Buffett on the Auto Industry

[mchastek]

Warren Buffett adn Charles Munger's take on the Automotive Industry (sourced from CNN Money: http://money.cnn.com/2005/05/01/news/fortune500/buffett_talks/index.htm?cnn=yes)


Buffett: "[GM boss] Rick Waggoner and [Ford chairman] Bill Ford have both been handed, by past managers, extremely difficult hands to play. They're not the consequences of their own doing, but they have inherited a legacy cost structure, with contracts put in place decades ago, that make it very difficult for them to be competitive in today's world.

"Just imagine if they'd been made to sign contracts that made them pay several more tons per steel than their competitors have to, people would feel that's untenable. [GM and Ford] have to pay contracts that give them immense obligations for health-care and retirement annuities at high cost. Their competitiors can buy steel and other commodities no cheaper, but the competitors don't have nearly the same level of costs for these [health-care and retirement expenses].

"Someone once asked Bill Buckley what he would do if he actually won his race for New York mayor back and the 1960s and he said, 'First thing I'd do is ask for a recount.' Well, that's what I'd do at GM. You've got a $90 billion pension fund, $20 billion set aside for health-care liabilities, and the whole equity value of the company is $14 billion. That's not sustainable.... Something will have to give."

Munger: "Warren gave a very optimistic prognosis. Some people seem to think there's no trouble just because it hasn't happened yet. If you jump out the window at the 42nd floor and you're still doing fine as you pass the 27th floor, that doesn't mean you don't have a serious problem. I would want to address the problem right now. They'd better face it."

What do you think?

[harkul]

Well, it's like this; and believe me, nothing personal here, but if you look at the american car industry, i.e., the big three, aside from few specialty vehicles or concepts they really have nothing that could stand the heat that comes from the Asian and European manufacturers. In the long term, or should I really say, short term, manufacturers other than the big three, will simply overtake the market in USA. Why, well, they simply follow the trends, or better yet, they make the trends, they produce cars that truly have quality built in, I mean look at Toyota, and quite clearly, they are hitting squarely on all those weaknesses that the american producers have with no mercy. And yet, the Big Three just keeps on making the same stuff over and over again, almost as if the other guys do not excist. I myself attended a american manufacturer sponsored dealer meeting in Las Vegas in the early '80s, and they had brought along a Honda 600, small little tinbox that was easy to laugh at, and in wonderment, most people were shaking their heads in disbelief and thinking this can not be a threat to us, no way! Well, as they say, the rest is history, and if the big three will not face it, and I mean now, they will simply dissappear and cause untold economical damages in doing so. It is not just the manufacturers that need to understand this, also the government, labor unions and all those blood sucking lawyers and CEO's who will take it to whatever end, even to a total collapse of an industry, just so they can have the last word, or the last dollar!

[loren_parker@yahoo.com]

I think issue here is less about trends and more about cost structure (per Buffet's comments in the original post). When over $1500 of the final price paid by the consumer on a new GM car goes to support the cost of the ailing manufacturer's healthcare I see a problem. Ford and GM will need to shake off this cost structure albatross before they can again be competitive in the industry.

As for design, one need only look at Chrysler and Mercedes of late to realize that there has been a brain drain (or a design drain) from the German side of the house. These days it looks like all Euro designs are chasing the Japanese designers (not certain why). The new Chryslers are a long-awaited improvement. The new Mercedes designs hitting the floor are -well - lame from a design perspective and better suited for Nissan's dealer showroom than the legendary Mercedes sales floor.

[alistairhill]

I agree with Buffet and would extend his analogy further. Not only are Ford and GM trying to play with the deck stacked against them from a cost structure point of view, any US profitability is generated in precicely the sectors of the market that will turn down with increasing fuel costs. The other problem with this is that while currently GM and Ford still have their heads above water (just!) their supply base is failing fast. Look at the rate at which they are seeking chapter 11 protection and the rate at which US jobs are moving to lower cost manufacturing locations.

The problems with the US industry seem to be structural, and it is long overdue for a major realignment - it only remains to be seen how painful this turns out to be.

[Mr. Pebble]

See my item on Six Sigma and note my 24,000 word proposal to GM. The Big 3 gave the farm to the workers decades ago. They didn't have to do that but they did. The workers got rich, lazy, and fat heads to go with it and thought that the largesse was an entitlement forever. Hundreds of thousands have lost their jobs and the UAW is trading in its Big 3 jobs for low paying Tier jobs as they retreat into oblivion.

Health Care legacy is a smokescreen. My paper suggests that we question the healthcare industry that charges $55 for a pair of socks that cost under a dollar to produce and the Pharmaceutical Companies as they take billions of auto money, less campaign contributions to the offshore banks that hold their lucre.

My paper also suggests that the Seven Billion Dollars in Health Care costs could only be marginally reduced and in total is under 5% of gross revenue. The incredible waste in the operations that the automanufacturers and their suppliers carefully hide under the table because they do not have the leadership to address the issue is five to ten times the amount of healthcare.

By the way, if you ever see a news item on an auto assembly plant, watch the workers that cost GM $73 per hour snooze around the job. Then look at all of the people in the background standing thre doing nothing at all. Afterwards, you can listen to them cry about about how hard they have to work and complain about being underpaid. Then you can go to the local Burger King at lunchtime and watch the $7 per hour workers run their collective butts off in ways that would give any auto worker muscle spasms.

Somone ought to impress on the Big three and the UAW that as long as they try to walk on water and keep their head in the sand at the same time, they can slowly kiss their fat cat jobs goodbye. Only question is which of the Big 3 will be the first to join Eastern Airlines, Builders Square and Amiga Computers in the Smithsonian and become a blip in the history books.