2007 September 04 Tuesday
GM And Ford May Shift Production Out Of United States

The US domestic automakers are headed down the road to bankruptcy unless they find a way to make their labor costs globally competitive. They've been steadily losing market share to Japanese rivals for years. South Korea is starting to eat into their marketshares as well and even if they find a way to survive the Japanese onslaught the behemoth called China could finish them off. The Big (but shrinking) Three want big cuts in health care costs and creation of health trusts managed by the UAW. It is no wonder then that in the current contract negotiations with the United Auto Workers GM and Ford are threatening to pull all car production out of the US and move factories to cheaper labor countries.

Their biggest burden is the current labour cost per vehicle - an estimated $71 (around £35) per man hour. Workers earn about $27 an hour with the remainder made up of overheads such as pensions and healthcare costs for the thousands of retirees on their books.

Ford and GM have made it clear that they expect to reduce the hourly cost from $71 to about $50 - a cut of about 30 per cent. The companies are keen not to cut workers' hourly pay, but they insist that other overheads must be reduced.

If a deal cannot be reached, Ford and GM negotiators have said the companies will have no choice but to move their North American operations to countries in Latin America and Asia where manufacturing costs are cheaper.

GM says this isn't a bluff. Look at all the other industries that have already bailed. Highly credible argument.

Sources close to senior GM executives confirmed that the prospect of shifting operations away from North America was very real. 'We have seen it in every other industry,' one said. 'There are no sacred cows today. Globalisation means just that, it's a worldwide playing field.'

They are right that they can not survive with their current union labor costs. No way. No how. Either the UAW grants them a big concession or they go bankrupt or they move abroad. Those are the three possibilities.

What I wonder: Can they afford to move abroad? The UAW will try to go on strike to stop them. So can GM or Ford manage to move their factories fast enough that they can get set up in other countries before they run out of cash? How fast could they move?

I'm thinking they could shift some production to Canada in a hurry. For example, Ford could make Crown Victorias and Grand Marquis in the Canadian plant that makes Lincoln Town Cars. Also, they already have factories in Mexico and Brazil. How fast could production get expanded at those factories?

Update: The UAW threat to strike is hollow since bankruptcy would allow auto makers to walk away from their retirement benefit obligations and union contract workers.

But industry experts say there is almost no possibility of a strike, as the car companies are in such fragile financial shape that a shutdown could force at least one of them into bankruptcy.

“It would be really remarkable if there was a strike. You’d need a complete collapse of negotiations,” said David L. Gregory, a professor of labor law at St. John’s University in Queens. “A strike this time around could be absolutely lethal for the company being struck.”

The UAW's biggest problem is that its members are deluded. They probably can't bring themselves to face the size of the benefits cuts they need to agree to in order to maintain a domestic unionized auto industry. UAW workers oppose efforts to cut auto maker medical costs. Well, US automakers can't survive under current obligations. If the UAW doesn't provide relief the bankruptcy courts will.

Share |      By Randall Parker at 2007 September 04 07:24 PM  Economics Transportation

John S Bolton said at September 5, 2007 12:08 AM:

If they don't produce here, though, why should they have import limitations in their favor, they'll just be another group of foreign producers trying for a share of the US market?

Wolf-Dog said at September 5, 2007 1:10 AM:

After the United States is so extensively de-industrialized, if there is a major world disorder, then there will be terrible inflation and many shortages in the US.

David Lajaunie said at September 5, 2007 5:24 AM:

Just another good reason for the establishment of a moderate tariff regime to counter the effects of foreign VAT and earned income rebates, not to mention discounts due to circumventing EPA, OSHA and various other US regulatory burdens.

Anon said at September 5, 2007 6:35 AM:

The UAW should be happy, they got exactly what they wanted. They got to show the world that the union was tougher and could bring American automakers to their knees. Great work you assholes. Funny thing is though Japanese automakers have plenty of factories here in the US and are planning more. Of course the UAW has no idea why this is so.

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