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Why GM is so oppressed by legacy costs

Posted by: Michael Mandel on July 13

I’ve been trying to understand why General Motors is so oppressed by legacy costs, and I think I finally have got it. Look at this table:

1985 Latest* change
employment (thousands) (percent)
General Motors 811 324 -60%
Honda 54 132 145%
Toyota 80 264 231%
*2004 for GM, 2003 for Honda and Toyota
Data: Compustat

GM, a company with 300,000 employees, is supporting the number of retirees appropriate for a company with a workforce of 800,000, almost triple the size.

Meanwhile, Toyota and Honda, both growing companies, are supporting a retiree base which is relatively small compared to their current workforces.

Definitely a case where GM is still being punished today for mistakes it made in the past.

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Reader Comments

sun bin

July 14, 2005 02:00 AM

What this means is GM has been less profitable than reported in 1980s and 1990s? GM has basically spent the pension fund it should have set aside in the past. otherwise, provisioned pension should not impact today's cost position.

it reminds me of the SOE in China.


July 18, 2005 04:01 PM

GM is having problems today because it does not build cars that consumers want. It continues to focus on large suv's and trucks in the face of market surveys and $2.50/gallon gas. Their sales numbers aren't so bad because they have dropped the prices so low to stimulate demand, driving shoppers to purchase for the deal, not the product.

Little wonder why Toyota is doing so much better. Toyota focuses on the product. They offer the Corolla (great car) and Prius (gas sipper) for those who are economically-oriented.

Any shopper who buys a product they ultimately do not want because of a good deal will not be a happy customer down the road.

I own a GM product and I do not want to see them fail, yet they seem to get into the same problem time after time.

Les Washington

October 15, 2005 04:42 PM

If GM goes into bankruptcy, will it shed the company of its enormous "legacy costs"?


January 28, 2006 02:15 PM

One of the most significant issue with legacy cost is how it drives behavior of the management. With the prospect of legacy cost hanging over your head, it limits your options significantly.

A classic approach to a business with a poor product to customer alignment (dogs don't like the dog food) would be to cut back on production. The fix cost nature of the automotive model tends to limit that response (keep the plants running, to pay off the investment).

Legacy costs add yet another hurdle to this strategy of reducing production. It leaves the management team forced to "stick with a loser" to maintain volume. This strategy ultimatley spoils the market and forces poor future product decisions. It turns into a death spiral.


January 30, 2006 06:23 PM

GM's problems aren't new - they've been brewing for over a decade. It's just that it's only recently that they've become so insurmountable that people are starting to pay attention.

It's a combination of a number of factors. It's partly due to massive legacy health costs, but it's also due to uninspired design by committee (look at the Pontiac Aztek), a fundamental misunderstanding of basic economic principles (trying to maintain brand differentiation while also achieving economies of scale and value pricing through architectural commonalities), massive overinvestment in capital (leading to global overcapacity), and a poor corporate culture.

The rational thing to do with their production overcapacity would be to shut down plants. Unfortunately, doing so doesn't have any labour benefit - under union agreements, they have to keep paying labour costs even if the labour isn't utilised. So, better to keep the plant operating and give the cars away.

The rational thing to do with their brands would be to choose a busines model - either be Ferarri or be Toyota. Instead, GM keeps trying to be both, and by doing so, creates relatively uninspired cars that cost more than the value competitors they're going against.

The current model of discount pricing with overproduction and brand saturation is a race to the bottom, and GM's winning. Odds are GM will look for chapter 11 protection within the next two to three years. If you're interested, check out their remaining cash reserves and compare it against their burn rate. As of two years ago, they had approximately five to eight years left before they would be forced to sell assets, assuming the burn rate didn't increase. With their current discounting in China, you have to assume things are getting worse.

Michael Westfall

November 11, 2008 08:27 AM


Breaking retirement promises to the elderly dependent retirees.

Not protecting the standard of living or vesting the benefits over past decades of trusting retirees who built America.


November 12, 2008 02:29 AM

Each year GM starts off $6B in the hole due to their legacy costs.
Also, you had the introduction of the Honda during the 1970’s.

GM: “That’s okay, that’s the low end of the market, we can let them have that.”

Introducing Acura, Lexus & Infiniti.

GM: “That’s okay, trucks are where the real profits are.”

Introducing Landcruiser, Forefunner, Tacoma, etc.

One of the Big 3 was going to launch a car w/ 17 cup holders, for 5 passengers. Nuff said?

GM has stuck its head in the sand for nearly 3 decades. My advice to GM (albeit possibly too late)...don't grow a wishbone where your spine should be!
Either start making a quality product that people actually want, or start retooling your factories to produce those Sports Illustrated Football Phones...I'm sure you've got enough GM dashboards laying around the factory, although you might need to increase the quality of the plastic.

P.S. EVERYONE should watch “Who Killed the Electric Car”. You'll be dumbfounded by, and irate with, GM. GM is Ostrich Central and going the way of the dodo, my friends. Darwin's theory, playing out before our very eyes...those who don't adapt, don't survive.


December 9, 2008 02:21 AM

Listing the problems is easy. Why not offer what all executives like to hear..


December 9, 2008 02:35 AM

Oops. I hit the wrong key. As I was saying what we need is a solution to the problems not lists of them. In an article in Kiplinger's which echoes the suggestions of many hands on professionals like myself, the idea of a consumption tax (national sales tax)is the best solution to the problem with not only GM but almost all the troubles we are now seeing across our entire economy. What we have is a result of actions by a group of unscrupulous bankers in the beginning of the century. They manipulated this nation's economy for decades; slowly converting it into a slave economy by using a method which the Constitution of the United States of the America expressly forbade... direct taxes on the American citizen in the form of income taxation. To their credit, it was done so smoothly that today Americans do not even notice the amount of their income that they never see. This has placed a tremendous burden on business but they too do not even recognize the source of their problem. More money will not fix a problem when there is a hole in your pocket. We must recognize this tragedy and reverse it immediately. I strongly urge that each of you read the Fair Tax Book and think, in the name of all that is Holy please Read it and Think. If you received all your income earned then you could live better and your doctor bills would be cut by 50 to 90%. Most of that cost comes from income taxes. Imagine how much income taxes comes out of a doctor's income and guess to whom that cost is passed. YOU!! Then you buy high cost insurance as a means to help pay that bill reducing your take home pay even more. Why not pay your doctors and hospital half of what you are paying Medicaid and Medicare and private insurance and you will be richer and healthier. I know I am a doctor.


December 23, 2008 08:02 AM

Hey, the gasoline is from $40 to closing $150 per gallon during two term of Predient Bush, then now it is below $40 before his final over with two months, but he told us the oil will be free after Iraq war. I doubt Republic predient Bush from TEXAS want to makes our car manufactures down in purposes. Also, three of these companies have several very bad Managements which they inflated their own benefits from all managers and workers base on unreachable goals such as lower quality cars and high prices, unexpected high tech bubble and housing bubble, banking and financial cruch, credit over expending and debit unrecovery... we have to cut all benefits to all managers and workers at least 50%, then make these companies in even with two years in USA.

Thank you for your interest. This blog is no longer active.



Michael Mandel, BW's award-winning chief economist, provides his unique perspective on the hot economic issues of the day. From globalization to the future of work to the ups and downs of the financial markets, Mandel-named 2006 economic journalist of the year by the World Leadership Forum-offers cutting edge analysis and commentary.

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