Legacy costs aren't the problem.

A friend of mine was bewailing the high pension costs at the US automakers as the one big causes of Detroit’s problems. I emailed this back to him.

You surprise me!  You of all people (as an MBA) should understand that the retirement plans for the people who are now retired were paid for by cars sold in the years they were working. The burdened rate for the worker included their future pension costs. So each time that worker touched a component or car, some part of the cost of their retirement was added to the sale price. The auto manufactures have already collect the money to pay the pensions! That’s for both current and future retirees.

I think it was in the mid or late 80s that the auto manufacturers lobbied congress to allow them to tap the huge cash reserves they had set aside for pensions, and permit them to pay the future pensions from future revenues.  Now they’ve spent the pension reserves, are crying poor, and blaming the pension costs and not themselves for wasting the reserves.

Toyota was able to negotiate lower wages because there were no other competitive wage jobs in Tennessee and there was a lot of competition for workers in Detroit. At least there was a lot of competition for workers when the contracts were signed.

The problem lies with Detroit demanding a 6.1% profit instead of 6% or whatever the real percentages are. That pressure for a tenth of one percent drove short sighted decisions that prevented innovation and quality improvements. For instance, according to the manufacturer’s web sites, the entry level Honda has a 110 cubic inch displacement (CID) engine producing over 145 HP, Chevy has a 350 CID engine producing 275 HP. Using the Honda as the gauge, the 350 should be producing over 460 HP. Even if it doesn't scale precisely, the Chevy should be producing a lot more power per cubic inch than it is. Why not? Because Detroit didn't invest in quality improvements, they spent their money trying to fight the CAFE standards and avoiding new technology because it would eat the 1/10 of one percent profit!

Picture if you will an empty cubicle with a turned off computer - no work done. Then picture the same cubicle with a worker - work done. Sorry to burst some accountant’s bubble, the important part of the plant is not the physical fixtures, it's the person doing the work. Even if we accept that the workers have negotiated excessive salaries, it still doesn't answer why the big three are in trouble when they have cars at the same price point as Toyota, Nissan, and Honda.

Detroit cars aren't selling.

Not because of price, it's the design and quality of the product. Most of the low to mid price cars from Detroit are butt ugly and not very interesting. The US automakers could just as easily built cars that look and work as well as their competition's for very close to the same price. But they would have had to invest some of their profits back into the company and then the stock price would have fallen by that magic one tenth of one percent.