By on August 6, 2007

cars.jpgThe contract negotiations between the Detroit automakers and The United Autoworkers Union (UAW) continue apace. The employers are adamant: they need union concessions to survive. BIG concessions. Citing a $25/hour labor cost differential between their operations and those of the transplants, The Big 2.8 claim their salvation depends on taking food from union workers' table negotiating large pay and benefit cuts. But would such concession from the carmakers' "partners" actually bail them out of hot water? 

First, the majority of that disparity comes down to The Big 2.8's retiree overhang. Including workers' spouses, Chrysler pays health care and pensions to 78,435 non-active UAW beneficiaries. Ford pays out to 123,007 off-line union dependents. And GM signs checks to 338,902 non-working union members. Take those numbers out of the equation and the actual direct labor costs between domestic and transplant automakers are roughly comparable.

Second, when it comes to union concessions, what's the big deal? For the sake of argument, let's say the UAW negotiators lose their collective [bargaining] minds and agree to a $20/hour cut. GM has approximately 80K active UAW workers on its payroll. Cutting $20/hour from their union personnel costs will save them $1.6m/hour. Now, let's take that out to a year, based on a 40-hour work week (2,080 hrs/year). In theory, GM would save $3.3b/year. 

Let's also assume GM sets up a union-controlled VEBA for UAW retiree health care. That little item would run anywhere from $30b to $40b. While a UAW VEBA would only require a one-time payment of cash and stock, it would take The General at least ten years to recoup the cost from the resulting savings.

Ford? Same boat. FoMoCo's in hock up to and including their Blue Oval, facing a mountain of long-term debt. Any savings The Blue Oval Boys realize from cutting UAW salaries/benefits might cover their interest payments. Chrysler must fry the same fish.

Detroit must look for more fundamental solutions. The Big 2.8's existing union contracts and a woeful lack of flexible manufacturing capacity make it cheaper to keep a factory turning out cars (and let them pile up on storage lots) than it is to suspend production (and let supply decrease to match diminished demand). The results: excess inventory, fire sales,and continued brand degradation. Union negotiations need to focus on facilitating efficient operations, rather than simply cutting costs.

Meanwhile, the crucial adjustments must come from management. They can try to lay blame wherever they want, but the union didn't approve the lackluster designs that have been rolling out of Detroit for years. The union's not responsible for badge-engineered product planning. The union didn't fill the executive suites with yes men (and women) who will kiss whatever they have to kiss to keep their jobs. And the union had nothing to do with putting beancounters in charge instead of engineers.

Bottom line: labor costs have zero impact on what cars consumers decide to buy. You could argue that an extra grand here and there– taken out of direct costs and plowed back into new vehicles– would make The Big 2.8's vehicles more competitive. Given the failure of heavily discounted domestic product to strike back against the Toyotas of the world, you could make an equally compelling case that lowering the domestics' production costs wouldn't have any impact on the end result and, thus, U.S. consumers' choices.

While Mulally's Ford seems to "get it." GM under Wagoner singularly fails to recognize this simple fact. And Chrysler is now even more of a question mark. Lest we forget, the automakers have been digging themselves into this very deep hole for a very long time. Decades of hit-or-miss product planning, questionable quality, emphasis on quarterly profits instead of long-term results and obscene executive bonuses have all yielded a lineup that can't cut the mustard.

There's only one way to "save" Detroit. American automakers and their unions must set aside their adversarial relationship and find a way to build the world's best cars– price no object. That's right: they must stop focusing on margins and start focusing on market share. Making a small profit on a smaller and smaller slice of the U.S. market will do nothing more than prolong The Big 2.8's agonizing journey on the road to oblivion. They need to recapture the high ground, destroy the transplants' mindspace advantages, restore America's carmaking reputation and THEN think about profits. 

Is there enough time? Probably not. At this point, committing all remaining resources to building the world's best automobiles at any cost is a death or glory strategy that has more than a whiff of the grave to it. But thinking that Detroit's future depends largely on reducing labor costs is the worst kind of self-delusion: the kind without any chance of working. 

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46 Comments on “UAW Negotiations: The Blame Game...”


  • avatar
    GS650G

    I still can’t see how they are surviving. The credit markets are going south faster than a Ford GT. the Cerberus deal was in jeopardy because of tight money. The mortgage market is grilling GMAC and we are weeks away froma private money meltdown. One little terrorist hit and we ae smack dab in a huge recession. There will be no money for new cars, people.

    I think the end will come faster than anyone thinks. The GM 100K warranty and Cry-sler lifetime coverage are apt to be meaningless. I still don’t like their cars nor want to buy them. I’ll go Korean before I buy American, especially since most of thema re made overseas and reimported anyway. At least the Japanese and Korean cars are assembled here.

  • avatar
    geeber

    Perhaps it’s a good time to review the history of Studebaker.

    Studebaker coddled its UAW local, and regularly agreed to work standards and pay packages that were far more generous than the Big Three competition. Harold Vance, Studebaker CEO, even sent every new blue-collar worker a letter urging him or her to join the UAW! This was less than a decade after the infamous Battle of the Overpass at Ford, where Harry Bennett was hiring goons to beat up union organizers! But Studebaker management thought that this strategy would work, as long as volume remained high.

    At the same time, Studebaker made several key mistakes in planning its 1953 line, and allowed problems with poorly engineered front fenders that would rust within 18 months to continue uncorrected. (This was a problem up until the last Studebaker was built; it first appeared with the “which way is it going?” model in 1947!)

    By 1954, the seller’s market had ended, Studebaker’s reputation for rust had caught up with the cars and the restyled line introduced for 1953 was sinking after just one year. Studebaker needed relief, but it had squandered its capital on executive salaries, lavish dividends for shareholders and very high wages for workers. By early 1954, the company was literally broke, and would have gone under, except that Packard was dumb enough to buy it. Studebaker used Packard’s money to stay in the car business for another decade.

    Studebaker workers agreed to pay cuts and more efficient work standards in 1954 (even Walther Reuther went to South Bend to urge support for the changes), but it was too late. Studebaker staggered on until that fateful day in December 1963.

    By the time a car company asks for wage cuts, it’s usually too late. Wage cuts alone cannot save the company. But a total wage and benefit package greatly out of line with industry standards usually signals that a company is not very well run. Even with the cuts, the underlying problem remains.

    The UAW and management remind me of two spouses in a dysfunctional marriage. Neither is really happy with the relationship, and they both need to change their behaviors (and attitudes), but neither one really wants to. But if they don’t, they are both doomed.

    I hope that the story for GM, Ford and Chrysler has a happier ending than the story that unfolded in South Bend over half a century ago, but I’m getting very nervous…

  • avatar
    Landcrusher

    It will be interesting to see what the non-auto experts recently brought into Chrysler will do when they go to UAW meetings. I will bet they go in and start talking about efficiency and productivity, just like Frank is saying GM and F need to. How will UAW react? I bet many of the line workers would be thrilled to have the chance to work more freely without so many rules to keep them from doing a better job. They know they can out produce the rest of the world.

    Only one hitch – will UAW leadership be willing to save the members jobs at risk of losing power for themselves?

  • avatar
    nonce

    If the Big 3 somehow cut their wages to ~$20/hour less than their competition, the labor market will react to that:

    1. Current Big 3 workers will take their buyouts or whatever and go work for the imports.

    2. The imports will be able to offer lower wages to their current and new workers.

    Result: Big 3 right back where they started.

    Of course there’s some friction in the above transactions — not everyone bails from the old workplace, contracts protect the wages of current competition employees.

    But the Big 3 is fighting uphill against the laws of economics here.

    The only way out is for the union to bargain away the retiree’s benefits. The press would have a field day; probably lots of op-ed pieces entitled “Big Three Bloodbath” or the like. It won’t be pretty.

  • avatar
    CeeDragon

    “Don’t cut my job and benefits, no matter how poorly we’re manufacturing”

    “Don’t cut my large bonus, no matter how much money we’re losing”

    “Don’t cut my commission, no matter how few we’re selling”

    The whining of special interest groups who are unwilling to sacrifice for the greater good. The Detriot auto culture is toxic to the core.

  • avatar
    Kevin

    Take those numbers out of the equation and the actual direct labor costs between domestic and transplant automakers are roughly comparable.

    I very much doubt this — if it’s true at all that UAW workers average $150,000 in compensation, as cited before here and elsewhere, this is not even remotely true. Unless you want to explain how employing UAW workers in Detroit costs the same as employing non-union workers in Alabama and Texas and Kentucky.

  • avatar
    Rick Korallus

    Isn’t the new Chrysler CEO the same putz that ran Home Depot into the ground by cost cutting?

    I always get a kick out energy wasted on the blame game instead of put to good use making progress. Most people never learn.

  • avatar
    geeber

    Remember that the wages at the transplant operations are pretty close to those paid by the Big Three. The transplants want to avoid a successful unionization drive, and one way to head off the union is to make sure the pay is pretty close to what the Big Three workers are getting (and there are no deductions for union dues in the transplant operations).

    The transplants save money through less restrictive work rules and health benefit packages that were designed after it became apparent that agreeing to generous health care benefits was simply not sustainable over the long haul. They are also supporting a much smaller number of retirees than the Big Three.

  • avatar
    Ralph SS

    Thanks, Frank. I’d say you pretty well nailed it.

  • avatar

    Kevin: ” very much doubt this — if it’s true at all that UAW workers average $150,000 in compensation, as cited before here and elsewhere”

    Kevin I believe the 150,000 dollar figure is arrived at by adding back in the cost of the retiree’s healthcare benefit. If you cut the retiree’s healthcare I believe the cost is very similar between transplant employees and UAW. The problem is that cutting the retiree’s healthcare is a major cultural political barrier for the UAW. However, doing that should solve the labor cost disparity. It still doesn’t solve product problems

  • avatar
    LoserBoy

    Result: Big 3 right back where they started.

    Exactly. If you make a cost-cutting move that can be duplicated by your competitors, it’s not a competitive advantage, it’s the new status quo.

  • avatar
    oboylepr

    Frank, you are quite right in your assertion that the changes needed are more than just UAW givebacks.
    Given the complexity of the problems facing G, F and C it will take a miracle of Biblical proportions to solve them. I do not think that the capability within the industry leadership exists with the possible exception of Mr. Mulally. In the case of GM the task verges on the impossible. If the UAW stands firm (I think they will) GMNA will file for CH11, either because of a strike or because GM went for the ‘pay off to ****off’ solution we have all become used to and manages to buy a little more time in the hope that the next big thing will save them. I think the UAW is in a very difficult position because they are being looked at as the key to the survival of the industry based on what they give back or don’t. This is unfair really. Most of the current problems are not the fault of the UAW but they will take the rap when and if the industry goes down. Major UAW givebacks? as they saw on Autoextremist.com it ‘aintgonnahappen.com!

  • avatar
    KatiePuckrik

    I’d love to be in the room when Rabid Rick tries to negotiate concessions from the UAW, a week after announcing a $891 million profit in the last quarter!

    But I totally agree with Mr Williams. The big 2.8 have much deeper problems than the UAW. In fact, I think it’s a bit rich to ask for concessions from the working man, when the person asking has a bankrupcty proof pension. But again, the irony is lost on the management and can’t understand why the UAW are getting all shirty over it….(!)

    In fact, one can hardly lay the blame at the UAW’s doorstep. All they’re doing is ensuring that their (hard fought) benefits aren’t lost due to mismanagement of the mismanagers. The managers aren’t suffering, why should the UAW?

    Detroit’s problem rest solely with their product and their legacy.

    Firstly, look at their line ups. Anyone died of boredom yet? Where’s the spirit of Henry Ford gone? Where’s the passion? It’s like modern music. People are churning out songs, not because they have something to say, but because they want to make money. We can thank people like Mr Cowell for that. Sorry US for THAT UK export! But, as Toyota have proved, if your cars have no flair, then they better have quality and reliablity, which brings me neatly onto point two.

    Detroit’s so called “perception” gap. I’m sure everyone has a horror story to tell about Detroit metal (I have more than my fair share). But what are Detroit doing about it? Saying they won loads of awards that nobody trusts? Big deal. I’m afraid, that’s not good enough for me. If I’m going to make the second biggest investment of my life with Detroit, I want something in return. How arrogant of the big 2.8 to think a few words will smooth everything over with all those customers who got…well, you know the word.

    Like someone on this forum once said (I think it was Rastus) Hyundai had a much worse perception problem, but they didn’t just bitch and whine like a bunch of girls saying “Why won’t anyone trust us anymore?”. Nope, the CEO, Mr Chung Mong-Koo, ordered all of his designers to make quality and reliability priority number one, they gave all of their cars a 5 year warranty and put their money where their mouth is. The rest is history. Hyundai are now up where Toyota and Honda are in the reliability table through nothing but sheer bloody mindedness and hard work. THAT’S how you kill a perception gap problem! Which is why I have to give Chrysler a little credit for their lifetime warranty. OK it may be a little flawed in the sense that they may not be around a lifetime to honour it, but at least they’re trying. What have GM and Ford done?

    So, to any members of the UAW who may be reading these comments. Don’t give in and keep your benefits. If Detroit go under, it wasn’t your fault. You didn’t design the cars, approve the managers compensation packages and bankruptcy proof them. You did your jobs.

    P.S. For the record, I realise the UAW are a little inflexible, but let’s face it, who do you think did more damage to Detroit? Management or the UAW…..?

  • avatar
    Hippo

    Pretty much right on. It is obvious they all need a new beginning.
    IMO while wage content may not be a issue, and if quality and total price were comparable, many would choose a domestic. As it is almost everyone chooses a import because of the perception that the 2.X in general and the UAW in particular are worse then the FSU (former Soviet Union)

    It isn’t going to happen with the UAW, and while at it replace the bean counters and management with more engineering oriented people.

  • avatar
    Bunter1

    Oh ratz. You mean they still have to go out and make cars people want to buy at profitable margin?
    Bummer.
    I agree Frank, Mullaly may just “get it”. There road back is a bit steeper but I personally think his (apparent) approach has a better long term chance then Rick and Alternate Reality Bob’s “we are already there, the idiot public just isn’t listening” plan. I use the word “plan” in a very sarcastic sense there, BTW.

    Cheerio,

    Bunter

  • avatar
    Luther

    It’s like beating a dead horse ain’t it Frank?

    Dead Horse = 2.801 General Ledger.

    Even if UAW agrees to all concessions, it will not matter. Chrysler is now in the best position to survive…Not saying much, I know…..

  • avatar
    Dynamic88

    “Perhaps it’s a good time to review the history of Studebaker.”

    In other words, it’s the same today as in Stude’s time – union wages haven’t got jack to do with the troubles the D3 are in. It was bad product and bad management decissions that led Stude down the tubes. Sounds familiar, doesn’t it ?

  • avatar
    Luther

    “Meanwhile, the crucial adjustments must come from management. They can try to lay blame wherever they want, but the union didn’t approve the lackluster designs that have been rolling out of Detroit for years. The union’s not responsible for badge-engineered product planning. The union didn’t fill the executive suites with yes men (and women) who will kiss whatever they have to kiss to keep their jobs. And the union had nothing to do with putting beancounters in charge instead of engineers.”

    Directly, No. Indirectly YES they (UAW) did.

  • avatar
    50merc

    It does no good to play the blame game, but the D3 (by which I mean their US and Canadian-made products) and UAW also need to face reality. The golden era of oligopoly and monopoly is gone. All four are high-cost producers who have lost pricing power. To regain viability, each must either cut per-unit costs or acquire a status that allows profitable pricing. To achieve prosperity, they must do both. The last quarter’s reported profits weren’t made in North America.

    For the D3, that means more cost-cutting and building products recognized as superior. The former is getting progressively harder to do; the latter appears to be beyond their capabilities.

    For the UAW, primarily it means realizing that unfunded pensions and lavish health benefits for both workers and retirees are obstacles to becoming a cost-competitive labor supplier. As has been noted, current wage rates are less problematic. (Though only because the transplants also pay well. China and Mexico can short-circuit around that.)

    My guess is that the D3 will continue to sink in the marketplace and the UAW will reject attempts to subdue the legacy cost T-Rex. If so, chapter 11 will be the best chance for a reborn phoenix bird to rise from the ashes.

  • avatar
    hltguy

    Yep, same guy who did such a marvelous job at Home Depot is numero uno hombre at Chrysler. While he was head of Home Depot, the value of the company sank, many of the stores sucked and Lowes kicked their a–.
    So the 2.8 are supporting over 650,000 retirees. I wonder how many of those retirees give a damn how much their health care costs? How many work out and stay fit? My guess most are out of shape, have a plethora of health problems and use boatloads of prescription drugs. Reminds of an employee of mine, has cancer, continues to smoke and her health care costs are astronomical. She just left the job as her cancer is now spread to her lungs.

  • avatar
    ihatetrees

    Mr Williams is basically right on – although I think he underestimates the ‘cost’ of UAW work rules. And maybe he missed the hidden costs of the jobs’ bank (in unnecessary production).

    Maybe a VEBA will work for the big 2.x. But they still have so many issues…

    Regarding legacy costs and retirement benefits, I think Steve Miller (ex CEO of Delphi) summed it up best when he said that we (as a society) will have to make some very tough fiscal choices regarding elderly medical care in the future.

    And the UAW isn’t the only entitlement mentality, head-in-the-sand organization regarding such benefits. The economic cement heads in government employee unions are worse. We’re a couple years out from accounting changes that will force local and state GOVERNMENTS to account for THEIR retiree health benefits. The screams and bleating from that crowd will make the UAW seem like mute kittens…

  • avatar
    Robbie

    Why don’t they consider the standard solution in these situations: leave the sitting personnel with a generous package BUT make sure that all new personnel gets hired on competitive terms? UAW and auto makers will both save face that way.

  • avatar
    Acd

    At some point the domestics are going to have to increase revenues because they won’t be able to ‘save’ themselves into a profit. Even with having to pay for retirees from an era where GM had a 40%+ market share if they had an even close market share today they would be making enough money that there would be no speculation about their demise.

    Geeber makes a great point about Studebaker. In the sellers market of the late 40’s it didn’t matter that they were paying too much to produce their cars; the important thing was that they produced them because they could sell eveything they could make. When the market changed and Ford and Chevy really went after each other in 1954 the independents with their high labor costs were very vulnerable.

    As it looks today Toyota and Hondas seems to be in the GM and Ford position today and GM, Ford and Chrysler have become the indepnedents (Studebaker, Packard, Nash and Hudson)struggling for survival.

  • avatar
    jurisb

    that`s right, it is all about product. Looks like toyota`s announcement of the first quarter profits in excess of 4.6 bn doesn`t help much detroit psychologically. And if UAW are as stuubborn as before , they will dig a grave for themselves. Detroit must accept not only lean manufacturing and neverending product improvement, but also The rules of fair game. faking, grillmatching and `global parts binning` won`t cut it. Unless you start actually constructing cars yourself, noone is going to respect you and buy your whatever derivatives.
    But history teaches, that DETROIT WON`T SURVIVE. The instincts to avoid any real work and get as big money as easily as possible, will at the end ruin not only detroit, but the whole empire…..

  • avatar
    Dynamic88

    > As it looks today Toyota and Hondas seems to be in the GM and Ford position today and GM, Ford and Chrysler have become the indepnedents (Studebaker, Packard, Nash and Hudson)struggling for survival.

    Except that G/F/C were the big 3 with GM taking about half the market and F/C splitting up most of the other half. The independants only had small percentages of market share. (Though Rambler managed #3 in sales, briefly)

    GM still has 25% of the market, Ford somewhere around 18%, and Chrysler something like 13%. IOW they are still much larger than the independants were.

    Toyota has about 16% and I don’t know where Honda is at exactly, but both are much smaller than GM.

    The difference, IMO, is that the American idependants basically killed themselves – not with high labor costs but with shody product. For the most part, they weren’t competing with the import/transplants (well AMC had to a bit) just against the B3. The standards of the time weren’t that tough to meet, yet they couldn’t do it. Their market share tellls their story. Even if they’d scaled back their labor costs to be identical to G/F/C it wouldn’t have made any difference. They didn’t get beat on price, they got beat on quality, in an era when quality wasn’t all that important. The B3 were not setting standards that were hard to attain. When the ’54 Stude came out, a person couldn’t get his legs under the steering wheel – it was only inches from the seat. Ergonomics weren’t important at the time, but getting one’s legs under the steering wheel is pretty basic. Stude couldn’t even manage that.

    GM/F/C by contrast are not killing themselves with horribly shody product – their product is fairly good – they simply are failing to meet the competition. And the standards are much higher today. Toyohondissan have set standards that are hard to attain. Getting one’s legs in the car and not having it rust out in 18 months is no longer sufficient.

    If G/F/C were as incompetent as Stude/Packard/Hudson, it would have been over years ago. OTOH, if the standards were as easy to meet as they were 45 years ago, the D3 would have met them easily and there would be no real competiton for them. The differnece here is that reasonably competent makers of pretty decent autos are being killed off because the transplants have set the bar much much higher.

    But they do have sufficient market share to survive, if they can somehow get it through their corporate heads that price isn’t killing them. GM could survive as a seller of 1/5 of the light vehicles sold in NA. Ford can survive at 15% or even a bit lower. But they have to sell quality. They aren’t getting beat on price, therefore all the attention towards getting concessions is wasted energy. They need to focus on being better than Toyohon.

  • avatar
    jolo

    Robbie: Why don’t they consider the standard solution in these situations: leave the sitting personnel with a generous package BUT make sure that all new personnel gets hired on competitive terms? UAW and auto makers will both save face that way. Most UAW members I have talked to do not like the idea of the two tier pay system that is presently in place. Lower pay also equates to lower benefits. From their perspective, if you are in a union, everybody gets paid the same, no matter what experience you have. Everybody has the same benefits. In the real world, you come into a job with lower pay and prove your worth and then either you get raises or shown the door. In the UAW world, everyone gets the same raise. In the real world, you wait a while for your benefits to kick in, usually it is staggered and everything is in place after your probationary period, however long that is. In the union world, everyone should have immediate benefits so they are on par with everyone else. In the real world, the more amibitious will work harder to get up their respective ladders. In a union world, working harder does not move you up, it's who you know that will work to your advantage when either moving through the production floor, up the skill trades positions, or up and through the union leadership spots that are available.

  • avatar
    BostonTeaParty

    How about the UAW gets knocked back to what everyday white collar workers earn and get in benefits, the same rights and the same sackable opportunities so they pull their finger out work as team and try and head in the same direction. Lose the job bank, flexible manufacturing like in the rest of the world, WOW team work thats a thought UAW…..go on i dare you

  • avatar

    Interesting that Walter Reuther predicted this crisis in the early ’50s. It seems patently obvious that healthcare and pension schemes financed by future earnings will come to the end of the track. This has been accelerated by the public’s willingness to allow healthcare costs to advance at a rate far beyond anyone’s ability to pay for same.

    The sad point in Detroit is that the only apparent solution is to watch as the three Titanics slip under the waves; unfortunately, they only carried enough lifeboats for the executives who jumped ship after they struck the iceberg of competition in the late 80’s. The last remaining “passengers” will surely go down with the ship.

  • avatar
    geeber

    Dynamic88: In other words, it’s the same today as in Stude’s time – union wages haven’t got jack to do with the troubles the D3 are in. It was bad product and bad management decissions that led Stude down the tubes. Sounds familiar, doesn’t it ?

    Sorry, can’t buy it. The high wages made it impossible for Studebaker to make a profit on its products. Studebaker’s labor costs were out of line with those of the Big Three, but the Big Three set the ceiling on price. (Sound familiar?)

    Studebaker had trouble generating sufficient margins on its products, given its lower volume (it had to spread its fixed costs over a much smaller production base than Chevrolet).

    Studebaker did keep a lid on other other costs. Bob Bourke (the man who styled the famous 1953 coupes) “costed out” a Studebaker Commander Starliner using GM’s cost structure (including GM’s labor costs). A Starliner would have sold for less than a Chevrolet Bel Air if GM built it (which shows that Studebaker was watching costs while engineering the product), but Studebaker had to charge Buick prices for the final product, and even then it barely make a profit!

    Besides, didn’t you read the article a few weeks back that showed how Toyota was worried about labor costs, and isn’t exactly welcoming the UAW with open arms at its plants?

    That’s not union bashing; that’s stating the facts.

    Yes, Studebaker management made bad decisions, but one of those bad decisions was giving the local UAW chapter virtually everything it wanted. When the seller’s market disappeared, Studebaker’s cash was gone, and it couldn’t afford to retool.

    After South Bend closed, a UAW leader commented, “Everytime the union asked for something, Studebaker management said ‘yes.’ There were times I was thinking, ‘Don’t agree to this! You can’t afford it!\'”

    And that was a union leader speaking!

    Dynamic88: The difference, IMO, is that the American idependants basically killed themselves – not with high labor costs but with shody product. For the most part, they weren’t competing with the import/transplants (well AMC had to a bit) just against the B3. The standards of the time weren’t that tough to meet, yet they couldn’t do it. Their market share tellls their story. Even if they’d scaled back their labor costs to be identical to G/F/C it wouldn’t have made any difference.

    Sorry, can’t but that, either. One reason the independents couldn’t match the quality of the Big Three is because they were at a cost disadvantage, and couldn’t spend the extra money to make a better product, because they couldn’t charge the higher prices necessary to recoup those costs.

    In 1955, AMC, under Romney, took on the UAW and demanded that work standards and labor costs be brought into line with those of the Big Three. It was a hard strike, but the union gave in, and soon AMC was prospering, because it put that advantage back into the product by accelerating introduction of the 1956 Rambler, the car that saved AMC.

    Labor costs matter, plain and simple. Now, what a company does with its cost advantage also matters. If the company puts the cost advantage back into the product to increase quality (the Toyota and Honda method) while holding the line on prices, it will prosper. If a company uses the cost advantage to offer the same old car at $1,500 less (the GM method), it will eventually fail.

    Dynamic88: They didn’t get beat on price, they got beat on quality, in an era when quality wasn’t all that important. The B3 were not setting standards that were hard to attain.

    GM quality was very good throughout most of the 1950s, especially in the Olds, Buick and Cadillac lines. And Mopars were also quite good, although the 1953 Dodge and Plymouth models were a step down from the previous models. In 1957, all of the Chrysler divisions went down the toilet in build quality. Ford did have some problems with body fit on the 1949-51 models.

    People in 1954 weren’t comparing a Buick to an Avalon; they were comparing a Packard Clipper or a Commander Starliner to a Special Riviera or 88 Holiday, and the Buick and Oldsmobile were so far ahead in build quality and reliability it was no contest.

    Dynamic88: They aren’t getting beat on price, therefore all the attention towards getting concessions is wasted energy. They need to focus on being better than Toyohon.

    And if labor costs are brought in line, and they put that money back into the product, they have a better shot at doing that.

  • avatar

    geeber:

    “And if labor costs are brought in line, and they put that money back into the product, they have a better shot at doing that.”

    Detroit culture doesn’t work that way. Period.

  • avatar
    geeber

    True, Mr. Farago, but that is different from saying that labor costs don’t matter. It’s what a company does with its cost advantage that matters.

    This is where Detroit has typically failed, and why the the UAW is skeptical.

  • avatar

    geeber:

    Well, if they don’t matter then they don’t.

  • avatar

    Hmmm so if GM had lower labor costs then they would make a lot more money to put into engineering better cars?

    Then how come GM made lame cars when they were making tons of money in the 90s?

    What world class small car has GM made ever?

    Where has the Honda accord beater been?

    High labor costs may be starving funds now but thats only because the world class managers at GM have lost the market share and that is not the UAW s fault

  • avatar
    geeber

    Mr. Farago, I don’t understand what you saying.

    Labor costs matter, but if a company doesn’t use that competitive advantage in the right way, it will still fail.

    Shermin Lin: GM was almost bankrupt in 1992. It spent most of the 1990s trying to recover from the Roger Smith debacle.

    And whatever profits it made in the 1990s were from mostly the sale of trucks, SUVs and larger cars, not J-cars, Luminas and Malibus. They weren’t making tons of money on passenger cars during the 1990s.

  • avatar
    Rick Korallus

    ihatetrees: The mute kitten analogy is funny and sad but true all at once. Our state pensions are severely underfunded. When the day of reckoning comes, there will be some howling around here!! Someone should start a death watch for that!

  • avatar

    Thats right they don’t make money on cars so they don’t invest money in cars but this time its different honest, this time GM will take the money if it gets cost savings and make better cars.

    By the way GM announced buying 50 % of Saab in dec of 89 and the rest in 2000, Gm spent how much buying into Fiat and how much more not to buy Fiat. How many billions was it? Yes Geeber its the greedy UAW eating up all the developement funds.

    GM chose not to put money into the developement of cars. I’ll repeat myself, “GM CHOSE TO NOT PUT MONEY INTO CARS.” GM had money but they chose to buy into Saab and later Fiat just like in the 80s they bought EDS and Hughes.

  • avatar
    Pch101

    GM chose not to put money into the developement of cars. I’ll repeat myself, “GM CHOSE TO NOT PUT MONEY INTO CARS.”

    Actually, GM put plenty of money into cars. Unfortunately, they just happened to be other peoples’ cars, such as Saab, Fiat, Isuzu, Subaru and Daewoo.

    Give GM management excess cash, and you can bet that it will squander it. If I was a grunt on the assembly line, the last thing that I’d want to do is to give up my take home pay so that I could allow Mr. Wagoner spend it on yet another failed acquisition.

    GM has done a horrendous job of investing in its own cars and in consolidating its brands so that it could do more with less. GM has about three times the number of nameplates as does Toyota, even though it doesn’t move a lot more sheetmetal. Is it any surprise that Toyota leads in segments in which GM barely competes?

  • avatar
    naif

    as the auto companys go down the tubes, what has, if anything the Feds done to equalize the old playing field on the exchange rate of the yen/dollar? how about tariffs on imported American cars to Japan? there may be other things they could do without directly giving them money which I do not see happening anyway.
    it appears to be that big business has found a way via the auto companys with help from the Feds to do away with the unions by getting rid of one of the biggest first.

  • avatar
    Pch101

    how about tariffs on imported American cars to Japan?

    There are no tariffs on American cars imported to Japan. (In contrast, the US does have an import tariff of 2.5% on cars, 25% on trucks.)

    But the lack of tariffs is irrelevant. Since we don’t want our cars, what makes you think that they will? I doubt that anyone in Japan is in need of a gas guzzling mammoth Chevy Silverado with the steering wheel on the wrong side. (Good luck with parking it on narrow Japanese roads and filling the tank with $5 fuel…)

  • avatar
    Dynamic88

    geeber,

    Respectfully, I disagree with your post above. Stude/Packard had it’s best year ever in ’59 (best in terms of market share) with 2.21% of the market. Even if it had costs slightly lower than GM’s it was doomed unless either it could gain market share, or somehow make a really expensive (and worth it) car with very high margins. That probably wasn’t feasible with Packard, having moved the brand down-market so that it was competing with Caddy and Buick. (It used to be a rung above a Caddy) It is of course absolutely impossible to have high high margins an an econo cruiser like Studebaker.

    IMO the biggest waste of money was not saying yes to the UAW, but rather all the money they sank into the Avanti project. What did Stude need with a Corvette competitor in it’s stable?

    As far as having money to invest in quality, they really didn’t need huge capital investment to angle the steering column so that the steering wheel didn’t rub the driver’s thighs.

    AMC also did best in ’59 – in terms of market share- at 6.02% . It looked like they might concentrate on “owning” the compact segment, (well, they’d been making ambassador too) but no, they came out with intermediates and full sized cars and muscle cars and just squandered what resources they had trying to be like the B3.

    They put themselves out of business at a time when it wasn’t that hard to make a car Americans would accept.

    Just so you don’t think I have it in for AMC or Stude, I’m a Rambler collector/restorer, and one of my brothers does the same with Studes. I have soft spot in my heart (and head) for the orphan badges.

    By contrast, GM was all the way down to 42.12% in ’59 (having reached 50% in ’56) Ford took 28.14% and Chrysler made it’s worst showing in decades at 11.30%

    So with the B3 taking 81.5% of the market that obviously left 18.5% of the market open. AMC took 6% and S/P just 2.21% To me, these %s tell the story. People didn’t want Studes, even in ’59. AMC might have looked as if it were taking off but the next several year’s would tell a different story.

  • avatar
    Dynamic88

    addendum

    In 1959 import cars got 10.11% of the market. In order of sales the top ten were – VW, Renault, English Ford, Opel (GM), Fiat, Simca (once Ford of France, owned by Chrysler at this point), Hillman, Triumph, Vauxhall, and Volvo.
    In 10-20th were: MG, Austin-Healey, Morris, Metropolitan (made by Austin for AMC), Mercedes-Benz, Peugeot, Borgward, Taunus (Ford), Jaguar, and Saab.

    The Japanese were barely players in NA in ’59. Datsun (Nissan) was 32nd in sales, and Toyopet (Toyota) was 33rd. Each had sales of under 1,000 units for the year.

  • avatar
    geeber

    Dynamic88: Respectfully, I disagree with your post above. Stude/Packard had it’s best year ever in ‘59 (best in terms of market share) with 2.21% of the market.

    As I recall (I can’t access my Studebaker books), Studebaker’s best years were 1950-51, when sales were almost 300,000 units, which was far higher than sales in 1959. Market share for Studebaker at this time was also higher than it was for Studebaker-Packard in 1959.

    Dynamic 88: Even if it had costs slightly lower than GM’s it was doomed unless either it could gain market share, or somehow make a really expensive (and worth it) car with very high margins.

    Studebaker could have watched its labor costs, as Nash did – and AMC did even more aggressively under Romney – and put the money back into product development and factory modernization. (Studebaker’s factory was outmoded by the early 1950s, and needed a thorough update.) Studebaker’s biggest mistake was not to take a strike during the immediate postwar years, as GM did, to get labor costs back into line.

    Studebaker settled with the union – largely on the union’s terms – and tried to make up for the higher labor costs and lower productivity through greater volume and higher transactions prices. In addition to higher wages, Studebaker settled for much lower productivity standards and serious overstaffing. There are credible stories from lineworkers that it was not uncommon for Studebaker workers to bring cots to work, and rotate “sleeping shifts” while on the job, because there were enough other workers to keep the lines moving!

    Studebaker’s strategy only worked as long as the sellers’ market was still in effect. Once the Ford Blitz began in 1953, Studebaker’s sales evaporated, and it could not respond.

    Dynamic88: That probably wasn’t feasible with Packard, having moved the brand down-market so that it was competing with Caddy and Buick. (It used to be a rung above a Caddy) It is of course absolutely impossible to have high high margins an an econo cruiser like Studebaker.

    But Nash survived, even though it faced the same brutal competition as Studebaker (and in the same segments). One reason was that Nash (and later AMC) was a well-run company, that kept all of its costs in line.

    Dynamic88: IMO the biggest waste of money was not saying yes to the UAW, but rather all the money they sank into the Avanti project. What did Stude need with a Corvette competitor in it’s stable?

    By the time the Avanti was proposed and introduced, Studebaker was already finished. It was really all over – Egbert just didn’t realize it.

    Plus, Egbert’s ultimate plan for the Avanti was to produce a line-up of regular passenger sedans with styling based on the Avanti. The Avanti would thus influence Studebaker styling much the same way the 1958 Thunderbird’s styling features filtered down to the standard Fords.

    The directors would not approve these cars, because the Avanti had flopped. Meanwhile the bankers were unwilling to finance any ANY new passenger cars without Studebaker putting up all of its non-automotive operations as collateral. Even Egbert wouldn’t go that far to save Studebaker cars, so the South Bend operation was doomed, as the Lark couldn’t go on forever.

    Dynamic88: As far as having money to invest in quality, they really didn’t need huge capital investment to angle the steering column so that the steering wheel didn’t rub the driver’s thighs.

    The problems went deeper than that. They needed to reengineer the front fender assembly, and bring out a line of sedans that were larger and roomier. The coupes were actually a hit in 1953. If I recall correctly, sales of the Starliner and Starlight almost matched sales of the Chevrolet Bel Air hardtop. It was the sedans that flopped.

    Dynamic88: AMC also did best in ‘59 – in terms of market share- at 6.02% . It looked like they might concentrate on “owning” the compact segment, (well, they’d been making ambassador too) but no, they came out with intermediates and full sized cars and muscle cars and just squandered what resources they had trying to be like the B3.

    AMC’s best year from a sales standpoint – which is more important from a production point of view, as more cars equals more utilization of the factory – was 1963. Over 500,000 cars were produced (this includes models for export).

    And while the full-line approach was a mistake, AMC was facing fierce competition from the Big Three on its own turf by 1965. The Ford Fairlane, GM intermediates and Plymouth Belvedere/Dodge Coronet were all selling against the Classic/Ambassador through bigger dealer groups, and in GM’s case, with more “modern” styling.

    Also, with the debut of the Mustang and the GTO in 1964, people realized that “small” didn’t equal “staid, slow and boring.” AMC had cornered the consservative buyers, but the market was turning away from companies with that image during the GO-GO 1960s. AMC needed something new by 1965.

    Dynamic88: Just so you don’t think I have it in for AMC or Stude, I’m a Rambler collector/restorer, and one of my brothers does the same with Studes. I have soft spot in my heart (and head) for the orphan badges.

    My dad had a 1953 Champion Starlight, and then traded it for a used 1959 Rambler Cross Country when I was born. I learned to drive on a 1973 AMC Gremlin, so I share your soft spot the independents. This past weekend there was a huge Antique Automobile Club of America (AACA) show at Macungie, Pa., and it was fun to see all of the old orphans on display. One can only look at so many 1957 Chevrolets before getting bored….

    I don’t expect the UAW members to work for the minimum wage, and I’m not happy that anyone is faced with the prospect of losing a job. But the UAW needs to realize that if these companies go under, its members are out of a job, and are highly unlikely to find work with similar wages and benefits.

    Unions are like any other organization run by humans – they can be short-sighted and run for the benefit of the top few at the expense of many. Right now, I see a union that just isn’t facing reality any more than management.

    Sure, the union isn’t responsible for the Aztek, the mishandling of Oldsmobile or the introduction of the “fish-faced” Taurus.

    On the other hand, the UAW didn’t come up with the original Mustang, style all of those attractive GM cars in the 1960s, conceive the original Chrysler minivan, design the original Taurus or figure out that a small Ford SUV would sell better with a new name (Explorer) and two extra doors. But it was happy to demand a share of the profits generated by those decisions. The UAW is happy to share in the bounty generated by the good decisions it really didn’t have any hand in making. It will have to share in the bad.

    New thinking is needed, not only in the executive suites, but also in the union halls. The union-run health care plan is a good start.

  • avatar
    Dynamic88

    “As I recall (I can’t access my Studebaker books), Studebaker’s best years were 1950-51, when sales were almost 300,000 units, which was far higher than sales in 1959. Market share for Studebaker at this time was also higher than it was for Studebaker-Packard in 1959.”

    Yes, but I was talking about S/P corp. They merged because both were weak- especially after ’53 when Stude really dropped the ball.

    “Studebaker could have watched its labor costs, as Nash did – and AMC did even more aggressively under Romney – and put the money back into product development and factory modernization. (Studebaker’s factory was outmoded by the early 1950s, and needed a thorough update.) Studebaker’s biggest mistake was not to take a strike during the immediate postwar years, as GM did, to get labor costs back into line.”

    No, their biggest mistake was to keep loosing market share. When you are mainly selling basic transport (Stude) you’ve got to get more than 2% of the market. There just can’t be enough revenue at that level of sales – no matter the per unit profit.

    “But Nash survived, even though it faced the same brutal competition as Studebaker (and in the same segments). One reason was that Nash (and later AMC) was a well-run company, that kept all of its costs in line.”

    Not really. It peaked in ’59 and more or less was going out of business since then. It took it’s sweet time, which gives me hope for the D3, but AMC was definitely dying. When you have to cut the back end off a Hornet to make a Gremlin, you know there is no money left for product development.

    “AMC’s best year from a sales standpoint – which is more important from a production point of view, as more cars equals more utilization of the factory – was 1963. Over 500,000 cars were produced (this includes models for export).”

    Respectfully I don’t think this is as important as market share. In a good sales year it’s not unusual to have an increase in production. But if you’re loosing market share at the same time, you’re dying. As an aside, on of my Ramblers is a ’63.

    “And while the full-line approach was a mistake, AMC was facing fierce competition from the Big Three on its own turf by 1965. The Ford Fairlane, GM intermediates and Plymouth Belvedere/Dodge Coronet were all selling against the Classic/Ambassador through bigger dealer groups, and in GM’s case, with more “modern” styling.”

    Absolutely correct, which is why they should have concentrated on one segment of the market and been the leader in that, instead of a follower in several segments.

    “… One can only look at so many 1957 Chevrolets before getting bored….”

    Too true. 1 usually is enough for me.

    “I don’t expect the UAW members to work for the minimum wage, and I’m not happy that anyone is faced with the prospect of losing a job. But the UAW needs to realize that if these companies go under, its members are out of a job, and are highly unlikely to find work with similar wages and benefits.”

    They know that. But where is the incentive to give something up? Execs continue to make bad decissions and get huge bonuses for doing so. Execs spend spare cash on dying Sweedish and English car companies instead of improving domestic product.

    They have no say in car design. They have no say in product development. They have no say -in much of anyting, except to bargain for wages and benefits. I think they should concede on work rules and that’s it. Let management take a pay cut then maybe next time around it will be labor’s turn.

    “On the other hand, the UAW didn’t come up with the original Mustang, style all of those attractive GM cars in the 1960s, conceive the original Chrysler minivan, design the original Taurus or figure out that a small Ford SUV would sell better with a new name (Explorer) and two extra doors. But it was happy to demand a share of the profits generated by those decisions. The UAW is happy to share in the bounty generated by the good decisions it really didn’t have any hand in making. It will have to share in the bad.”

    Their share was already determined by their contract. And it’s a bit silly (no disrespect) to trot out a few good decissions from decades past. They are selling (trying) cars today, not in the 1960s.

    My point is simply that worrying about labor costs – while necessary- isn’t where the game is being won/lost. People are willing to pay much more for a ToyHon than the offerings of the D3 in the same category. That tells me the competition isn’t about price. As you said yourself, AMC held the line with the Union, but AMC you may have noticed is no longer with us. They had their eye on the wrong prize.

  • avatar
    geeber

    Dynamic88: No, their biggest mistake was to keep loosing market share. When you are mainly selling basic transport (Stude) you’ve got to get more than 2% of the market. There just can’t be enough revenue at that level of sales – no matter the per unit profit.

    Studebaker lost market share were because it couldn’t afford to upgrade the plant for improved efficiency, as it chose to accept higher wages and lower productivity levels in the UAW contract. The higher wages and lower productivity also prevented the company from spending more to improve the product.

    Dynamic88: Not really. It peaked in ‘59 and more or less was going out of business since then. It took it’s sweet time, which gives me hope for the D3, but AMC was definitely dying. When you have to cut the back end off a Hornet to make a Gremlin, you know there is no money left for product development.

    AMC was still a very healthy company in the early 1960s. It had enough money to bring out the 1963 Rambler and 1964 American, both of which were very competitive products, and initially sold very well. It modernized the Kenosha plant, and also brought out all-new engines (a new six for 1964; a new thinwall V-8 for 1966).

    The company didn’t hit trouble until 1965, when Abernethy tried to field three distinct lines of cars by divorcing the Ambassador from the Classic. Sales of the two models didn’t cover the tooling costs. AMC wasn’t forced into making the Gremlin until after the 1967 debacle, when the company almost went broke.

    Dynamic88: Respectfully I don’t think this is as important as market share. In a good sales year it’s not unusual to have an increase in production. But if you’re loosing market share at the same time, you’re dying. As an aside, on of my Ramblers is a ‘63.

    GM lost market share in the mid-1960s…I don’t think anyone would say it was dying. And sales don’t automatically go up for every company in an improving market – 1962 was a good year for the industry, but Chrysler’s sales and market penetration dropped, because of the unpopular full-size Plymouths and Dodges.

    Dynamic88: They know that. But where is the incentive to give something up?

    The strong possibility of unemployment, and the knowledge that they will not be able to find jobs with similar wages and benefits if their employer goes under?

    I’m not saying that UAW members have to like their employers, but I would think they are smart enough to figure out which side their bread is buttered on (as my parents used to say).

    Dynamic88: I think they should concede on work rules and that’s it. Let management take a pay cut then maybe next time around it will be labor’s turn.

    Most white-collar employees have already taken benefits cuts. I would have the union run the health plan, make changes in work rules, get rid of the Jobs Bank (it is mostly empty anyway with the recent buyouts at Ford and GM) and leave the pay untouched, as the transplants largely match UAW pay rates.

    Dynamic88: Their share was already determined by their contract. And it’s a bit silly (no disrespect) to trot out a few good decissions from decades past. They are selling (trying) cars today, not in the 1960s.

    The UAW was happy to benefit from those decisions, even though it had no hand in making them. And to understand how the companies and the UAW arrived at this present juncture, it is necessary to look at the history of the industry.

    Many of the uncompetitive provisions of today’s contracts came about in the 1960s, 1970s and 1980s, when those companies were making money because of their good decisions.

    Dynamic88: My point is simply that worrying about labor costs – while necessary- isn’t where the game is being won/lost. People are willing to pay much more for a ToyHon than the offerings of the D3 in the same category. That tells me the competition isn’t about price.

    I wouldn’t say price is completely irrelevant. Honda and Toyota set the ceiling on price in each respective segments. (And even for them,, price still matters – Honda would not sell many $24,000 Civics and $30,000 Accords.) GM and Ford cannot charge more for their passenger cars than Honda and Toyota and expect many sales.

    They cannot exceed Honda and Toyota prices, but they must offer products of the same quality – which is virtually impossible when handicapped by higher structural costs.

    Dynamic88: As you said yourself, AMC held the line with the Union, but AMC you may have noticed is no longer with us. They had their eye on the wrong prize.

    Competitive labor costs aren’t everything, but they still matter. You are right that if a company is making the 1974 Matador and 1975 Pacer, then paying the workers $1 an hour won’t make a difference.

    But if costs are out of line with other competitors selling vehicles in that segment, then the company is also doomed. A company can find a niche, but if it becomes too successful, then competitors will start invading the niche for a piece of the pie.

    It’s a balancing act, and the UAW and the Big Three need to find a better balance.

    Of the three, I think Mullaly is the one who most likely “gets it” – that savings from improved productivity and lower costs need to be put back into the product.

    I get the feeling that GM believes it has done everything it can on the product front, and now just needs to get its labor costs in line – which is very premature.

    With Chrysler, I have the feeling that Mr. Nardelli is going to pick a fight with the union, and both sides will end up losing.

  • avatar
    Inthemiddle

    Toyota – Made In America – No Union – Profitable and growing.

    Ford – Made In America (somewhat) – Unionized – losing money and marketshare…

    Hmmmm…..what’s the difference between these two?

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