Business Week Case: A Comeback For The Uaw

Business Week Case: A Comeback For The Uaw

As strikes go, Chrysler’s wasn’t all that impressive. When Chrysler’s unionized workers nationwide left their assembly line positions in early October 2007 to protest the holdup in securing a new four-year labor contract, the media reported “the second major UAW walkout in a month”—but it seemed more like a long lunch with picketing during dessert. By nightfall the parties had come to an agreement, and the next morning the newspapers chorused such headlines as “It’s a New Day in Detroit” and “Detroit’s 3 Finally on Track.”

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Really? It seems to me we’ve read those headlines a hundred times in the past 25 years. And each time they’re wrong.

Many observers seem to believe that the Big Three’s woes are all tied to union wages and the benefits its blue-collar workforce receives. But those are not their biggest problems. While the new agreements with the UAW could help, cutting labor costs won’t cure what ails Detroit. In fact, just the opposite could happen.

General Motors has cried loudest about the “unfair” wage advantage the Japanese automakers enjoy. It has bemoaned what it sees as a $1,500 to $1,900 price disadvantage (owing to active and retiree health care costs) on every product it sells. Detroit spends approximately $78 an hour in blue-collar wages and benefits, while Toyota Motor spends less than $50. But a plant’s productivity may be more important than actual wages paid there. Auto executives know real labor costs aren’t framed just by the per-hour pay but are measured by how many vehicles the fewest workers can build in one shift. And consider Ford’s last minivan attempt. No matter what Ford spent to develop or build a new minivan, it was DOA at Ford and Lincoln-Mercury dealerships. When a new vehicle comes to market and fails, the manufacturer loses hundreds of millions—if not billions—no matter what its labor costs are.

Much has been made of the fact that Detroit already spent much more than Japanese automakers in the United States for health insurance. Yet GM admitted something important after the union contracts were signed: Fully 56,000 of its remaining 74,500 blue-collar workers will be eligible for retirement by 2011. So the average age of GM’s factory workers will be coming down rapidly in the near future. Theoretically this would lower costs associated with health care per employee.

At first glance, this looks to be a huge financial win for General Motors, and in the near term it is. However, it could all too easily bring the United Auto Workers roaring back to life.

Here’s how it is likely to backfire. First, retired autoworkers don’t get to vote on new contracts. Second, up to 56,000 of GM’s 74,500 workers might be replaced either by the time of the next union negotiations or by the 2015 negotiations at the latest. Do you think the new and younger workers, paid less and getting fewer benefits, will fight to keep the retirees’ benefits? A younger worker might well feel cheated and resentful.

This time around, the UAW could sign up the American workforce of foreign car companies for the same reason. The Detroit News reported that a secret internal Toyota report written by Seiichi Sudo, president of Toyota Engineering & Manufacturing for America, suggests that Toyota needs to get its labor costs down to whatever the prevailing wages are in the region where the factories are located. If Toyota can move more quickly to cut its labor costs because its $25 hourly wage is high compared to GM’s possible $14 in some positions, then GM is putting downward pressure on Japanese wages. So the Japanese could use GM’s lower wages to put downward pressure on some of their employees—and those earning Japanese wages might start to think that union representation isn’t a bad idea.

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