“WHAT I REALLY WANT, WHAT’S REALLY IMPORTANT TO ME…”

9/19/07

It looks like GM and the UAW are close on a labor contract. Most of the focus has been on the proposed VEBA. While the VEBA and the ameliorative effect it will have on the labor costs of the Big 3 is important, we can judge the merit of this contract by how it handles the JOBS bank, the scheme under which line workers at the car companies are paid even if they don’t work.

As I have said ad nauseam for years, if the JOBS bank is not addressed, the Big 3 will remain at a severe competitive disadvantage to their Asian rivals. Why? Under the JOBS bank, labor effectively becomes a fixed cost. If labor is a fixed cost, it makes sense to produce cars even if they aren’t needed or wanted. After all, you’re paying people; they might as well be producing something, especially when the real contribution margin on cars is astronomically high even at very low prices. Overproduction leads to deterioration in car prices via rebates, cheap financing, and other incentives. Deterioration in car prices leads to deterioration in resale values, especially of those “domestic” cars that are being overproduced. This leads to further downward pressure on new car prices as dealers need more incentives to get deals done. And the downward spiral continues.

It is the lousy resale values of the former that is the primary point of distinction between Big 3 products and the products of the Asian and European carmakers. Big 3 “quality” is, for all intents and purposes, at the same level of that of its Asian rivals, and better than that of the Europeans. Dealer service, while varying from dealer to dealer, is generally at least as good at Big 3 dealerships as it is at dealerships of “foreign” Big 3 competitors. However, it is the poor resale values of “domestic” products that make the purchase of a Big 3 product a bad deal at any but a steeply discounted price. There are exceptions, of course, but not many. For every, say, Caddy CTS one can cite as a pretty good reseller one can cite legions of Ford Tauri, Pontiac Grand Prixs, Chrysler Sebrings, and Ford Expeditions that almost have to be given away at used car lots. The only way to address this problem is by addressing the JOBS bank. If the JOBS bank isn’t addressed, little will have been accomplished in this new contract.

Given my feelings about the impact of the housing situation on the economy generally and on the car business in general (Those on Wall Street who argue that high end marques are not going to feel much impact from the housing difficulties are blind; plenty of “cash” buyers (or lessees) of Lexi, Mercedes, etc. are financing their “just gotta have it” luxury car “acquisitions via “tapping the equity” of their homes.), I am not long any of the Big 3 and remain long the puts of the grossly overpriced Daimler (DAI). My feelings on the Big 3 will become decidedly more negative should progress on the JOBS bank be thrown over the side in exchange for accommodation on a VEBA in these contract talks.