2008 November 20 Thursday
Car Companies Need Bankruptcy To Escape UAW?
What I find most troubling about the proposals to loan tens of billions of dollars to GM, Ford, and Chrysler is that these proposals ignore the biggest reason why the Big (and continually shrinking) Three have been in decline for decades running: Companies with much higher labor costs can not compete with companies that have much lower labor costs. The US Congress has kept the Big Three in a bleeding bear hug with the United Auto Workers. At the recent US Senate hearings where the 3 US domestic auto company CEOs pressed their case for big government while an economist at University of Maryland, Peter Morici, presented an opposing argument.
The gradual erosion of the market shares, of the Detroit Three, over the last several decades, stems from higher labor costs, having origins in wages, benefits, work rules, poor management decisions and less than fully supportive government policies.
Although the government has been sympathetic, to the needs of this industry, the industry has fallen victim to currency manipulation and other forms of protectionism, predominantly in Asia, in Japan, Korea, China, India and elsewhere. The Detroit Three are rapidly running out of cash and face filing for Chapter 11 reorganization.
It's my position that it would be better to let them go through that process and reemerge with new labor agreements, reduced debt, strengthened management. That would permit these companies to produce cars at costs comparable to those enjoyed by their Japanese and other foreign competitors assembling vehicles in the United States.
There is an alternative: impose tariffs on imported cars and also force domestic plants run by foreign competitors to accept a union. But to do that would require the admission that, yes, labor costs are the biggest problem.
Morici argues that loans would just delay the inevitable because as long as the UAW (with a big body of US government labor laws to give the UAW legal power to extort from the Big Three) forces the Big Three into uncompetitive labor costs the continued decline of the Big Three is assured.
Today, the Detroit Three have achieved remarkable progress in improving productivity and lowering labor costs, thanks to a new agreement with the UAW. But they still don't have costs quite as low as their Japanese transplants.
This is an industry with very thin margins. I've heard over and over again, for example, when Ford decided to locate its small-car factory in Mexico, that the UAW tried to persuade Ford that it could be competitive enough in the United States.
There is no such thing as competitive enough in the automobile industry. Either you hit the mark that Honda hits, in Indiana, or you are not competitive. The margins are too thin. There's too much excess capacity. Either the costs are the same or they're not. There's no such thing as almost as competitive.
By assisting the Detroit Three, Congress can delay one or all of them from going through Chapter 11 reorganization. But sooner or later, one of them will march down that path.
Here's another alternative: Congress could repeal the labor laws that enable the UAW to drive the Big Three into bankruptcy. Let the Big Three throw the UAW out of their plants and I bet suddenly the credit ratings for the Big Three would soar.
Morici says that the Detroit Three must have the same labor costs as their competitors or die.
Without a new labor agreement that brings wages and benefits absolutely in line with those at the most competitive transplant factories, without reduced debt and other liabilities, the Detroit Three will continue to lag in innovation and field too few attractive vehicles because their higher cost, debt and other liabilities require them to spend less on new product development than they should. General Motors makes about the same number of cars globally as Toyota. It simply has a smaller product development budget because of the cost it bears. They have very fine engineers. They are capable of producing very good cars. The same applies at Ford.
If you have less money to develop product, you put fewer products on the street. They have a longer life. For example, the Impala was a great car, but it was left sitting out there for seven years. Camry recycles every four.
People who complain about the rate at which the Detroit makers rev their designs miss why this happens: Toyota pays less in manufacturing labor costs and therefore has more money to pay for engineering labor and other engineering costs. Toyota can outspend GM in engineering. The fact that GM has managed to last as long as it has with this huge disadvantage probably comes as a result of a combination of American customer loyalty for the home team and a high level of productivity per engineer and manager among the Detroit Three.
Free trade and a union with a labor monopoly in only some companies is not a sustainable combination. The union either has to cut its costs or companies have to shut down plants and stop using the labor union's high priced labor. The Big Three really need to move abroad and stop using UAW labor.
The Democrats want to bail out the US car companies because they want to retain high union wages in US companies. Barney Frank wants the US car companies to find a magical way to survive in spite of uncompetitive labor costs.
BARNEY FRANK: Bankruptcy would be very disruptive. Bankruptcy is a favorite spectator sport for politicians and experts who don't have to engage in it. You have a whole network of suppliers--small businesses and others--who would get "stiffed," to use the legal term, in a bankruptcy.
There is also an assumption that if you do bankruptcy, you could undo labor contracts. Now the unions to their credit have negotiated some concessions. But you know, we already have too much union-busting and too much income inequality for the average worker in this country for us to now say by the way, if you're a company and you haven't been able to totally get rid of the unions, then go bankrupt and rewrite, write down the contracts.
You have to admire this irresponsible audacity. What nerve the guy has. GM is weeks away from running out of money. But Frank thinks the unions shouldn't have to give up squat.
House leader Nancy Pelosi insists the auto makers show how they can become profitable.
"Unless they can show us a plan, we can't show them the money," said House Speaker Nancy Pelosi.
Nancy's House has the power to change the labor laws in a way that will allow the auto makers to compete. Congress holds the most powerful cards. But they do not want to admit they are the cause of the problem.
I do not know whether the auto makers can escape from the UAW in bankruptcy or whether they can avoid liquidation in bankruptcy. We would be better off if the auto makers could escape the UAW without going into bankruptcy. If Congress loaned them enough money to relocate their plants to Mexico and Canada that would probably enable them to compete. But can automation and other cost cutting measures eventually allow the Big Three to compete without totally escaping the UAW? The politically possible two choices of either government loans or bankruptcy both have big risks.
Basically, it's all to do with the *quality* of the labor.
When one ses newsreels of the staff at a Japanese or Chinese auto-plant, one is always struck by how fit, young, athletic, well-groomed, healthy and intelligent looking the workers are - exactly the kind of worker you need building cars.
By conrast footage of the Detroit factories seems to display a crew who, quite frankly, turns one's stomach up in disgust.Well past late middle-age, the workers look horribly flabby and obese - in many cases physically disabled and unfit - and with that horrid 'slack-jawed gum chewing habit' that so marks a man down.
Couple this with a preponderence of affirmative action women (who have no place in a auto plant) - again middle aged flabby 'American princesses', who look as unattractive as they undoubtedly work and their long hair in pony tails.
And this is not to mention the vast numbers of minorities.
Perhaps what Detroit really needs is a gay taste in aesthetics and rampant homosexuals in charge of the uman resources dept. at all levels.Then, perhaps, muscular, chiselled jaws 'heroes of labor' might actually get a look-in at these 'spoil-system' jobs.
Yep, its nothing to do with making products that look to be 20yrs out of date before the first model comes off the production line. Consumers have voted, and guess whose cars they voted for?
A. Prole -
You are right. For years the UAW has promoted first-dollar health care plans that give the workers absolutely no financial stake in staying well. Also, until recently, the UAW defended the right of workers to smoke on the job. So much for the union's concern about its members' welfare. Eat too much, drink too much, smoke too much, don't worry, the union's got you covered.
But the current mess is not all the UAW's fault, not by a longshot. The managerial incompetence of the "Big 3" over the last several decades has been breathtaking. GM alone has $186 billion in debt! How is a chunk of $25 billion going to do anything more thean delay the inevitable? Go into bankruptcy, get rid of the debt, get rid of the boards and executives, get rid of the unions, and start over with what's left.
I guess you have 2 options:
1. Insist that the other car plants in the US are also brought under the strictures of the UAW and then slap tarrifs on imported cars to up the price difference.
2. Let the Big 3 get out of the UAW contracts.
The Detroit Three will continue to lag in innovation and field too few attractive vehicles because their higher cost, debt and other liabilities require them to spend less on new product development than they should."
High costs have resulted from a primary factor. The primary factor behind the demise of the Big 3 is their constant hiring of weak men and women and their unending worship at the altar of diversity. Demography is destiny.
Go to Ford's HR page: http://www.ford.com/about-ford/careers Where is the call to find high IQ, or highly innovative people regardless of background?
I think this situation can be most profitably analyzed in Steve Sailer's intra-White status competition.
Whites outside the states dominated by the UAW would not support working-class whites and actively enacted measures that would impede the rise in status of UAW-affiliated working whites.
Agree with Stephen,
Labor costs now represent something like 8-10% of the price of a car. At this small a fraction, the higher labor cost structure of US manufacturers may ensure at most a 3% cost difference between US and foreign cars- and this assuming equivalent worker productivity. It is my understanding that American car workers are the most productive in the world (though I may be out of date on this data) in a way that more than makes up for the 3% cost difference. Labor costs are not the issue anymore.
It is the cars themselves AND overcoming a bad reputation- something the poor management of the US auto companies has not been able to overcome. The Chevy Malibu as one example is really a pretty good car- the problem it has is the brand Chevy itself is killing it in big markets like California, etc... where Japanese cars are simply preferred on brand alone.
Once a reputation becomes tarnished, it can be very hard to overcome and US auto executives have not helped this issue.
8% to 10% would be a huge profit per vehicle. You aren't being realistic. GM has a $1500 tax per car for UAW labor. That's the difference between profitable growth and bankruptcy.
I expected you wouldn't want to accept that the UAW is the biggest cause of the bankruptcy of the US auto industry. But it really is.
Style is the major problem? Nope. That's a symptom of the underlying problem.
The massive debt is the result of the UAW.
Look guys, you are confusing symptoms with underlying causes. Why did the Big Three push into SUVs? Because they already couldn't compete with the Japanese for cost on sedans and the Japanese weren't making SUVs. So the Big Three pushed into market niches where they didn't initially have to compete on labor cost.
Quality: That is certainly a big reason for their losses against Toyota, but not against Nissan. Consumer Reports now says that Ford has caught up with the Japanese in quality (except in a few SUVs and F-250s). Ford sedans are as reliable as Japanese sedans. So sayeth Consumer Reports.
But even the quality was partly the fault of the UAW. Want to change processes to reduce defect rates? Not if the local objects. I've known plenty of engineers who worked for GM and Ford (and suppliers) who've told me stories about their experiences around production plants. Engineers couldn't tweak on the production equipment. They had to say instructions to a UAW lunkhead while a foreman looked on. 3 guys to slowly do what 1 guy could do quickly.
An ex-Ford seat assembler (now retired in Florida) told me that back in the 80s he had a production quota he could make in 3 hours. He rushed thru his work and then took the rest of the day off.
I also hear stories from engineers about UAW opposition to rearranging production equipment to lower labor costs. They want to keep their jobs in the short term and to hell with the company in the long term.
I've worked for a car company and know lots of people who have as well. So I know what happens. I think the management is not the biggest cause of the decline. Certainly management made some mistakes. But their biggest mistake was to not try to break the union while Reagan was in office.
Randall, I just know what I read. If the data is wrong I stand down http://economix.blogs.nytimes.com/2008/11/19/why-a-big-three-failure-wouldnt-kill-us-auto-making/
I keep reading the 8-10% number just about everywhere. If you have more accurate data, I would love to see it.
I already read that article. The added value comes from designing the cars and designing the factories. Foreign transplant plants don't bring most of that.
8%-10%: I'm not disputing that number. Let us assume it is true. A company at 8% has a 2% advantage over a company at 10%. A company with a 2% cost advantage that sells at the same price on $100 billion in sales makes $2 billion while potentially its competitor doesn't make anything.
The Big Three can't compensate for their higher labor costs by saving money elsewhere.
Well, a left-wing person could blame the lack of protectionism by not imposing tariffs on Japanese vehicles. Also, one could blame it on the lack of a safety net in the United States too, which would cause people to hang on to their jobs, which might explain the aversion to downsizing. Randall, I do not know what you mean by "tax." Presumably you mean labor costs, but are they the total labor costs, or the cost differential between companies that have the UAW and other car companies?
And too bad we could not appease the people who would be laid off by rearranging production by giving them nice jobs or putting them away in "labor market political activities" ("AMS-åtgärder" and "arbejdsmarkedspolitiske foranstaltninger" in Sweden and Denmark respectively.)
"Let the Big Three throw the UAW out of their plants and I bet suddenly the credit ratings for the Big Three would soar."
Is that a figure of speech, or will you actually buy the bonds if that happens (as that is one way one can make a bet on it)?
"Look guys, you are confusing symptoms with underlying causes."
Undoubtedly, there is a lot of truth that the UAW is the reason for the failure of the Big 3. Organized labor is nothing more than extortion and the proles that run the UAW have screwed the goose that lays the golden eggs. One clear lesson seems to be that unions are incapable of future planning in a competitive world. Watching the recent Boeing strike, one cannot help but wonder how long before that giant has to move offshore or risk it's very existence.
However, despite the unions, the Big 3 all had choices. They could fight for their life or they could procrastinate on hard choices and shift the injury to future generations. They always chose to shift the decisions, and now bankruptcy looms. If you consider management to be a factor of production, and if you believe only extraordinary people should earn multi-million dollar salaries, then it may be fair to conclude that past CEOs of the Big 3 were often unworthy of their positions. Every CEO had the choice of how to govern. None chose to break the union lock. If the Unions are empowered to stop management from modifying production equipment, then someone needed to break that control. The fact that CEOs continued to allow and enable that type of interference, demonstrates something significant about governance. Looking back would it have been so bad for GM to lose billions of dollars in a bid to break the UAW? Few people have the forethought to understand that hard decisions today often do not just disappear sometime into the future. I am sure there were many upcoming execs at the Big 3 who pleaded the need to break the unions, but they were likely shouted down.
"I am sure there were many upcoming execs at the Big 3 who pleaded the need to break the unions, but they were likely shouted down."
Is it actually that simple? Yes, breaking unions is almost always the logical move if you're an employer (if they get in, they feed on your company until they kill it) but I don't think it's actually legal to not make a deal just to break the union (and what's legal and not in labor disputes gets decided by the NLRB which is not likely to be sympathetic to anyone facing off against a union).
Does anyone have any more detailed information than my half remembered info from my labor econ and negotiation courses in college?
By "tax" I mean the incremental higher labor cost that the Big Three pay due to the UAW. That "tax" is by far the biggest reason the Big Three are going under.
As for buying the bonds if the UAW was tossed out: I literally would. I've already looked at the bonds since GM might emerge from the bankruptcy without most of their UAW tax. But I'm not convinced they could escape entirely from the UAW. Look at Delphi. They came out with much lower hourly labor costs but still with UAW representation.
People complain about Big Three quality. Well, there are two parts to that. One is defect rate. Certainly the Big Three should have moved more quickly to cut defect rate. But there's also material quality. The Big Three could not afford to use materials of comparable quality because they had to pay more for labor. Spend more money in one area and you have less to spend in another area. It is as simple as that.
Regards making decisions for the short term: Yes, GM did that. Roger B. Smith did not try to defeat the unions. He just tried to complete his term of office with the company still intact.
I too would really like to know the rules for union busting.
Randall, the flaw in your logic is that you are not adjusting for potential productivity differences between UAW labor and foreign labor. UAW workers can easy justify higher compensation than foreigner workers IF their productivity justifies the higher salaries. And if it does, the US car companies can still easiliy make a profit while paying higher wages- my own business runs on exactly this model. How many workers does it take to make a US car? How many does it take to make a foreign car? etc...
So while you may absolutely be correct and labor costs may be the albatross around the car companies neck, I am afraid you can't make the claims you are making for sure unless you absolutely know that UAW labor is either less productivem, equiproductive or only minimally more productive than foreign car workers.
I have read that UAW workers are now the most produductive auto workers in the world (and that this was not the case in the past)... but I can't find the article I read about this so if you have better data, then I would submit you are correct.
My bad. I didn't consider the productivity advantage of smarter Chinese and Japanese workers. But in my defense I'm thinking that the equipment does most of the work anyway and this'll be even more true in the future.
UAW workers most productive? Just where do you read this sort of propaganda?
American exceptionalism is an obstacle in the way of accurately understanding the world.
That is what I said- that I can no longer find the article I read as it was a while back (I tried a google search on UAW productivity and can't find the article anymore). If it was inaccurate then it was inaccurate. But if you are spouting opinion, just say so.
I am the first to admit that it may or may not be true- I drive a Subaru, don't work for the auto industry, don't have family that works for the auto industry (have absolutely no dog in this fight so to speak). But I know there is a correct answer, like 2+2=4, and I am curious to know what it is. I am not making a statement on American exceptionalism, just commenting on what I read.
AND the equipment issue was exactly my point- it is the reason why labor might not be the albatross on US auto companies as you suggest. Again, IF US labor is only 8-10% of a price of a car, and US labor is more productive than foreign labor, then the higher wages the more productive US labor earns may not play any role in whether US auto companies either make worse cars or are not profitable.
There is a correct answer here- I was just wondering if you knew what it was. I am the first to admit I am not sure.
Claiming that the results can be something other than the legally enforced result of unions and the contracts that they extorted is like saying water can run uphill.
Let's consider the knowns:
1) American car manufacturers make an inferior product in both reliability and design. Apparently some claim that Ford is now as reliable as Honda or Toyota; this may be the case but only a fool would believe that after only a few years worth of data as a car is a large investment and a bad car results in major disruptions to its owner's life. As far as design goes, I've got no specifics to back me other than a very unpleasant impression of American cars (from having rented some) and a relatively neutral impression from having rented some Japanese cars.
2) American car manufacturers pay workers more than non-American car manufacturers pay their American workers.
3) UAW contracts include restrictive work rules that are not present in the contracts between non-American car manufacturers and their workers.
4) UAW contracts include protections against dismissal for union members.
Now let's compare possible factors that can explain why American car manufacturers are massively unprofitable while Japanese car manufacturers' American divisions are profitable:
1) Plants and equipment
2) Labor costs
3) Lack of design talent
All of these factors come down to the union contracts (that GM / Ford / Chrysler) had to accept. Can't modernize the process in the plant if the UAW gets veto power through work rules. Can't pay the union members any less or cut back on their pensions. As far as (3) goes, if you're bleeding money everywhere else you've got to cut corners somewhere and design and quality get the shaft. Americans aren't genetically incapable of good design, in fact that should actually be a huge edge over the Japanese manufacturers (look at iPods versus generic mp3 players out of Asia as a model).
Steve, Randall, we have an answer and you are correct! It took me a little while to find the articles (the annual productivity report on the American auto industry are known as 'The Harbor Report'). I misread the article: US workers have made larger improvements than anyone else but the Japanese workers are still the most productive in the world.
Go ahead, continue your union bashing if you want (though I would argue you are missing the boat on this, as it is really our cultures that make the difference and our cultures are very different). I wouldn't kid yourself however that the Japanese do not know how to be as unproductive as the rest of us: http://www.quirkyjapan.or.tv/useless.htm
I certainly don't exempt the UAW from blame - their extortion has been a big component of the current disaster. However, when I raised this issue with a Ford VP a couple of years ago, he responded that those UAW contracts had management as well as union signatures on them. Getting rid of the UAW without throwing out the incompetent boards and executives is only treating half the problem.
Yes, I've read the news ports on The Harbor Report in the past. One of my take-home lessons is that plant productivity doesn't vary all that much probably because they all use the same capital equipment suppliers. So they have to compete on other factors. What varies more? Labor costs. UAW versus non-union plants in the Old South versus Mexican workers versus Japanese workers versus Chinese workers. There is also shipping costs, taxes, utility costs, and other costs.
Back in the 1980s if GM and Ford hadn't signed on the bottom line the UAW could have gone out on an extended strike against one or all of them. Could the companies have survived? Wall Street wanted short term profits.
"However, when I raised this issue with a Ford VP a couple of years ago, he responded that those UAW contracts had management as well as union signatures on them."
Randall / Ned,
I don't think that GM even had the option to not sign just to break the union.
According to the wikipedia article on "Unfair labor practice" (as a legal term of art) some items listed are:
"to refuse to bargain with the union that is the lawful representative of its employees."
"interfere with, restrain, or coerce employees in the exercise of their rights to engage in protected concerted activity or union activities or refrain from them (concerted activity is any activity where two or more employees act in concert to protect rights provided for in the Act, whether or not a union exists"
The NLRB has the right to investigate and remedy these actions. So UAW strikes, Ford refuses to talk with them and the NLRB starts fining the company the equivalent of the workers' salaries until the company goes under from the combination of no output and full costs of production.
That's a strange "contract". I would argue that if you are the CEO of a company and your workforce votes to unionize, the only way to execute your fiduciary responsibility to the shareholders is to liquidate the company and distribute what proceeds you can to the shareholders; in reality when your entire workforce unionizes, they really take over ownership.
I think the only other option that the Big Three had in the 1980s would have been to shut down all American factories and just become European and Asian car makers. But I'm not clear that the political system would have let them do this.
Randall, would you accept the dissolution of the UAW if a Danish or Swedish style of unemployment insurance is initiated?
"Denmark pursues a policy known as "flexicurity"-combining the flexible "hire and fire" system of freer economies and the government-provided security that is traditionally associated with continental European and Scandinavian countries. While it is far easier to fire employees than in France and Sweden, unemployment benefits is in fact even more "generous" than in Sweden (Unemployed gets 90% of their previous pay in Denmark, versus 80% in Sweden).
As for unemployment, the seemingly low numbers in Denmark reflect in fact the same kind of manipulation of statistics that the Swedish government have been using. While official unemployment in Denmark was only 133,500 or 4.8% in March 2006, there were in the fourth quarter (latest available number in Denmark's statistical data bank )some 117,600 people or 4.2% in so-called "arbejdsmarkedspolitiske foranstaltninger(="labor market political activities", what in Sweden is refered to as "AMS-åtgärder")". This means that Denmark have even more hidden unemployment in that respect than even Sweden, where "only" 3.2% (144,000) were put away in "labor market political activities" .
No. I would not saddle the whole economy with a big burden just to save the auto industry.
You are proposing to me "I will stop poisoning one of your family members with a really strong poison if you let me poison them all with a weaker poison". Homey don't play that.
Well, if the Union goes, you are going to have high taxes and a larger welfare state. You already know this already, but people want security (which explains why the people in the UAW want to keep their jobs). And if they could not find it with their own position in the labor market, they will turn to the government.
I hear your point but I am not sure I agree it will happen for the simple reason that you do not explain "where the money will come from". Scandinavian countries DO NOT spend money in very real ways that America does. One can't look simply at a social desire for a better 'safety net' in the absence of finding other ways to conserve spending and expect it will happen or every country in the world would have solved the issue long ago.
Scandinavian countries DO NOT spend nearly as much as America on things like crime, chronic ilness, premature births, etc... (there certainly is a lot of chronic illness and premature birth in Scandinavia but nowhere near as much as we have in the US). Further healthcare is rationed to a far greater extent at the end of life than it is in the US (I don't have a link for Scndinavian countries but here is one for Germany http://www.demogr.mpg.de/Papers/Working/WP-2000-001.pdf , it is my understanding that Scandinavians are even better rationers in health care than Germans are http://assets.opencrs.com/rpts/RL34175_20070917.pdf )
There are simply an enormous number of ways Scandinavians conserve spending money we are unable to similarly conserve on here in the US and IF a country does not need to spend money in these 'non-economically productive' ways, it has the money left over to spend in it on other non-economically productive ways if it so chooses without having a similar negative economic consequence that it would have on (say) the US.
Saying the US will suddenly produce a better social safety net for (say) auto workers without first finding money from other non-economically productive spending seems a little far fetched or every country in the world would have done this a long time ago.
Where will the money come from? If we can cut back on crime, etc... to Scandinavian levels, you have found your money. If we can't, then where?
"And if they could not find it with their own position in the labor market, they will turn to the government. "
They already did turn to government. That's how they ended up with pay and work rules that destroyed the company in the first place.
Facts of life:
All stuff people consume has to be produced by someone
If you pay Danes and Swedes to not work some will work anyway; not so much for other ethnic groups that are present in the United States but not in Europe
If you pay people to not work in multi-ethnic nations more will not work and more will resent it since there are going to be differences in the prevalence of laziness among ethnic groups
Unions gave Obama and his gang their power. They expect to be paid back. The numbers can always be manipulated for the public's benefit. The bottom line is power, and who pulls the strings.