Question: Your opinion on the auto industry?
Buffett: [GM CEO] 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.
GM and Ford don’t sign long-term contracts to pay high amounts for steel, but that’s what they’ve done with annuity and healthcare payments to employees. The result is such expenses are far higher than that of competitors, so it’s not a fair fight.
GM once had 50% market share, and it’s fallen to 25%. Even if it was still 50%, they’d still be in trouble.
I’m not sure what I’d do if I was elected CEO of GM. It reminds me of what Bill Buckley said when asked what he would do if he actually won his race for New York mayor back in 1965 and he said, “The first thing I’d do is ask for a recount.” (Laughter) Well, that’s what I’d do at GM.
The UAW says, “We have a contract and we have a deal.” GM has set aside $90 billion for pensions and another $20 billion or so for healthcare, yet has a market cap of only $14 billion. That’s not sustainable…. Something will have to give.
If a company had to pay an extra $2,000 per car more for steel, everyone would realize there was a crisis and demand a quick solution, but that’s not happening.
Part of the problem arose because [the actions of previous managements] bore no accounting consequences. Back in the 1960s, companies didn’t have to account for pension costs on an accrual basis, and didn’t have to do so for healthcare costs until the late 80s or early 90s. But those costs are very real…
[CHARLIE MUNGER: Warren just gave a very optimistic prognosis in my view. Just because the full consequences haven’t yet hit, doesn’t mean there isn’t a huge problem. It’s as if someone jumped out of a window on the 42nd floor. As you go by the 20th floor, you’re still OK, but that doesn’t mean you don’t have a real problem. (Laughter)
If I was the President of the U.S., Governor of Michigan or the CEO of GM, I wouldn’t wait. I’d address the problem right now because no one’s coming to save you.]
Source: 2005 Berkshire Hathaway Annual Shareholders Meeting
Auto industry outlook (especially GM):
– GM bonds are currently selling at B spreads
– Auto industry is a very tough business
– In the ‘60’s GM had over 50% of the US car market…people thought they were
– GM did dumb labor deals when the accounting didn’t require accruals for costs
– GM is now a terrible life/health benefits company with an auto business attached
- Auto business is well managed, but labor issues are just killer
– 2000 auto companies were started after Henry Ford – there are now 3 left in the US – no money has been really made over time
Source: Meeting with Warren Buffett, Jan 28 ,2005