Trend Analysis GM and Toyota 2005—2008

Posted by PITHOCRATES - January 29th, 2013

History 101

GM’s Problems were caused by Franklin Delano Roosevelt and his Ceiling on Wages

The GM bailout is still controversial.  It was part of the 2012 campaign.  It was why we should reelect President Obama.  Because Osama bin Laden was dead.  And General Motors was alive.  But the bailout didn’t fix what was wrong with GM.  Why it went bankrupt in the first place.  The prevailing market price for cars was below their costs.  And what was driving their costs so high?  It was labor.  It was the UAW wage and benefit package that made it impossible for GM to sell a car profitably.

GM’s problems go back to Franklin Delano Roosevelt.  The country was suffering in the Great Depression with double-digit unemployment.  He wanted to get businesses to hire people.  To reduce unemployment.  And pull us out of the Great Depression.  So how do you get businesses to hire more people?  Hmmm, he thought.  Pay people less so businesses have more money to hire more people.  It was brilliant.  So FDR imposed a ceiling on wages.  Why did FDR do this?  Because he was from a rich family who didn’t understand business or basic economics.

Of course there was one major drawback to this.  How do you get the best talent to work for you if you can’t pay top dollar?  Normally the best talent can go to whoever pays the most.  But if everyone pays the same by law you might as well work at the place closest to your house.  Or across from the best bars.  No, if a business wanted the best workers they had to figure out how to get them to drive across town in rush hour traffic and sit in that traffic on the way home.  A real pain in the you-know-what.  So how to get workers to do that if you can’t pay them more?  You give them benefits.

Toyota doesn’t have the Legacy Costs that Bankrupted an Uncompetitive GM

And this was, is, the root of GM’s problems.  Those generous pension and health care benefits.  Things we once took care of ourselves.  Before our employers started providing these.  And the UAW really put the screws to GM.  Getting great pay, benefits and workplace rules.  For both active workers.  And retirees.  Even laid-off workers.  Such as the job bank.  Where GM paid workers who had no work to do.  It’s benefits like this that have bankrupted GM.  Especially the pensions and health care costs for retired workers.  Who outnumbered active workers.  Those people actually assembling the cars they sell.

It’s these legacy costs that have made GM uncompetitive.  Toyota, for example, didn’t suffer the FDR problem.  So their costs for retired workers don’t exceed their costs for active workers.  In fact let’s compare GM and Toyota for the four years just before GM’s government bailout (2005-2008).  We pulled financial numbers from their annual reports (see GM 2005 & 2006, GM 2007 & 2008, Toyota 2005 & 2006 and Toyota 2007 & 2008).  We’ve used some standard ratios and plotted some resulting trends.  Note that this is a crude analysis that provides a general overview of the information in their annual reports.  A proper analysis is far more involved and you should not construe that the following is an appropriate way to analyze financial statements.  We believe these results show general trends.  But we offer no investment advice or endorsements.

GM Toyota Current Ratio

We get the current ration by dividing current assets by current liabilities.  These are the assets/liabilities that will become cash or will have to be paid with cash within 12 months.  If this ratio is 1 it means current assets equals current liabilities.  Meaning that a business will have just enough cash to meet their cash needs in the next 12 months.  If the number is greater than 1 a business will have even a little extra cash.  If the number is less than 1 a business is in trouble.  As they won’t have the cash to meet their cash needs in the next 12 months.  Unless they borrow cash.  Toyota’s current ratio fell slightly during these 4 years but always remained above 1.  Falling as low as 1.01.  Whereas GM’s current ratio was never above 1 during these 4 years.  And only got worse after 2006.  Showing GM’s financial crash in 2008.

The GM Bailout did not address the Cause of their Bankruptcy—UAW Pensions and Health Care Benefits

There are two basic ways to finance a business.  With debt.  And equity.  Equity comes from outside investors (when a business issues new stock).  Or from profitable business operations.  Which typically accounts for the majority of equity.  Profitable business operations are the whole point of running a business.  And it’s what raises stock prices.  To see which is providing the financing of a business (debt or equity) we calculate the debt ratio.  We do this by dividing total liabilities by total assets.  If this number equals 1 then total assets equal total liabilities.  Meaning that 100% of a business’ assets are financed with debt.  And 0% with equity.  Lenders do not like seeing this.  And will be very reluctant to loan money to you if your business operations cannot generate enough profits to build up some equity.  And that was the problem GM had.  Their business operations could not generate any profits.  So GM had to keep borrowing.

GM Toyota Debt Ratio

GM went from bad to worse after 2005.  Their debt ratio went from 1.02 in 2006.  To 1.24 in 2007.  And to 1.94 in 2008.  Indicating massive borrowings to offset massive operating losses.   And how big were those losses?  They lost $17.806 billion in 2005.  $5.823 billion in 2006.  $4.309 billion in 2007.  And in the year of their crash (2008) they lost $21.284 billion.  Meanwhile Toyota kept their debt ratio fluctuating between 0.61 and 0.62.  Very respectable.  And where lenders like to see it.  As they will be more willing to loan money to a company that can generate almost half of their financing needs from profitable business operations.  So why can’t GM?  Because of those legacy costs.  Which increases their cost of sales.

GM Toyota Cost of Sales

GM’s cost of sales was close to 100% of automotive sales revenue these 4 years.  Even exceeding 100% in 2008.  And it’s this cost of sales that sent GM into bankruptcy.  Toyota’s was close to 80% through these 4 years.  Leaving about 20% of sales to pay their other costs.  Like selling, general and administrative (S,G&A).  Whereas GM was already losing money before they started paying these expenses.  Thanks to generous UAW pay and benefit packages.  The job bank.  And the even greater costs of pensions and health care for their retirees.  It’s not CEO compensation that bankrupted GM.  It was the UAW.  As CEO compensation comes out of S,G&A.  Which was less than 10% of sales in 2007 and 2008.  Which was even less than Toyota’s.

GM Toyota S G and A

GM’s costs kept rising.  But they couldn’t pass it on to the consumer.  For if they did the people would just buy a less expensive Toyota.  So GM kept building cars even though they couldn’t sell them competitively.  And sold them at steep discounts.  Just to make room for more new cars.  So the UAW could keep building cars.  Incurring massive losses.  Hoping they could make it up in volume.  But that volume never came.

GM Toyota Automotive Sales as percent of 2005

Toyota continued to increase sales revenue year after year.  But GM’s sales grew at a flatter rate.  Even falling in 2008.  It was just too much.  GM was such a train wreck that it would have required a massive reorganization in a bankruptcy.  Specifically dealing with the uncompetitive UAW labor.  Especially those pensions and health care benefits for retirees.  Which the government bailout did not address.  At all.  The white collar workforce lost their pensions.  But not the UAW.  In fact, the government bailout went to bolster those pension and health care plans.  So the underlying problems are still there.  And another bankruptcy is likely around the corner.

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The Federal Debt and Public Sector Grow, American Exceptionalism Declines

Posted by PITHOCRATES - April 4th, 2011

Obama sets Spending Record, Maxes out Uncle Sam’s Credit Card

As Congress battles over a budget, Timothy Geithner goes back to Congress and warns them that the world as we know it will end unless they increase the debt ceiling.  I’m paraphrasing, of course (see U.S. will hit debt ceiling by May 16, Geithner warns Congress by Jim Puzzanghera posted 4/4/2011 on the Los Angeles Times).

The Treasury Department had estimated that the nation would reach its $14.29-trillion debt limit between April 5 and May 31…

The Obama administration is pushing Congress to increase the debt limit, as it has done 75 times since 1962. The nation has never failed to increase the limit, Geithner said.

But the nation has never spent money it doesn’t have like the Obama administration has.  After some 2 years in office Obama has added about $4.3 trillion to the national debt.  That’s pretty impressive for just two scant years.  And how does that compare with his predecessors?  George W. Bush‘s added $4.2 trillion in eight years.  Bill Clinton added $1.4 trillion in his eight years.  Ronald Reagan added $1.6 trillion in his eight years.  And Reagan is always attacked with the ‘sure he saved the economy and increased GDP but at what cost’ line implying he did it with reckless and irresponsible spending by mortgaging our future.  But Reagan’s debt was chump change compared to the Obama $4.3 trillion added in only 2 years.  Yet the Reagan debt was bad.  While the Obama debt is nothing to worry about.  Funny how that works. 

One thing for sure, Obama sure likes to spend other people’s money. 

Renewable Energy Subsidies are a Slush Fund for Democrats

So what are we spending so much money on?  Oh, lots and lots of things.  Some big (Obamacare).  Some small.  So small that when you look at it as a line item you say, sure, that’s a lot of money, but in the grand scheme of things, it’s chump change.  Like the debt Reagan added rebuilding the American economy and winning the Cold War.  Or solar energy subsidies (see Get A Tax Break For Going Green In 2011 by Ashlea Ebeling posted 4/1/2011 on Forbes).

When [a retired couple], N.J., both 73, file their 2010 tax return this spring, they’ll be getting a $15,000 federal tax credit for going solar. They were expecting to get an additional $11,000 state rebate too, but newly-elected Republican Gov. Chris Christie raided the N.J. Clean Energy Fund last year to help balance the state budget, so the pot of rebate money ran dry. Yet even without the promised state rebate, [they] calculate that their $50,000 investment will be paid off in five years thanks to the federal tax credit and other incentives.

He’s already watching his meter send electricity he generates back to the power company; he figures he’ll save $1,600 a year in electricity bills. And he stands to get up to $6,500 a year for 15 years in state-legislated solar renewable energy certificates…

Okay, so we have a retired couple who could afford to spend $50,000 on solar panels that will never pay for themselves in energy savings unless they live another 32 years in retirement.  You know, that is an awful return on investment.  Which explains why no one is making this investment.  Unless the government gives them about $100,000 in the next 15 years on top of the $15,000 federal tax credit.  And the $11,000 state benefits.  All to save $1,600 a year.  What a scam.

This may stimulate the economy locally for a short time, but it just adds to the debt.  And the long term problems will be far greater than the short term benefits.  Then again, 73 year old people won’t be around to face those problems.  But you can bet that they will be voting for the party that just dropped a boatload of money into their laps to spend in their retirement years.  Let’s not forget that the senior population is growing greater than the younger population.  And they vote more.  So you can see that although the return on investment on solar energy is awful, it pays huge political dividends.  And that’s what it’s all about.  Not the environment.

Obamacare is a Slush Fund for Democrats

And speaking of really enjoying those retirement years, here’s a little pork buried in Obamacare just coming to light (see Uncovered: New $2 billion bailout in Obamacare by Byron York posted 3/31/2011 on The Examiner).

Investigators for the House Energy and Commerce Committee have discovered that a little-known provision in the national health care law has allowed the federal government to pay nearly $2 billion to unions, state public employee systems, and big corporations to subsidize health coverage costs for early retirees.

The legislation called for the program to spend a total of $5 billion, beginning in June 2010 — shortly after Obamacare was passed — and ending on January 1, 2014, as the system of national health care exchanges was scheduled to go into effect.

In other words, if you support Obamacare, we’ll take care of you.  As we always do.  And that’s why they fight for the public sector workers like they do.  They get a lot of union dues and foot soldiers.  In return the government throws them a bone.  Like an additional $5 billion in health care subsidies.

Where is the money going?  According to the new report, the biggest single recipient of an early-retiree bailout is the United Auto Workers, which has so far received $206,798,086.  Other big recipients include AT&T, which received $140,022,949, and Verizon, which received $91,702,538.  General Electric, in the news recently for not paying any U.S. taxes last year, received $36,607,818.  General Motors, recipient of a massive government bailout, received $19,002,669.

The program also paid large sums of money to state governments.  The Public Employees Retirement System of Ohio received $70,557,764; the Teacher Retirement System of Texas received $68,074,118; the California Public Employees Retirement System, or CalPERS, received $57,834,267; the Georgia Department of Community Health received $57,936,127; and the state of New York received $47,869,044.  Other states received lesser but still substantial sums.

But payments to individual states were dwarfed by the payout to the auto workers union, which received more than the states of New York, California, and Texas combined.  Other unions also received government funds, including the United Food and Commercial Workers, the United Mine Workers, and the Teamsters.

Remember the GM bailout?  Obama screwed the GM bond holders.  He called them greedy.  Humiliated them for trying to keep their contract rights.  The Obama administration sent these ‘first in line’ in bankruptcy to the end of the line.  Even behind the UAW who had no investment in GM.  Obama gave the UAW free shares of stock just for being who they were; contributors to the Democrat Party.  When the company went public again, the UAW was able to reap a fortune on that stock gift and fund their poorly funded pension fund.  And now this.  More tax dollars gifted to them for being good Democrat Party contributors.  This time to pay for health care costs of early retirees.  Lovely. 

Privileged life is good.  Obama takes care of the privileged.  And all you have to do is vote for him.  And give him a piece of your union dues.

The Public Sector Grows, the Private Sector Shrinks

But this government generosity is getting out of control.  People see the gravy train.  And they’re getting on it (see We’ve Become a Nation of Takers, Not Makers by Stephen Moore posted 4/1/2011 on The Wall Street Journal).

If you want to understand better why so many states—from New York to Wisconsin to California—are teetering on the brink of bankruptcy, consider this depressing statistic: Today in America there are nearly twice as many people working for the government (22.5 million) than in all of manufacturing (11.5 million). This is an almost exact reversal of the situation in 1960, when there were 15 million workers in manufacturing and 8.7 million collecting a paycheck from the government.

It gets worse. More Americans work for the government than work in construction, farming, fishing, forestry, manufacturing, mining and utilities combined. We have moved decisively from a nation of makers to a nation of takers. Nearly half of the $2.2 trillion cost of state and local governments is the $1 trillion-a-year tab for pay and benefits of state and local employees. Is it any wonder that so many states and cities cannot pay their bills?

The problem with this trend is that the government doesn’t pay for these government workers.  The taxpayers do.  The people with private sector jobs.  And as the public sector (i.e., government) grows, the smaller the private sector gets.  Which has to fund an even greater public sector by ever greater taxes.  But the more taxes we pay the more sacrifices we have to make.  Our lives grow more austere.  While the public sector lives a far more comfortable life than ours.  The government will be the first to condemn this income disparity when they can attack some corporation.  But it’s a different story when the well-to-do are their own people.  So they try to hide this wealth transfer.  Well, they try to hide it from the makers.  Not the takers.

Don’t expect a reversal of this trend anytime soon. Surveys of college graduates are finding that more and more of our top minds want to work for the government. Why? Because in recent years only government agencies have been hiring, and because the offer of near lifetime security is highly valued in these times of economic turbulence. When 23-year-olds aren’t willing to take career risks, we have a real problem on our hands. Sadly, we could end up with a generation of Americans who want to work at the Department of Motor Vehicles.

Public sector workers will bitch and moan about their jobs.  How they can earn more in the private sector.  Of course, they never leave the public sector.  Because the pay and benefits in the private sector suck compared to what they get in the public sector.  And no one ever fires them or lays them off.  That’s why they don’t ever give up those jobs.  Even college graduates have learned this.  And to guarantee those sweet jobs you know they will become lifetime Democrat voters.

Over the period 1970-2005, school spending per pupil, adjusted for inflation, doubled, while standardized achievement test scores were flat. Over roughly that same time period, public-school employment doubled per student, according to a study by researchers at the University of Washington. That is what economists call negative productivity.

Why, then, is the answer to our educational woes always more spending?  Because there are a lot of teachers.  Who pay a lot of dues.  That go straight to the Democrat Party.  In exchange for more government spending on education.  Always for the children.  Yet the money never seems to make it to the classroom.  Based on the test scores.  But the money keeps flowing.  So the Democrat Party can always count on the teachers’ vote.

Most reasonable steps to restrain public-sector employment costs are smothered by the unions. Study after study has shown that states and cities could shave 20% to 40% off the cost of many services—fire fighting, public transportation, garbage collection, administrative functions, even prison operations—through competitive contracting to private providers. But unions have blocked many of those efforts. Public employees maintain that they are underpaid relative to equally qualified private-sector workers, yet they are deathly afraid of competitive bidding for government services.

So you could say these public sector workers are 20% to 40% overpaid, couldn’t you?  I mean, in the private sector, it’s the rare person who can demand 20% to 40% more than the going market salary or wage.  People just don’t choose to pay more.  Do you?  Do you hire a plumber whose rates are 20% to 40% higher than the going rate?  No, I doubt you do. I’ve even known union construction workers who hire nonunion workers to work at their house.  Because they, too, don’t want to pay more than they have to.  But public sector workers think they deserve this higher pay and benefits.  As does the federal government.  Who steps in to fight a governor (Scott Walker) who is trying to balance his state’s budget.  Why?  Because public sector workers are loyal Democrat voters.  And donors.  Via their automatically deducted union dues.

The Shining City upon a Hill to become Ordinary?

The national debt is growing out of control for a good reason.  Spending.  Now we’ve had spending in the past that was necessary.  But much of the spending in the last 2 years has had a higher purpose.  To fund the growing public sector.  And to buy loyal Democrat voters.  With the growth in entitlements consuming an ever larger part of the budget, that leaves little for the business of politics.  So they must borrow.  And borrow they do.  More than ever before.  They’ve added more in 2 years than George W. Bush, Bill Clinton and Ronald Reagan did in their 8-year terms.  And they’re begging Congress to raise the debt ceiling so they can keep on spending.

The future isn’t looking so bright.  Perhaps this marks the beginning of the end of American Exceptionalism.  The point on the historical timeline when we stopped being that shining city upon a hill.  When we became ordinary.  With our best days long behind us.  I hope not.  But it’s been done before.  Great civilizations have come and gone.  Done in by an ever growing public sector that bankrupts nations.  Even empires.  No one is immune.  Not even that shining city upon the hill.

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