Driving Toward Oblivion

There was a time when General Motors (NYSE: GM  ) was the king of the road and the largest company in America. When times were good, they were very good, and GM freely shared the wealth. There was only one problem: GM wasn't a monopoly. For a while, that was fine since fellow American carmakers Ford (NYSE: F  ) and Chrysler, now a unit of Germany's DaimlerChrysler (NYSE: DCX  ) , shared similar cost structures. But in the face of rising global competition, GM's excessive costs simply got the better of it. The company became too bloated and its cost structure too rigid for it to absorb the impact of competition and a downturn in its own business.

As a shareholder of General Motors, I held out hope that its current troubles could be repaired. The company has had decades to study the businesses of Japanese rivals Honda (NYSE: HMC  ) and Toyota (NYSE: TM  ) , which have been nipping at its heels. As the largest firm in the business, GM had ample resources and opportunity to make what would have been relatively simple fixes to maintain its competitive position and global strength. But GM's unwillingness to change when it had the chance to do so relatively painlessly has resulted in a dire situation today.

After reading an editorial in Tuesday's Wall Street Journal by General Motors CEO Rick Wagoner, my hopes for recovery have been largely dashed. I have little choice now but to wonder why GM's board has not yet either requested Wagoner's resignation or allowed him to take an early retirement. The more of the editorial I read, the more I realized that Wagoner is looking exclusively at external causes for and solutions to the company's problems. Without an acknowledgement of the company's role in its own undoing, GM has very little chance of recovery.

Playing the blame game
First, Wagoner complains that the Japanese government is paying the health-care costs for the Japanese automakers. I found that odd in light of those companies' major manufacturing presences in the United States. In 2004, Honda reports that it built more than 800,000 automobiles in the U.S. Based on figures from its website, Toyota did even better, manufacturing more than 1 million automobiles in the United States that same year. Both did so using U.S. workers being paid U.S. wages, working within the U.S. health-care system. That's nearly 2 million Toyotas and Hondas built in the U.S. last year alone. Why would both of these Japan-based companies choose to establish and strengthen their U.S. manufacturing sites if the Japanese health-care system offered such competitive advantages?

Could GM's real health-care cost problem be the fact that it disregarded basic economics? Economics 101 teaches the law of supply and demand and sets out pretty clearly what happens when a good or service is offered for free. It gets consumed beyond the ability of providers to supply it, raising the cost for whoever pays the "free" bill. The primary reason that General Motors' health-care costs are crippling is that its retirees have virtually no incentive not to spend the company's money. Most of the country has learned to adapt through premium-sharing, coinsurance costs, deductibles, catastrophic-only coverage, and/or health savings accounts. Sure, health-care costs are high, but few other major companies have been utterly destroyed by medical costs the way GM has.

Wagoner also attempted to dismiss legitimate criticisms of GM's role in its current legacy cost crisis. The fact is, the company played pension accounting games when times got tight, then was caught totally unprepared to the tune of billions of dollars. What responsible pension plan really expects a 10% annual return, as GM's did? Excessively high assumed returns led to chronic underfunding, accelerating what is now a legitimate crisis. And for that, GM can blame only itself.

Once more leaving me scratching my head in wonder, Wagoner continued his weak attempt to blame the Japanese government for his firm's poor performance. His claim that the Bank of Japan's "initiatives to artificially weaken the Yen" are to blame for GM's poor showing fails to stand up to scrutiny. That excuse completely ignores the fact that General Motors still managed to lose $0.44 a share in the December 2004 quarter, the very quarter where the yen was at its strongest in the last five years.

Time is running out
No matter what so-called "social contract" it may have offered, no company does well by its employees, shareholders, retirees, or the general public if it ends up going bankrupt. The time for easy fixes is long gone. With junk-rated debt and mounting losses, the company can't even borrow its way to more time. GM must make the hard changes now to become globally competitive or it will just end up another Bethlehem Steel or Eastern Airlines -- a mere footnote in the annals of history. Continued attempts at making excuses, pointing fingers, and placing the blame on everyone and everything other than the company itself will not be tolerated by this shareholder.

Contrary to Wagoner's claims, massive policy changes are not needed to retain American manufacturing jobs. He needs only look at the success of steel pioneer Nucor (NYSE: NUE  ) for evidence that American ingenuity can still compete on a global scale, and in a business line that's much more commoditized than the automobile industry. All it takes is cost discipline, leading-edge innovation, and a willingness to acknowledge and adapt to the market's reality.

The situation at General Motors is quite bad, but with a concerted effort to reinvent itself for the modern world, the company could once again thrive. It will take, among other things, product focus and financial discipline. Above all else, however, success will require the willingness of a certain executive to acknowledge his company's own role in causing its current mess.

A large part of successful investing is keeping watch over the companies you already own to make sure they're still worth holding. AtMotley Fool Inside Value, we keep a close eye on all the businesses we've picked. Click here to start your 30-day free trial and learn which ones we've sold as their stories have changed. Subscribe today, and you'll receive Stocks 2006, the Fool's guide to investing in the year ahead, absolutely free.

At the time of publication, Fool contributor and Inside Value team member Chuck Saletta owned shares of General Motors, though that may change once the Fool's trading guidelines allow.


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