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Diagnosis for Ills at GM Questioned

June 28, 2005

General Motors chairman and CEO Rick Wagoner added to the auto manufacturer’s steady flow of bad news when he disclosed at the company’s annual meeting of shareholders last month that the company will reduce its U.S. manufacturing workforce by 25,000 jobs.

In explaining the move, Wagoner placed a large share of the blame on GM’s liberal health care benefits package, which he says adds $1,500 to the price of every vehicle it sells. Health care expenses, he said, put GM at a significant disadvantage to overseas competitors.

“Left unaddressed, this will make a big difference in our ability to compete in investment, technology and other key contributors to our future success,” Wagoner told the GM shareholders.

Richard Shoemaker, a vice president for the United Auto Workers, said in his initial reaction to Wagoner’s state-of-the business address that the company needs to rebuild its U.S. market share and work on getting the right product mix of vehicles. But union officials later indicated that the UAW was willing to work within its current contract, set to expire in 2007, to reduce health care costs.

Paul Dennett, the American Benefits Council’s vice president for health policy, says GM’s announcement is somewhat sobering because the company is one of the leaders in creating innovative health benefit programs.

“It’s basic,” Dennett says of the problem facing companies. “If you have health care costs continuing to increase at roughly 10 percent while wages and the cost of other goods and services are increasing at the lower rate of inflation, it isn’t long before health care becomes one of your largest components.”

General Motors spent $5.2 billion on health care in 2004 and has 21/2 retirees on its health care rolls for each active employee. But critics say blaming health care costs may be diverting attention away from more significant problems.

In recent years the company has lost billions in questionable investments. Some of its car models have been criticized as boring. Strategically, the company has been criticized for losing market share and failing to protect its base in the U.S. while focusing on overseas markets such as Asia.

Maryann Keller, a longtime automotive industry analyst and author, has studied GM for 30 years. She says that the company carries much of the blame for the drain on its bottom line created by health care benefits. The company signed a series of generous contracts that apparently did not anticipate its current struggles.

“Nobody put their feet to the fire and forced them to sign these contracts,” she says.

Blaming health care costs is shortsighted, she says.

“Let’s say you took away the health care burden and the cost came down,” she says. “Do you honestly think that tomorrow General Motors would sell more cars?”

Dennett says GM can innovate with programs like managed care and efforts to steer employees to the best-quality care, but much of the problem is beyond the company’s control.

“Employers face a real dilemma in that they don’t have direct control over the costs of health care services provided to their employees,” Dennett says. “GM’s innovations are going to help, but these things take time to produce results, and time is often a commodity that is in short supply.”

Douglas P. Shuit