That Delphi, GM and Ford are struggling to deal with ‘legacy costs’ – the cost of guaranteed paychecks and health care coverage for retired and laid off employees – is well known. How could anyone not know? The whining out of Detroit can be heard around the world. I, for one, have no sympathy. I also think that closing plants and moving manufacturing to Asia to offset the ‘cost structure’ problems is incredibly irresponsible and gutless.
Imagine that you had a neighbor. While you lived frugally to pay your mortgage and save for your kids’ college education, this neighbor negotiated a balloon mortgage with little due for twenty years. He saved nothing and lived like a drunken sailor for those twenty years. At the end of that time, while your house is paid for and your kids’ tuition is covered, that neighbor is facing a house payment he cannot make and his kids must forgo college. How much sympathy can you have? To make matters worse, that neighbor refuses to stop his irresponsible spending even when he is begging you for support. That is precisely what the auto companies appear to be doing.
The legacy costs were incurred twenty years ago when the auto companies signed binding, legal contracts with their employees in order to prevent any work stoppage. The Ronald Regan boom years were so good to them that they were nearly desperate to keep the profit train rolling. As a result of the promises made, the plants stayed open and GM and the rest made tons of money, paid astronomical dividends and shelled out huge management bonuses. Now comes the time to pony up the car companies’ end of the bargain, but the money is all gone.
The auto companies certainly did not just figure out within the last few weeks that Toyota and other foreign competitors were eating their lunch; nor did it just dawn on them that doctor bills are getting pretty high.
So with this big IOU coming due, and a good, long twenty year look at it as the magnitude of the debt became clearer, how on earth can they justify trying to get out from under their contracts, while still paying dividends to their stockholders? Rather than report grand profits as a result of the benefits of their promises to labor, it seems to me they should have been taking healthy reserves all along against the legacy cost bill they had to see coming.
Delphi has paid quarterly dividends from the get go, all the way up through the first half of this year. In fact they declared one exactly 108 days before they trotted into bankruptcy court. GM has paid fifty cents per quarter for so long it looks like a fixed cost – even after they announced that 25,000 employees would have to hit the streets. Ford does not treat dividends as tithing, like GM, but they never fail to make a quarterly payment of some amount. No wonder none of these guys can pay for health care – they gave all the money away.
Granted, I slept through most of my finance classes at the University of Cincinnati, but I am quite sure that investing in stock was supposed to carry a degree of risk. Not if you own stock in these guys, I guess. It seems as though a lot more risk is born by people who agree to go to work for them. Owners of the stock in an unprofitable company get paid, while people retired after a lifetime commitment to that company get zip! In America! Neither George Washington nor John Wayne would be pleased with what this country is coming to.
Dividends are supposed to be a distribution of profits. It is impossible for me to wrap my limited mental capabilities around paying dividends to shareholders as if the companies were profitable, while simultaneously shutting down plants, moving jobs to countries with unpronouncable names, and announcing that the company cannot make money in the American economic structure.
It looks as though the management has no problem reneging on deals and promises, or giving bad news to production employees, middle managers, suppliers and countless American communities. Apparently giving bad news to Wall Street, however, takes more backbone than they can muster.
I am the most pro-manufacturing guy I know and I am hardly a union supporter. But you cannot strike a contract with the union, take all of your side of the gains, and twenty years later, after you can no longer wring a nickel out of the deal, announce that the contract was unfair all along and wriggle out of it.
This is not manufacturing management as I have grown to respect it. We certainly don’t raise our sons and daughters to conduct their personal lives with such disregard for integrity and commitment. When the giants of manufacturing behave this way, it harms us all. How can the employees of any manufacturer trust their management when the managers of the greatest American companies so cavalierly sell out their employees in order to placate Wall Street? This looks to me like nothing more than the systematic looting of American factories.
Jon Miller says
Thanks for your important observations Bill.