Healthcare costs for retired workers cost General Motors $US1,300 for each of the 5.5 million vehicles churned out by its north American factories, well above the steel cost, the Financial Times (FT) said.
The newspaper said this is a disaster for GM, which has ended up as one of the world’s biggest healthcare providers, hurting profits.
Together with its huge pension bill, the healthcare costs are driving its strategy of cutting prices to increase sales, in order to spread the cost across more vehicles, the paper said, adding that medical inflation is running rampant, and there appears to be little GM can do to avoid it.
“It is one of the biggest issues in investors’ minds when they think about GM,” Rod Lache, auto analyst at Deutsche Bank in New York, told the FT.
Noting that Ford and DaimlerChrysler are also affected, the Financial Times said GM is the worst hit because it has more pensioners relative to its size and that is part of the reason the company chose this month to inject $3 billion of its cash pile into an employee trust to pay future healthcare costs – the move allows it to take advantage of some tax breaks on payouts, and reduces future risk.
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By GlobalDataHowever, the FT added, it will do little to fill the yawning gap between the funds available and GM’s healthcare bill. At the end of last year, GM’s post-retirement benefits – almost exclusively healthcare – were $51 billion under-funded. The benefits added $4.1bn to its costs last year, and are expected to cost $4.5bn this year, almost double its forecast of profits, the paper said, noting that, for investors, the big concern is that even this understates GM’s healthcare bill.
GM chief financial officer John Devine told the Financial Times that the company has held healthcare inflation in the first half of the year to an annualised 7.1-7.2%, in line with its forecasts and already a better performance than its rivals; Ford, for example, expects an 11% increase this year.
But both companies forecast a drop to 5% annual cost rises by the end of the decade, something that has prompted Wall Street scepticism, the newspaper said.
Lache told the FT: “Why would anybody at this point in time believe that there will be a 5% inflation rate? I guess it is just hope.”
The Financial Times said the figure is more important than it appears – if long-term inflation runs one point higher than GM hopes, it will cost the company $523 million a year extra, or almost a fifth of this year’s expected group profits, and would also add $5.3 billion to the unfunded pension hole.
The Financial Times said that, for many companies the solution is simple: cut benefits. Co-pays – where workers contribute to the cost – for non-unionised white-collar staff at GM and other car makers have risen but this option is not available for the larger group of blue-collar workers, as a strike at similarly affected General Electric demonstrated.
According to the Financial Times, GM chief executive Rick Wagoner admits there is no chance of persuading unions to accept lower benefits or higher co-pays in the four-yearly contract talks currently under way and that has left him with one option: cut prices to keep production high, spreading healthcare costs across as many cars and trucks as possible.
Chevrolet drivers should toot in thanks next time they pass a hospital, the FT added.
