The Missed Opportunity

With the bankruptcy of General Motors and Chrysler, many lessons about the world of business have been laid before Americans. I wonder how many have been looking and listening, and what observations have been made?

While it is true that both GM and Chrysler’s past leaders made strategically flawed decisions (most all are traceable to their relationship with the UAW), it takes two parties to make a bad labor deal. Seen from the past, one could say the union fought and won concessions from companies that would not have otherwise shared the profits of their labor. Anyone familiar with the automotive leaders over the past 50 years would agree that these upstanding individuals would much prefer to have paid higher dividends and higher bonuses.

The problem these companies faced is clearer now then when the conditions initially arose. Simply stated, today many other car companies can make excellent cars and trucks at costs below Big Three levels (Ford too). What should have been recognized by both union and management was that versus competition, dramatic shifts in the “labor cost per vehicle” needed to be made and that former standards were no longer justified in view of the competitive realities.  For too long we have heard the rhetoric that American made is better, or that foreign Government X is providing special help to Car Company Y. The fact is that American cars and trucks are only as good as others and not better. The automobile industry is a global one now.

The critical parameter is “labor cost per vehicle” and not “labor cost per hour”. For labor cost we must include all relevant costs such as wages, hours actually worked, pensions, and benefits (including retirement ones). So union contract provisions that prevent layoffs, restrict hours worked, or call for a “jobs bank” must be factored into the “labor cost per vehicle”. Without the possibility of reducing labor cost, and especially so when periodic slow downs occur in the economy, the Big Three have been at a substantial cost penalty against their world competition.

Layoffs just do not happen without consequences. The auto workers have lives and families and obligations. Once laid off, college education for their children, or maybe even the mortgage for their home, is much more difficult to cover. How can this situation be prevented?

Unfortunately there is no magic formula that can invent a business that only gets better over time and never experience a decline or stiff competition. It is more natural to expect stiff competition and to view competition as a challenge, and against this challenge grow to get even better. What can be done, however, is to enable a labor(union)-management relationship that possesses the optimum vision and ability to accept and deal with reality.

What do you think the situation might be now if the UAW in 1990 had accepted the same reality (projection of the auto industry) that other economist saw? Would they have negotiated with management to reduce labor cost per vehicle in good times? Would the UAW have taken an active part in skill training for its members (so they could do their current jobs better or if laid off, could find good new jobs)? Would the UAW have begun an education campaign to ground their members that foreign auto manufacturers (including those already building cars in North America) could do the same job as American workers at the same or higher quality and at a lower cost (and challenged their members to study more and contribute to continuous improvement projects on the job)?

Management could have also pressed for these recognitions, but did not. Management could have made much more prudent decisions on investments and cash flow.  And even more important, management could have held their line organization accountable for decisions and results. But they did not.

On one level, the automotive industry is very simple. Today one can make a car in Korea, sell it in America with a warranty that is longer than available from the Big Three, and at a lower price. The Big Three can do the same, and reverse the tables, if the UAW and management decided to work together. If they do not, we may be shortly down to the Big One and then to the Big Zero.

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Tags: automotive industry, chrysler, general motors, labor costs, uaw

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