Management AND Labor responsible for Big Three automakers’ systemic failure

By Andrew L. Jaffee, netwmd.com

It is disconcerting to see how many American manufacturers went from world dominance to fading flowers in the span of 30 years. While there are some niche/boutique manufacturers, and of course powerhouses like Boeing and American Apparel, things look bleak for labor-intensive producers, especially the U.S.’s “Big Three” automakers, General Motors Corp., Ford Motor Co., and Chrysler LLC, who all now “teeter on collapse.” The automakers’ systemic failure is a result of both labor and management’s dysfunctions, and we’ll explore both in this article. It is common to hear blame for the Big Three’s woes laid solely at the feet of corporate management, but these companies’ workers have also played a significant role in their near-demise. You would never know that if you only listened to labor’s side of the story — case in point: United Auto Workers President Ron Gettelfinger:

… “We’re here not because of what the auto industry has done,” he said. “We’re here because of what has happened to the economy.” …

Gettelfinger also called on Congress to act quickly on a bailout plan for the auto industry, saying action is necessary before President-elect Barack Obama takes office in January. …

Not only does Gettelfinger deny labor’s role in the automaker’s problems, he denies the corporations’ role in their own problems. First, let’s look at organized labor’s part in the Big Three’s decline. Later, we’ll look at the Big Three’s role in their own decline.

In an excellent treatise entitled, “Unions in Decline and Under Review,” the Heritage Foundation’s Tim Kane and James Sherk explain the problems caused by labor union practices:

… The slow demise of General Motors (GM) is visibly intertwined with the inefficient labor contracts that the United Auto Workers (UAW) secured in decades past. Regular media stories showcasing problems at GM and Delphi send a potent signal to other U.S. workers that big labor’s ideal business model is a bust. … the federal government has begun implementing significant changes to labor regulations. The Labor Department is enforcing accounting transparency in an effort to weed out corruption and bring some accountability between labor bosses and membership. …

… the union philosophy sees the economy through a 1950s lens where only two agents negotiate how to cut the economic pie: management as the agent of capital and investors, and organized labor as the agent of individual workers. It assumes monopoly power for employers, lifetime employment for workers, and non-unique (lower-skilled) labor. Consequently, unions tend to prosper only in the rare cases where all three conditions exist — an increasingly rare situation in the modern economy. The economic pie is dynamic, and burgeoning entrepreneurship simply does not make sense to the union philosophy. …

But the very things that big unions have been fighting for in recent years are hostile to innovation. They protect jobs of the past at the expense of jobs of the future. They fight for bailouts of inefficient corporations. They fight for higher minimum wages that price low-skilled workers out of the market (and out of competition with their members). Hostility to part-time employment, workplace flexibility, and capital gains are all antithetical to the virtual workspace that fosters start-up innovation. …

Organized labor, like the UAW, has made contractual pay concessions to the automakers, but U.S. auto worker pay is still excessive and much higher than what Japanese auto workers earn. So says Dr. Mark J. Perry, “a professor of economics and finance in the School of Management at the Flint campus of the University of Michigan.” He put together a compelling chart which compares U.S. auto worker compensation to that of their Japanese counterparts, which he backs up with raw data from his research:

Chart courtesy of CARPE DIEM, Professor Mark J. Perry’s Blog for Economics and Finance

Now let’s look at the Big Three’s responsibility in committing suicide. An article from the AP entitled, “Automakers struggle to survive past mistakes,” summarizes the automakers’ key defective decision (or perhaps indecision):

… The demise started in the 80s when Toyota Motor Corp. and Honda Motor Co. mastered building reliable and efficient cars while the Detroit Three lagged behind. …

There were plenty of other mistakes made by the Big Three:

… Critics say leaders over the years at Ford Motor Co., General Motors Corp. and what is now Chrysler LLC were slow to take on unions, failed to invest enough in new products, ceded the car market to the Japanese and were ill-prepared for the inevitable rise in gas prices that would make their trucks and SUVs obsolete.

“There’s been 30 years of denial,” said Noel Tichy, a University of Michigan business professor and author who ran General Electric Co.’s leadership program 1985-87 and once worked as a consultant for Ford. “They did not make themselves competitive. They didn’t deal with the union issues, the cost structures long ago, everything that makes a successful company.” …

The automakers have tried to some extent to improve their business models:

… Industry representatives, however, say their critics are simplistic, giving them no credit for huge progress this decade in cutting costs, raising productivity, and building competitive cars while handling multiple government regulations and a powerful labor union.

“In the last five years, there’s been more restructuring done in the automotive business than any other business in the history of the United States,” said Tony Cervone, a GM vice president of communications. …

But if these assertions by “industry representatives” were true, why are the Big Three teetering on the verge of collapse?

CNNMoney.com has produced a presentation entitled, “What’s really killing Detroit,” which is a probably an even-handed assessment of U.S. automakers’ tribulations:

SUV addiction

Gripe: They raked in huge profits for years from gas-guzzling SUVs.
Fact: Raking in profits is good, but taking eyes off the car market isn’t. …

Lack of small cars

Gripe: They don’t offer the small, fuel-efficient models consumers want.
Fact: They do make smaller cars but they’re not judged to be competitive. …

Lousy Quality

Gripe: Asian automakers sell more reliable products.
Fact: Detroit has lagged Toyota and Honda, but Ford has finally closed the gap.

Lack of hybrids

Gripe: They were blind to the opportunities offered by hybrid cars.
Fact: Hybrid cars represent a small and not very profitable segment of the market.

Union workers

Gripe: Union workers get paid too much
Fact: Pay isn’t the problem, it’s benefits. But the UAW has made significant concessions.

Fat executive paychecks

Gripe: CEOs make way too much for leading failing companies
Fact: It’s a tough job and their pay is about average, but they may have to take cuts …

CNNMoney.com is being too kind to auto workers and corporate management.

So now the Big Three are begging Congress for a financial bailout. The main questions now are: Is it too late to save these corporations; will a bailout simply allow — even encourage — the Big Three to continue treading water and retain their dysfunctional business models; and, will a rescue package simply allow — even encourage — labor unions to continue their dysfunctional, opaque practices?

There is no question that a failure of one or all of the U.S. automakers would cause wide-ranging economic repercussions, for example, major job losses and the failure of companies that supply parts and services to the Big Three. From the New York Times:

… The study, which came out on Election Day, estimates “the economic impact — in terms of jobs, compensation and tax revenues — of a major contraction involving one or more of the Detroit Three automakers,” under two separate scenarios. In both cases, there would be major short-term shocks to employment; depending on which scenario you use, a contraction of the Detroit Three would result in direct and indirect job losses of 2.5 million to 3 million in 2009. …

From CNNMoney.com:

A bankruptcy of one of the Big Three automakers could hit American consumers hard, industry experts warn. …

some experts predict higher car and truck prices, vehicle shortages and difficulty finding replacement parts for owners of American as well as Asian cars if Detroit’s Big Three don’t get the $25 billion they are asking for from Congress.

“Vehicles could cost anywhere from 5% to 15% more, maybe even more than that,” said Michael Robinet, vice president of global vehicle forecasts for auto consultant CSM Worldwide. …

“Many of the parts suppliers will have to file for bankruptcy immediately - some that day, some two or three days later when banks sweep their accounts and put a halt to their borrowing,” said Kriss Andrews, head of the North American auto practice for consultant BBK, who has specialized in bankruptcy among suppliers in recent years.

That would be a major headache for car owners, according to Kimberly Rodriguez, co-leader of global automotive services for accounting firm Grant Thornton.

She said she’s worried that many replacement parts will be in short supply if there are the widespread bankruptcies across the supplier base. In many cases there’s a single supplier making specific parts. So a closure of a supplier can make it difficult to get a new part. …

We as a nation are now bailing out the financial industry, even though the institutions involved (along with consumers) made very silly borrowing and lending decisions. Some argue that it would be extremely biased to rescue banks and brokerages while allowing the auto industry to go down the tubes. I agree.

Perhaps if we were to bailout the auto industry with big-time strings attached, like promises from corporations to implement Japanese-style corporate practices, and promises from labor unions to accept wage/benefit concessions and make their internal machinations transparent, we could get through this, ending up with a leaner, stronger auto makers.
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Cross-posted at netwmd.com and NeoConstant