AUTO INDUSTRY Pension payments fuel GM discounts

The rest of the industry doesn't have much choice other than to follow suit.
WASHINGTON POST
If you got a good deal recently on a new car or truck, thank Henry Orginsky.
The 72-year-old Michigan farmer is a retired General Motors Corp. autoworker who draws a $1,300 monthly pension from his four decades of building Buicks. That modest payment, multiplied by roughly 450,000 other GM pensioners in the United States, has become a huge burden on his former employer.
GM's pension is about $19 billion underfunded, and the nation's biggest carmaker has to sell vehicles as fast as possible to keep cash coming in to service the pension. That's why GM continues offering aggressive price discounts and cheap financing -- an average of $3,089 off each vehicle so far this year, according to AutoData Corp.
Threat to industry
Because GM is so big, the rest of the auto industry has little choice but to imitate its discounts, even though U.S. carmakers can ill afford to cut prices. The result is a worsening threat to the auto industry's financial health.
With foreign competitors gaining market share, domestic auto companies need to invest in new products and technology to keep up. Instead, their already shaky profits are drained by the price war.
The Big Three are stuck "in a downward competitive spiral," said Mike Flynn, head of the Office for the Study of Automotive Transportation at the University of Michigan. "The best short-term hope is that the value of stock market goes up and the value of holdings in pensions goes up. That will happen at some point -- if they can survive long enough."
Pensions and health care costs, which together are known as "legacy costs," are causing problems across all types of U.S. industries. Many pension funds are invested in stocks, and today's weakened Wall Street has left companies struggling to meet their retiree obligations.
Steel industry
In the steel industry, big mills have gone bankrupt under the pressure, cutting off some retiree health benefits and turning pension control over to the federal government -- often bringing lower payments to pensioners. Airlines and other big manufacturers could face similar straits, but few single companies are under a legacy cost burden as big as GM's, or one with as many consequences for consumers.
With 2.5 pensioners for every active worker, GM said last week that it will take on $10 billion in debt to help close the pension gap. That doesn't address current higher costs for running the plan, though, and GM's large showroom discounts won't change.
It's a high-roller way of doing business. On top of any discount, each GM car or truck this year will carry about $1,900 in pension and retiree health care costs, according to Stephen Girsky, an industry analyst for Morgan Stanley. That's up from about $1,300 last year.
"There are more health care costs in a car than steel," Girsky said.
GM's domestic rivals also carry legacy-cost burdens, but Girsky calculates those as being significantly lower -- about $1,100 per vehicle for DaimlerChrysler AG's Chrysler Group unit and about $900 each for Ford Motor Co. Still, those companies make less profit on each vehicle than GM, so they ultimately have less room to absorb price cuts.