GM's Pension Fund Problems

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Case Details:

Case Code : HROB077
Case Length : 21 Pages
Period : 1995 - 2005
Pub. Date : 2006
Teaching Note :Not Available
Organization : GM
Industry : Automobile
Countries : US

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Please note:

This case study was compiled from published sources, and is intended to be used as a basis for class discussion. It is not intended to illustrate either effective or ineffective handling of a management situation. Nor is it a primary information source.

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Change in Fortune

In the 1970s, many foreign automobile manufacturers, especially from Japan entered the US and started selling small cars which were imported from Japan. Later, some of them like Toyota and Honda, established manufacturing facilities in the country.

Initially, they sold small, fuel efficient and low cost cars as against the large and costly US cars. In 1973, the Yom-Kippur war or The October War broke out between Israel and some of its Arab neighbors, when Israel attacked Egypt and Syria. In retaliation, the Arab members in the Organization of the Petroleum Exporting Countries (OPEC), decided to stop oil supply to countries that supported Israel, and specially targeted the US and the Netherlands.

OPEC used its power and increased the oil prices four times from US$ 3 to US$ 12 per barrel (Refer Exhibit IV for global oil prices between 1970 and 2005). Since the US was the largest consumer of oil in the world, the restrictions created chaos in the US economy...

Troubles Began at GM


GM was the largest healthcare provider in the US and it spent US$ 5.2 billion in 2004 as healthcare costs for its 1.1 million workers, retirees and their family members.

The amount was greater than GM's advertising costs and was expected to touch US$ 5.6 billion in 2005 (Refer Exhibit V for GM's healthcare costs between 1996 and 2005). After December 2004, GM's future Post Retirement Employee Benefits (OPEB) liabilities reached US$ 77.5 billion from US$ 67.5 billion in 2003.

Apart from these, GM's worldwide pension liability crossed US$ 100 billion (102.4 billion) in December 2003, and out of this, approximately US$ 87.3 billion was for US retirees. These costs had contributed more than US$ 2,000 to the cost of each of the 4.65 million vehicles sold in 2004. At this point, John Devine (Devine), Vice-chairman and CFO of GM remarked, "Healthcare costs are not in our control"...

Excerpts Contd... >>


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