Braces For The Perfect Storm

Engine Charlie Wilson never actually said: "What's good for General Motors is good for the country." Prior to becoming President Eisenhower's secretary of defense in 1953, the GM boss was asked by the Senate Armed Services Committee if he could make a decision adverse to the interests of the company. Wilson said yes, but added he couldn't conceive of such a situation "because for years I thought what was good for the country was good for General Motors and vice versa."

Engine Charlie--the nickname came from Washington insiders to distinguish him from Electric Charlie, the Charles Wilson who headed General Electric and the Office of Defense Mobilization in the Truman administration--ran GM as it neared the absolute zenith of its glory days. He could never have imagined a time would come when GM would have a market share of little more than 26 percent and have to give consumers an average of 4000 bucks a car just to get them to buy one. And he almost certainly never thought much about health care.

Rick Wagoner thinks about health care a lot. Just chew on this number: $5.2 billion. That's how much the current GM chairman says his company spent on health care for its 1.1 million employees, retirees, and dependents in the U.S. in 2004. This year, it expects to cough up a billion bucks more than that. Wagoner says health care costs have been rising at double-digit rates for years and are at least 30 percent higher than those of the next most expensive country. And yet, he says, the U.S. ranks a lowly 12th out of 13 industrialized nations in 16 top health indicators, including infant mortality and life expectancy, according to figures compiled by the Organization for Economic Cooperation and Development.

But GM's a big and rich company, with revenues that last year totaled $193 billion, so what's the big deal? Well, GM made a $3.7-billion profit last year. Sounds good, but in reality that's a wafer-thin 1.9-percent margin. Worse, barely $1.2 billion of that profit came from actually building and selling cars and trucks.

By contrast, GM's financial services company, GMAC, made $2.9 billion. Crunch the numbers, and GM today looks basically like a money lending operation with an auto business on the side.

So here's the big deal: GM's health care bill alone adds about $1500 to the cost of every car and truck it makes in America. That's an unimaginable disadvantage in a business where engineers sweat blood to pull a buck off the cost of making a fender. Think about it: Even if GM were as efficient a manufacturer as, say, Toyota, it would still be 1500 bucks a vehicle worse off. To look at it another way, money going into health care would pay for the design and development of 10 all-new GM cars and trucks. Every year.

Sure, GM's done plenty of expensively dumb things in the past, like when Roger B. Smith blew billions on complex automated manufacturing systems that didn't quite work or, most recently, when it spent $2 billion not to buy the 90 percent of Fiat it didn't already own. But health care, which was meant to look after GM workers, has now turned into a cash-hungry monster beyond the company's control.

David E. Cole, chairman of the Center for Automotive Research in Ann Arbor, Michigan, has warned of a "perfect storm," composed of stagnating markets, chronic over-capacity, greater competition from newly industrialized nations like China and India, and increasing developmental and regulatory costs, that's about to rip through the world's auto industry in the next few years. Weighed down by what will be a $6-billion-plus health-care bill, GM's steaming straight into this perfect storm running low in the water; so low in fact, whisper some analysts, it could sink the company.

Engine Charlie clearly understood GM and America's relationship. But you can bet he never for a moment thought any of his successors would one day stand up and say, in effect, that what's bad for the country is proving very bad for General Motors. And vice versa.