Tuesday, April 07, 2009

Auto Bailout: Russian Style

NY TIMES -- If there is a country that truly needs a car czar, it is Russia, home of the czars — and Lada. The factory here has been stamping out the same version of the Lada, the typical boxy people’s car of the former Eastern Bloc, for four decades (see picture above).

Avtovaz is one of the least efficient automobile factories anywhere in the world — each worker produces, on average, eight cars a year, compared with 36 cars a year at GM’s assembly line in Bowling Green, Ky., for example.

Yet the government is giving Avtovaz billions of dollars in aid, no strings attached. No chief executive firings. No renegotiation of workers’ contracts. No demands to turn out better-quality cars, much less fuel-efficient hybrid cars.

But the auto bailout, Russian style, is intended more to ensure peace in the streets than restructure a business, much to the lament of some critics who think tough love might be better.

22 Comments:

At 4/07/2009 9:46 AM, Blogger 1 said...

Geez! That car has all the beauty of a Prius...:-)

 
At 4/07/2009 9:59 AM, Anonymous Anonymous said...

Interesting.

Take you point that in the GM plant each worker produces 36 cars. Combine that with the estimate that GM pays each worker, including legacy cost, about $72,000 per year. That works out that the labor cost in the average car is $2,000.

In 2007 the average transaction price for a new car was $23,337.

This works out that the labor cost in an average US car is about 8.5%
of the total costs of the car.

If that is accurate it implies that the impact of unions on the costs of a car is not very significant.

 
At 4/07/2009 10:42 AM, Blogger Walt G. said...

Legacy costs should have been expensed when the revenue they created was realized. That’s a standard accounting principle. Instead, the money was distributed to stockholders, executives, and reinvested in the company. Now we have a problem. Any actuary worth his salt should have seen the retiree problem coming (just like the Social Security and Medicare implosion we are about to experience). I don’t know where GM’s and the United State's Social Security and Medicare problems will end, and they are one and the same, but there is more than enough blame to go around.

 
At 4/07/2009 10:55 AM, Blogger ExtremeHobo said...

1 - I figured you would like this link GM/Segway Car because you seem to have quite the distaste for tiny lil eco-cars

 
At 4/07/2009 12:07 PM, Anonymous Ralph Short said...

With regard to the "impact of unions on the costs of a car" the fact is in this type of manufacturing environment one of the few things management has control over is labor costs. That is achieved through productivity increases (technology, staffing, skill levels, etc.) and making sure wages and benefits are not excessive. In a mature and tight cost/profit ratio environment such as the auto industry a difference of 1, 2 or more percent in labor costs can be the difference between profit and loss. Also, it has been known for sometime that GM and others make money on the more expensive versions but sell many more of the lower cost cars. The labor cost per car on the latter versions is far in excess of 8.5%. The simple fact is the big 3 did not manage these costs well and it has had a huge impact on their P&L.

Walt, I am a little confused by your statement on legacy costs. I do not understand the comment "legacy costs should have been expensed when the revenue they created was realized". Maybe you could clarify the comment.

I agree with you on the SS and medicare disaster looming. But then again, all of us have known about it for 20 or 30 years yet we continue to vote in people who ignore it. The "looming disaster" will always be the case unless it is self sustaining. Every time a politician starts talking about self sustaining he/she is pilloried immediately. The majority prefers to continue robbing peter to pay paul.

 
At 4/07/2009 12:28 PM, Blogger Walt G. said...

Ralph Short,

The "legacy" cost was part of the labor cost to build a car in 1985 or 2000. Costs are expensed when the revenue they generate are realized. Costs and expenses are not the same thing.

In short, sorry I could not help that, year 2000 revenue should have paid for year 2000 labor cost--including legacy. Can you accountant types find fault with my reasoning. I think it's in FASB #6, but I am not an accountant.

 
At 4/07/2009 12:59 PM, Blogger 1 said...

Hey ExtremeHobo, I was reading about that wheelchair of death in the WSJ and had to ask myself, "what kind of fool would buy into this whole idea?"...

 
At 4/07/2009 1:22 PM, Blogger 1 said...

Now here's a potential car that can give one a thrill (not a Chris Matthews type thrill) in more ways than one...

From Autopia: It's Not a Flying Car — It's a Driveable Airplane

A Boston startup is confounding naysayers with a plane that combines the ease of driving with the thrill of flying, and it could shake up the industry by ushering in a new wave of recreational aviation.

Terrafugia's unusual aircraft just made a 30-second test flight as historic as it was brief, proving that flying cars aren't as outlandish as you might think. But as much as people might want to call the Transition a flying car, Terrafugia insists it's actually an airplane you can drive.
(pictures and video clips included in article)

 
At 4/07/2009 1:36 PM, Blogger 1 said...

Is the following by GM an attempt to pander to the real boss of GM?

From AutoblogGreen: Money-losing Chevy Volt will stay alive even if it can't "pay the rent"

General Motors doesn't have any money to play around with these days, but new CEO Fritz Henderson is willing to let at least one vehicle program's fiduciary requirements slide. Even though Henderson said recently that all GM models will need to "pay the rent," the money-losing Chevrolet Volt program will not be held to that standard. Apparently, the Volt is kind of like that really cool, constantly broke college roommate that never got kicked out because he had the best music....

 
At 4/07/2009 3:47 PM, Blogger QT said...

1,

Love the fineprint:

Segway - "56 km between charges (approx. 34 miles)"
flying car "at $194,000"

For a fraction of the cost, one could buy an Aerial Atom...0 to 60 m.p.h. in 3.7 seconds.

 
At 4/07/2009 4:27 PM, Anonymous Ralph Short said...

Walt, my understanding of legacy costs is as follows:
1. It is the cost of carrying the retirees in certain areas such as medical expenses and whatever else was not required to be funded ahead of their retirement.
2. These costs continue until someone dies and therefore have to be part of current operating costs.
3. Essentially, they are added into the process for making the automobiles as overhead to the current population of workers.

We did the same when we setup our machine rates and we referred to it as fringe benefits. Other cos. would take it out of direct operating costs and just show it as a one line item monthly, quarterly, annually, etc. It does not matter how you treat it the result is still the same dollar wise.

I believe an important part of the issue is GM went from 800,000 plus employees in the 80's to 200,000 or more currently. Many of the original 800,000 are still alive and therefore receiving benefits and they are being supported by the 200,000 plus currently.

It is in microcosm what you were referring to as the situation in social security and medicare.

Here is another thought and that is the cos. I worked for apparently saw this coming years ago and started changing the rules. These included things like exempting new employees from "free" this and that and increasing the medical costs for retirees and employees. They were also not as impacted from foreign competition.

It seems to me the government is wandering down the same road as the big 3, a)they are giving more away to certain groups and demographics and b) they are ignoring (for the time being) foreign influence. Notwithstanding the government's ability to print dollar bills, the current course to me, seems destined for failure just like the big 3 and other cos.

 
At 4/07/2009 11:00 PM, Blogger Jack McHugh said...

It's even worse than suggested by that comparison with the GM plant in Bowling Green. Rather than a Slavic iteration of an obsolete Fiat model, the Bowling Green plant produces Corvettes!

BTW, I love that Segway car! I could definitely see something like this in Chicago if say you worked downtown and lived in Wrigleyville. Even better in southern cities. Or Mumbai.

C'mon, let's let ourselves expand our imaginations a bit and have some fun! No one's talking about this as a transcontinental take-the-family-to-Yellowstone car. :)

 
At 4/08/2009 5:16 AM, Blogger Walt G. said...

Ralph Short,

I guess it boils down to whether the company (GM or others) was obligated, legally or otherwise, to provide lifetime health care and other benefits to retirees. If so, the benefits should have been funded when the revenue that generated that expense was generated.

That GM’s market share was going to drop should not have been a surprise. The 50% market share GM had at one time was not sustainable in a mature and competitive market. The only reason they had that much market share in the first place was due to Europe being decimated in WW II and a pent-up demand for products after the war. Just like other companies in a competitive market, GM will have to figure out how to make a profit with a realistic market share somewhere in the 15%-20% range.

That GM’s workforce would age and consist of many more retirees than active workers also should not have been a surprise. That comes with the reduction in market share, an ageing workforce, and a predictable increase in productivity.

It’s always easy to look back and see what could have been done differently. However, all of the current problems could have reasonably projected, expected, and expensed. Whether it is the Union’s fault or GM’s fault is really irrelevant at this point. Basic economic principles always win in the end.

 
At 4/08/2009 5:19 AM, Blogger Walt G. said...

1,

Toyota loses money on every Prius they sell and GM is supposed to copy their "successful" strategies :) Where's the problem?

 
At 4/08/2009 7:23 AM, Blogger 1 said...

qt says: "For a fraction of the cost, one could buy an Aerial Atom...0 to 60 m.p.h. in 3.7 seconds"...

Actually I've seen these little cars and for me they're especially small...

There is a place outside of Arlington, Tx were people could rent these puppies and take a spin around the track...

Truly a sweet little vehicle...

walt g says: "Toyota loses money on every Prius they sell and GM is supposed to copy their "successful" strategies :) Where's the problem?"...

Heck yeah! Where would those vehicles be without the tax write off which I understand gets less and less every year?

This is the federal government business model...

As noted on the Tree Hugger site from Dec. of '08: Worst Sales Performance of Any Car: Toyota Prius

 
At 4/08/2009 8:54 AM, Blogger ExtremeHobo said...

wheelchair of death

LOL!

 
At 4/08/2009 4:28 PM, Blogger Size said...

Hey, we used to have one of those and considered ourselves exceptionally lucky!

 
At 4/08/2009 4:45 PM, Blogger ExtremeHobo said...

Maybe this whole thing is unfair
They are built tough!

Look at the second picture down on the page

 
At 4/08/2009 7:20 PM, Blogger 1 said...

You know extremehobo that Lada looks like a wrecked Rambler...

 
At 4/09/2009 7:54 AM, Blogger misterjosh said...

I'm totally with Walt G on this one. When I worked for Boeing, I got the prospectus every year and they proudly proclaimed that the pension fund was fully funded. i.e. if they canceled the pension plan this second and never contributed another dime to the fund, it would be able to pay out the necessary compensation at the retirement of the applicable employees.

 
At 4/11/2009 8:45 PM, Anonymous Ralph Short said...

I do not believe the pensions are the issue. It is the free health care of retirees. In a 2005 article it was stated the legacy costs were 87 billion for the pension and 60 billion for the health care. Well, pensions are regulated and have been since the 70's. In other words there is a legal requirement for funding. So I do not believe the no. is a factor of current operating costs. Health care funding costs are not regulated. Therefore no money was set aside and therefore it is a function of current operating costs. In the 2005 article it was pointed out if the retirees had to pay 27 percent of their health care costs JUST LIKE THE CURRENT SALARIED EMPLOYEES GM would save 1 billion a year.

The reality is the UAW is expecting the rest of the taxpayers to bail out their extortion effort against GM that has finally gone bankrupt.

 
At 4/17/2009 11:35 AM, Blogger Paavo said...

Where's that picture from? I think it's from my neighbours house, but i might be wrong because those kind of houses are common everywhere in Finland.

 

Post a Comment

Links to this post:

Create a Link

<< Home