May 04, 2005

It's all in the way you tell it

So, there I was, sweating away this morning in the gym and half-listening to CNN when they did a really interesting interview with an automotive industry analyst who was brought on to talk about the stark drop off in sales at General Motors. She was quite good, actually, explaining that what has the Street so freaked out is that the drop in sales was mostly in the SUV market, where GM makes all their money. If Americans are not buying the big Suburbans than GM ain't making no money, Well, she said it better. Then she was asked about whether union deals were hurting GM and whether GM was really spending too much on healthcare.

And this is where it got interesting for me. The analyst said that $1200 out of every car sold is used to pay for health care costs. Ok, well, that seems like a lot but I have no way of knowing. How do I put that in context? How many workers does that $1200 pay for? How many retirees? How many families? In short, how many people are covered by that?

Well, she went on to put in context for me. And this is what I mean when I say that it's all in the way you tell it, all in the way you present information. Telling me $1200 per car really tells me nothing. But tell me:

General Motors spent more on health care last year than they did on steel

and you've smacked me upside the head and caught my attention. She felt that for a manufacturing company, this wasn't very good.

Can you imagine that? Is GM a manufacturing company or a social welfare state? Let's see if we can figure that out a little.

GM, according to their annual report for 2004, had net sales and revenue of $193.5 billion. GM seems to divide themselves into auto making and finance/insurance divisions for revenue purposes. That's our first hint that GM may not be just a manufacturing company -- they have a f/i division big enough to warrant a separate discussion in the annual report. Automotive still is the biggest, earning $161.5 billion of the $193.5 and f/i earning some $32 billion. But I do note that only f/i earned a profit -- some $2.9 billion. Unfortunately, I lack the time to probe further and I cannot seem to isolate how much GM spent on steel last year or even what the costs were associated with the automotive divisions. Not a shock, really, when you're dealing with a company that size.

But still, more on health care than on steel. Stunning, isn't it?

Posted by Random Penseur at May 4, 2005 09:27 AM

Have you read Ayn Rand's Atlas Shrugged? Remember Twentieth Century Motors in the book?

If you haven't read it or don't remember the scene, don't worry, I'll post some relevant quotes tonight or tomorrow.

Posted by: JohnL at May 4, 2005 03:03 PM

Forbes has been doing some decent reporting on this story for quite a while. Go here and peruse. It's horrible. The UAW is really cleaning their clock and so far they're acknowledging that there is a problem, but they're not willing to back down a bit on their demands. Which really isn't going to do them any good if GM goes under. If you're interested, Forbes has a whole slew of articles about this story. Check out Jerry Flint---he's a former auto industry exec and he has a regular column. He's been banging on about GM for years now, and a lot of his predictions have come true.

One of my brothers owns several GM dealerships out in Montana and while he is the ultimate GM guy, even he will admit they drive him round the bend sometimes with their demands. The whole Oldsmobile phase-out was so poorly handled and was a major headache for him. GM tells the world that they're not going to sell Oldsmobiles after a certain date, and they will keep the dealerships open until such and such a date. The problem with this scenario is that people stopped buying them altogether once the news hit, thinking that they're not going to be serviced/parts won't be available. Then they screwed over the dealers by forcing them to keep their Olds dealerships open after this news has hit the market, thinking that sales incentives would be enough to move these beasts. Oy. The brother had to sue GM to get a fair buyout on his dealership, and he was successful, but plenty of other dealers weren't.

Posted by: Kathy at May 4, 2005 03:07 PM

And one other interesting fact: the brother will tell you flat out that he doesn't make dime one selling cars. He makes all of his money on after-market products, service and, you guessed it, f and i. In fact, the majority of it is from selling GM branded f and i products.

So, if $1200 of every SUV that's sold goes toward health care costs, and practically none of it goes toward the dealer, where's the rest of the money going? I don't know if that makes any sense whatsoever---being the girl who doesn't have a MBA or even a lousy business degree---but it tells me that costs are out of control at GM and that health care costs aren't their only problem. If I were a conspiracy theory sort of girl, I would say that this is just the first whack GM is going to take at the UAW in a long series of whacks to try and cut costs. We'll have to see if I'm right.

Posted by: Kathy at May 4, 2005 03:14 PM

Can I read an annual report, or what? I just got suspicious when she described them as a manufacturing company, so I went and checked them out. f/i was the only place they made money.

As for conspiracy, maybe. Don't forget that SUV sales really are down and that is the profit center for the auto div. They may seize on that fact to press the unions, but it is a fact and they have to figure out how to sell cars the people want to buy. Or else they're really just a bank.

Thanks for the great comments, Kath!

Posted by: RP at May 4, 2005 04:00 PM

Here's a stat to answer Kathy's "where's the money going question". I'm sure you'll find this interesting.

"The Lincoln Navigator makes around $20,000 profit per vehicle even though it isn't much more expensive to build than a lower-priced Ford Explorer or F-Series pickup, who it shares architecture and components with." - Forbes Magazine.

I seriously doubt that the $1,200 health care cost per vehicle they're sharing with the public is cutting into their profits or into their price of steel.

It's all in how they leverage and present the numbers to the public in order to achieve their aim. Great post! Welcome back!

Posted by: Michele at May 10, 2005 12:44 PM
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