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June 14, 2007

Richard Florida

Blame the Workers

« By the Numbers: How We Get to Work! | Main | Teenage Entrepreneurs »

The Wall Street Journal (sub req) quotes a Big Three executive:

"We need to eliminate most, if not all...like 80%" of the gap, says a senior automotive executive involved in labor planning. "It has to be gone by the end of the contract, or doing business in the United States is unsustainable." All three domestic auto makers "will move investment in plants and people outside the country" if they don't bring U.S. labor costs in line with those of Toyota and the other foreign auto makers, the executive said.

How do they get away with this BS. This guy shouldn't be managing a 7-11. The Big Three are not failing because of labor costs. They are failing because their product is crap. The problem is the worst management since the US steel industry - whiners, cry-babies and incompetents.  They keep churning out stuff no one wants. The SUVs which were carrying them have now collapsed and they are being crushed with the move to more fuel efficient cars and hybrids. This is one of the greatest stories in gross mismanagement in world industrial history. It is hard to imagine how anyone could squander the kind of lead and assets they had, but they did. It boggles the mind, actually. When Martin Kenney and I studied Japanese investment in the auto industry during the 1980s and 1990s we were shocked and appalled by what we saw. Factories in total disrepair.  Crap everywhere. Workers treated like sub-humans. Read Rivethead sometime if you have a chance. So were the Japanese. They never even imagined the US auto and related industries could be in the shape they were in.  When in doubt remember this:  Those Camrys and Accords that are tearing up the US market? No, they're not made in Japan or some low labor cost country. They're made right smack here in the US, using American workers. And Japanese and German workers are not exactly cheap labor. It's not American workers that are the problem- it's management.

Detroit's Big Three, facing their worst crisis in decades, are seeking unprecedented concessions from the United Auto Workers union in a bid to narrow what they say is a $30-an-hour labor-cost disadvantage against Asian rivals like Toyota Motor Corp. and Honda Motor Co., auto executives say.

The unusually tough stance by General Motors Corp., Ford Motor Co. and DaimlerChrysler AG's Chrysler Group marks their latest attempt to stanch heavy losses in their North American auto operations. It also sets up a potential showdown with the UAW -- which has a 70-year history of winning progressively richer contracts for its members -- as the two sides prepare for contract talks that start this summer.

In recent years, the union has agreed to work-rule changes and benefit cuts for its retirees designed to save the auto makers billions of dollars a year. However, UAW President Ron Gettelfinger, who declined to comment on the coming negotiations, has argued his workers shouldn't bear the entire cost of Detroit's restructuring.

The Big Three have talked tough before ahead of contract talks, only to agree in the end to a costly labor deal. This time around, however, people familiar with their plans say all three are united in believing they have no choice but to close the $10 billion-a-year labor-cost gap between them and their leaner Asian competitors on cars and trucks built in the U.S. The three are also resolved to move jobs abroad if they can't bring down U.S. wage-and-benefit costs, one industry executive says.

GM, Ford and Chrysler have eliminated about 70,000 UAW jobs over the past two years through buyouts and other means. The three, which currently employ about 210,000 of the UAW's 520,000 active members, say they pay union workers $70 to $75 an hour, when wage, health-care and pension expenses are factored in. By comparison, according to Big Three estimates, Toyota and other Asian auto makers, pay $40 to $45 an hour at their U.S. plants, which together employ about 62,300 nonunion workers.

"We need to eliminate most, if not all...like 80%" of the gap, says a senior automotive executive involved in labor planning. "It has to be gone by the end of the contract, or doing business in the United States is unsustainable."

All three domestic auto makers "will move investment in plants and people outside the country" if they don't bring U.S. labor costs in line with those of Toyota and the other foreign auto makers, the executive said.

Detroit's auto makers are in a more precarious position than at any time since the early 1980s. Ford and GM are bleeding cash in North America and their debt ratings have sunk to junk status. Control of Chrysler is about to be passed from German industrial giant Daimler to private-equity firm Cerberus Capital Management LLC, which has profited by aggressively restructuring distressed companies.

The Big Three's competitive problems extend far beyond labor costs, a point UAW bargainers have made in the past and will likely make again. Union leaders have said the auto makers should invest more in improving the quality and design of their vehicles.

[Detroit's Dilemma]

The three companies allowed quality to deteriorate in the 1980s, a stumble that still haunts them by hurting their standing with consumers. Detroit also resorted to discount-driven marketing, undermining its profits and cheapening the image of its brands.

Moreover, the auto makers have been slow to respond to shifts in consumer tastes over the past two years; a sharp rise in gasoline prices caught them with too much of their production capacity devoted to trucks and sport-utility vehicles that got relatively poor mileage.

Mr. Gettelfinger, the UAW president, has been maneuvering for two years to soften the potential blow to the union's more than 700,000 active and retired members, agreeing to mass buyouts, some cuts in retiree health-care benefits and moves to improve factory-floor efficiency.

Former and current union officials say Mr. Gettelfinger prefers to make smaller, less dramatic sacrifices that still add up to substantial savings, concessions such as changing work rules to allow for outsourcing of jobs such as janitor or materials handler or restricting the amount of time a union worker can remain unemployed but on full pay in the industry's so-called Jobs Bank. Such moves can save an auto maker tens of millions of dollars per plant.

In recent speeches, Mr. Gettelfinger has reiterated calls for the federal government to take over some or all of the auto makers' health-care burdens. "The UAW believes it would be immoral and irresponsible to abandon the hundreds of thousands of retirees who helped build GM, Ford and Chrysler. We are simply not going to do that," he said in a speech earlier this month.

Jerry Sullivan, president of UAW Local 600 at Ford's Dearborn Truck plant, says his members know this summer's talks will be all about trying to catch up with Toyota. "But closing that gap, it will be very difficult," Mr. Sullivan says. "Hopefully we can get something worked out. That's why all the big minds are getting together to talk this summer."

The Big Three argue that Toyota, Honda, Nissan Motor Co. and other foreign auto makers building cars and trucks in the U.S. -- and not the UAW -- set the industry's rate for labor. This year more vehicles are expected to be built in the U.S. by non-UAW workers than by UAW members for the first time in the union's 72-year history, according to CSM Worldwide.

UAW workers in GM, Ford and Chrysler plants earn about $27 an hour in wages, roughly the same as the nonunion workers in the U.S. plants of Toyota, Honda and Nissan. But the UAW's generous health-care plans and pensions for the hundreds of thousands of union retirees and their dependents more than double the total hourly cost. By contrast, the foreign-owned auto plants in the U.S. haven't been around long enough to accumulate significant numbers of retirees.

Detroit's labor costs are continuing to rise, mainly due to rapidly increasing health-care expenses. According to an internal Chrysler estimate, the labor-cost gap could grow to $45 an hour by 2011 if nothing is done.

Cutting total labor costs by anywhere close to $30 an hour would be an unprecedented accomplishment. For decades, the UAW has won steady improvements in job security and benefits as well as wage increases of 2% to 3% per year.

Four former and current UAW officials with knowledge of the union's thinking say Mr. Gettelfinger wants to sign a new contract that, among other things, slows or stops the rapid decline of UAW membership. The union's membership could sink below 500,000 as a result of the tens of thousands of buyouts and early retirements GM, Ford and Chrysler are now in the process of completing. It had one million members in 1987.

The UAW has made significant concessions to save jobs in other industries. The auto makers are studying a six-year deal the union reached with heavy-equipment giant Caterpillar Inc. in January 2005 which allowed the company to pay new hires between $10 and $15 an hour, compared with $20 and $22 for previous hires.

UAW-Caterpillar workers must pay some of their health-care costs for the first time and get annual bonuses but no raises over the term of their contract. "A deal like the Caterpillar contract would take out $7 to $10 an hour of that $30 gap," said one senior automotive executive familiar with plans for the UAW talks.

Detroit, especially GM, would like the three companies to merge their combined $95 billion retiree health-care obligation into a separate trust. It would be partially funded by the auto makers, but managed by the UAW.

A UAW official that has worked on national contract talks said the union is analyzing a similar trust that Goodyear Tire & Rubber Co. recently created for its union retirees. One of the union's lawyers, Dan Sherrick, negotiated a similar health-care plan for the UAW a few years ago with engine maker Navistar International Corp.

The Goodyear trust involved just $1.2 billion in unfunded health-care liabilities, and Goodyear's Steelworkers union had also previously agreed to inflation caps, which the UAW hasn't. By contrast, the Big Three would have to come up with billions of dollars to fund such a trust. The UAW would likely have to agree to accept just 50 cents to 60 cents on the dollar of funding for the trust to make economic sense for the auto makers, one individual familiar with the process said.


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The Big Three are failing for several reasons ... they make cars that are increasingly found unappealing to the new elite and wealthy ... they struck a deal with labor which is incompatible with manufacturing the product ... they are financially focused and cannot understand why people purchase cars other than transport ... they are poor managers with a terrible track record of managing the product.

You simple assertion that they make crappy cars is incomplete. The unions do play a real role as well.



Agreed, they do play a role. But that role was conditioned, shaped and enabled by crappy management. The unions did not create this on their own, they responded as best they could to a the terrible situation management created and foisted upon them.

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