Category: Unions

By on January 21, 2009

2008 was supposed to be a banner year for Hyundai. The company predicted a huge sales jump and promised a new flagship. And then 2008 actually happened. Sales were, well, you can guess that one. From a sales and PR point-of-view, the new, V8-powered Genesis was well received. From a sales perspective, not to much. Still, as one Hyundai Marketing VP put it, “if [consumers] aren’t forced to reconsider us, they won’t.” To paraphrase Elvis, perhaps we ought to give Hyundai a little more time. Meanwhile, the comparison between Hyundai and a young Toyota seem to have faded from view. In fact, you could make the case that Hyundai is more GM than Toyota. Well, if not you, me.

Perhaps one of the biggest similarities between GM and Hyundai: a disfunctional relationship with its organized labor. Actually, the comparison leaves the GM-UAW relationship looking downright touchy-feely. In 2006 alone, Hyundai lost 118,293 vehicles worth $1.75b due to strikes and walkouts alone. When it refused to pay year-end bonuses of 1.5 times the monthly pay (even though the production goal wasn’t met… due to strikes and walkouts) workers (wait for it) walked out.

Hyundai caved a few days later, with bosses calling the bonus as a “fresh deal” and “an opportunity to clearly recognize that appropriate remuneration can only come after workers achieve the goals.” But Hyundai management is well-trained by now. Their notoriously militant union has held a strike every year since 1987. Except for 1994. Maybe NAFTA scared them for a year. In any case, if the brand that was launched by Rodney King wants to join the Toyotas of the world, something will have to be done about its labor relations.

But Hyundai management doesn’t have much moral high ground from which to fight. The antics of President Chung Mong-koo would make Blagojevich blush. Mong-koo was convicted on $100m embezzlement and bribery charges–and then freed on the grounds that he could “contribute to the company and the national economy one last time.” Although his son Chung Eui-sun has left the top spot at Kia, he’s still considered the dynastic heir apparent to his headline-grabbing father.

Kia was supposed to provide an opportunity for Eui-sun to prove himself. That hasn’t panned out. High steel prices in Asia and union turbulence have played merry hell with Kia’s thin profit margins. “Kia’s profitability this year and its longer-term competitiveness depend largely on labor flexibility,” says Stephen Ahn of Woori Investments. His theory: it will be better for Eui-sun to keep his hands clean. With another Hyundai strike looming and some serious coming to terms with economic reality ahead, he may be right.

So Eui-sun will stay on as head of Kia’s overseas operations, busying himself with successful Slovakia operations and a giant factory under construction near West Point, Georgia. While basking in the glow of Kia’s new products, from the current Euro Cee’ds to their forthcoming cousins, the Soul, Forte/Spectra and YN. But even on the product front, more symptoms of “Big  Company Syndrome” loom for the Hyundai conglomerate.

If the Genesis got people thinking differently about Hyundai, a super-Genesis will bring in the few remaining skeptics, right? That seems to be the thinking behind the Equus, the troublingly named, packed-with-technology, S-Class fighter. The car will clock-in with a reported price tag north of $95k. Luckily for Koreans, recent rumors of a stateside debut for the Equus means grey-market imports a la Genesis can begin.  

Even at a lower price, the Equus reeks of “Big Company Syndrome.” Whereas the Genesis adds least some enthusiast rear wheel-drive panache to the Hyundai brand, the Equus is a staid limousine. Its owner (Chung Mong-koo?) will likely never stray from the back seat, as he or she is shuttled from payoff to “political fundraiser.” More importantly, a $96k car in the midst of an economic downturn doesn’t say anything positive about the Hyundai brand that the Genesis doesn’t. A budget S-Class is one thing, a Hyundai Maybach is another. And that’s before you start on the name.

In reality, Hyundai is letting Kia take over as the purveyors of cheap and cheerful. And as the “junior brand” picks up its game with the Forte and Soul, Hyundai is chasing the American brands with SUVs, Crossovers and RWD offerings. Product overlap between the two brands, a coming labor confrontation and untimely upmarket ambitions by Hyundai may be enough to take some shine off the Hyundai-Kia juggernaut. Moody’s is eyeing a credit rating cut for Hyundai-Kia, as a weak Won kept things from getting too nasty in 2008. This year will be tougher still.

By on December 27, 2008

One of the uncomfortable facts about the automobile industry: its pay rates have been exceptionally high almost from day one. That said, just how much of a factor worker wages (and the cost differences that go with them) have to do with Motown’s meltdown is debatable. One thing’s for sure: the United Auto Workers (UAW) refusal to re-negotiate their current contract– repeated within two hours of the President’s cramdown conditional bailout bonanza– puts it squarely in the firing line for both sides of the “debate.” When trying to understand their seemingly suicidal recalcitrance, history is our guide.

For all of its famous affect on “creating America’s middle class,” it’s important to remember that Henry Ford’s “five-dollar day” (actually a bonus program) was a solution to an intractable problem. Put simply, Crazy Henry had to hire 40k men a year to have 10k working.

There are two things that haven’t changed about auto assembly since those early days: assembly-line work is a grind (imagine doing the same thing, 500 times a day) and auto production requires a steady work force. The initial raise in pay was to give the worker a stake in sticking with a nasty job. Yes, the worker could be replaced. But replacing him slowed the whole process down.

While there have been epic debates, and not a little violence, over unionized automotive workers’ wages and conditions, they generally conform to a worldwide pattern. The type of union– “company” (tame), “trade” (often bribed into submission) or “Industry”– doesn’t have much effect on the outcome. Recent surveys revealed developed world hourly wages for assemblers as more-or-less equal. It’s the “other” stuff– health care and pensions– that makes the biggest difference.

In theory, the USA’s lower corporate taxes should compensate for the advantages enjoyed by automakers operating in countries where employees get their health care and pensions from their government. In practice, Detroit’s sunk by simple math. While The Big 3 have been reducing their total workers. their pool of retired ones has been growing. Ford, GM and Chrysler have more retirees than active workers. Which accounts for much of the “$75 an hour” numbers you hear quoted in the MSM.

Worse, The Big 3 have funded all these benefits on a pay-as-you go basis. Instead of setting aside funds to cover pension and health-care throughout a worker’s career, like a company-level 401K, Ford, Chrysler and GM have been paying their retirees out of current revenues.

This is the same “trick” the U.S. government uses for Social Security. But at least the tax base is growing (and not aging much). The Big Three have shrank and aged themselves into a huge problem.

In theory, the Mother of All Health Care pay-it-forward UAW VEBA fund should finally allow the 3 to put these “legacy” costs behind them (in another two years). Only they still have to fund the fund. Putting company stock in the fund in lieu of cash is going to be about as welcome a blanket smeared in smallpox.

Pay and pension issues can always be laid at the feet of the money-men, who never looked past the next quarter. Health care and pensions can be “finessed.” But union work rules are, apparently, forever. This could be Detroit’s Gordian knot.

Put simply, you can’t. The UAW work in accordance with a series of massive documents directly exactly what every employee is allowed to do, how they should do it and how it’s judged. Having to adhere to a book of rules that practically require a forklift (and designated “operator”) to carry makes anything resembling “management” a major undertaking.

But before we lay the blame completely at the UAW’s feet, let’s consider how management performed when the Union Slacker’s Guide to Life, the Universe and Everything didn’t apply. The California NUMI plant (Toyota Matrix/Pontiac Vibe) doesn’t count. Toyota runs the show there. Saturn is the exception that proves (i.e. tests) the rules.

For GM’s different kind of car company, The General hand-picked workers willing to dump the rules, and then had them build one vehicle for almost a decade. Later on, GM set up the Aztek/Rendezvous plant in Mexico (lower cost AND no restrictions). Bottom line: both ventures failed to sell enough vehicles to make their plants pay. As restrictive as the work-rules are, they seem to conform to standard Big Three thinking as much as management thinking conforms to them.

Perhaps the UAW’s greatest sin, then, is the fact that they’ve been “along for the ride.” More specifically, a seemingly endless supply of money has narcotized the union into suicidal apathy. Worse still, their public persona projects a sense of entitlement that’s toxic to all but their closest political allies.

The UAW’s protests that “we’ve done nothing wrong” is true as far as it goes. But not doing wrong is not the same as doing right. As we shall see.

By on November 14, 2008

In December of last year, a certain Peter Hart wrote an opinion column for Fairness And Accuracy In Reporting (FAIR). Hart decried the prevalence of polling in political coverage. Not only did he cast aspersions on the accuracy and reliability of polls, he identified them as a sinister threat to no less than “American Democracy.” “The more fundamental problem for the press — and for American democracy —” wrote Hart, “is that the media’s overreliance on polls encourages a kind of political conversation that prioritizes strategic consideration and tactics over substance.” He didn’t know how right he was. Today, Peter Hart Associates released the results of a poll of their own, gauging support for an auto industry bailout. Read the results in the Detroit News and you might be surprised. Read the poll itself and the Hart Associates client list, and that surprise should evaporate faster than Mr Hart’s ideals regarding polls and their cynical abusers.

Let’s start with the substance of the poll, which would probably send Karl Rove into an ecstasy of nostalgia. After the usual demographic and exclusionary (no media, no auto workers) questions, the first substantive query shows where things are headed.

How important do you feel the American automobile industry is to the American economy–extremely important, very important, somewhat important, not important, or not at all important?

Needless to say there’s no satisfactory way to answer this question, let alone any metric provided to measure “importance.” Anyone who knows nothing about cars or the car business knows there’s only one answer here: somewhere between “extremely important” and “very important.”

As the questions go on, they make it clear that this poll isn’t about ascertaining public opinion. It’s about communicating and legitimizing pro-bailout arguments. In Hart’s words, “the prioritization of strategic consideration and tactics over substance.”

You know the pro-bailout arguments; we’ve sliced them and diced them all over this blog. Presented in their most misleading forms as questions, is it any surprise that they poll… decently? Actually, the poll result’s relative ambivalence is surprising, considering how questions’ inherent bias.

“The federal government has recently provided financial aid to the insurance and banking industries to make sure that these industries do not fail. Do you feel that providing financial aid to ensure that the U.S. auto industry does not fail is more important, just as important, or less important?” Only 14 percent answered “more.” Just 55 percent picked the obvious “correct” answer: “just as important.”

The scaremongering picks-up as the poll goes on, with subsequent questions asking respondents to rate the “importance” of a host of possible dire consequences of industry failure. Not that there are any guarantees that a bailout would prevent or solve any of these sinister symptoms. Just “which ones scare you the most?” Of course, when these questions meet with even the tiniest amount of context, the Hart poll’s results begin to look like the PR stunt they are.

Alternatively, a Rasmussen poll which asks the respondent to examine the entire economy and base priorities from there finds that 45 percent of Americans oppose a GM bailout, with 20 percent undecided. The same poll shows that the automotive industry has actually fallen eleven points as a priority since March 2007. Oh yeah, and 80 percent were “concerned the government is getting too involved in the private economy.”

Again, this is in the context of the larger economic picture. Only by looking at the auto industry through the wrong end of a telescope could Hart achieve the results his clients paid for.

Bias is evident enough in the substance of the post (have a look for yourself). But a quick peek at Hart Associates’ online client list is the final piece of the puzzle. Politically, it’s all Democrats, many from automaker states (with their party affiliation left unstated). On the corporate front, Hart’s benefactors include “DaimlerChrysler,” as well as notorious federal teat-sucklers Boeing and Fannie Mae. Then there’s the United Auto Workers, the AFL-CIO, Teamsters, SEIU and other unions, large and small.

In short, Hart works for this country’s biggest bailout backers, from the worlds of industry, politics and labor. Including of course, the big Kahuna: GM. As the Detroit News puts it, “General Motors Corp. paid for the poll but had no input or review of the design, methodology, content or interpretation.” Then again, why would they handsomely reward Hart if he wasn’t pro enough to give them exactly what they wanted, without them asking?

In any case, opinion polling, as Hart himself lamented, is a dark art. He correctly identified its significant shortcomings a long year ago– only to appropriate the very tactics he denounced in aid of a multi-billion dollar giveaway to failing companies.

And they say the master’s tools will never tear down his house.

By on July 31, 2008

The man and his legacyBuzz Hargrove doesn't mince his words. As demonstrated in Part 1 of this interview, the outgoing Canadian Auto Workers leader is fully aware of the Detroit domestics' dire financial peril. What's more, Buzz understands the balance between his members' welfare and the health of the automotive industry. Or lack thereof. "My first responsibility is to look after the interests of my members," Buzz admits. "But I tell my boys to look after the industry too. At every meeting." So, how's that going?

Not well. It's evident that Buzz Hargrove has little respect for the men who run the companies that employ his members. "We've made sacrifices. They have no sense of sacrifice."

"[Chrysler CEO] Bob Nardelli's big claim to fame, when he came in, was that he wouldn't need a big salary because of what he made at Home Depot. But today, he still won't disclose his salary." It reminds him of Lee Iacocca's first year as Chrysler chairman. "He came on saying he would only be paid $1/year. What he didn't tell you was next year he picked up $21 million. I'd take $1/year if you paid me $21 million the next year."

It's a credibility gap that irritates Hargrove and offends his political beliefs. "It's the guys at the top looking out for the guys at the top. That's capitalism."

Hargrove characterizes Ford CEO Alan Mulally and GM CEO Rick Wagoner as bright guys who understand the car business but can't get it done; they can't stop their companies' shrinking market shares. Again, Hargrove lets Chrysler's Nardelli have it with both barrels.

"I'm not convinced he's the right guy. It's a very complex industry. [Cerberus boss] Stephen Feinberg told me he hired him over Tommy [Lasorda] because he was the only one who admitted Chrysler was in trouble. That's true, but I'm not sure those are the best credentials to pick someone to run a multi-billion dollar business."

Cerberus itself was a source of controversy for Hargrove. Asked why he originally opposed the takeover and then supported it, Hargrove recounts a meeting with Feinberg. "They assured me they would continue to invest in Canadian operations."

"GM said the same thing," I counter.

Hargrove suggests it's not his fault that he took the auto execs at their word. Equally surprising, he isn't worried about the Canadian auto industry's future. I ask him if Canadian labour costs are scaring away automakers.

"That's completely ridiculous," he declares without hesitation.

"Chrysler just committed to making the new Caravan in Canada, Ford invested in Windsor, and GM committed the Impala. Labour costs are only a component. If it was such a big cost, we wouldn't have had any new investment. They've spent billions here."

You get what you pay for, according to Hargrove, citing Oshawa's quality ratings among the GM family of plants. As to what taxpayers pay for, Hargrove is unrepentant about asking for government bailouts.

"The CAW pays the educational costs for thousands of its members. We are one of the largest tax bases in Canada. When things are going well, we don't ask for taxes back. What we're asking for is our own money. All we want is for [the governments of Canada and Ontario] to respect that."

When I bring up the recent $350m investment announced by Canadian Finance Minister Jim Flaherty (and, oddly, current MP for Oshawa-Whitby), Hargrove's composure begins to fray.

"That's peanuts. That won't even open a bicycle plant. This is a billion-dollar industry."

"Flaherty never got it – not when he was at Queen's Park [as an MLA for Mike Harris' provincial government], not now."

 Another political irritant for Hargrove: the current push for free trade. "The old Auto Pact turned an industry around for 20 years. The volume of imports in North America is so high, higher than Europe and Asia."

So high, in fact, that Hargrove rejects all comparisons to the heavily-unionized car industry of 1960s Britain. "It's two different industries completely." Hargrove points out that Europe and Asia didn't open their markets as freely as Canada and the USA, which gives them a huge competitive advantage on the global scale.

"They wanted to push through that free trade deal with Korea. I met with Stephen Harper and with Flaherty, and they could not disagree with me. These are free market guys. It was not a good deal for us."

Hargrove feels vindicated that the deal fell through. But he maintains that the current situation still favours foreign manufacturers.

 All of which suggests Hargrove is leaving a bit of work behind for his eventual successor. Asked about the timing of his departure, Hargrove lays it out. "I've changed it so that retirement is mandatory at 65. It can be tempting to stay on too long. I have to set the example. My credibility is very important to me."  

By on July 30, 2008

“I still love it. If I were 55, not 65, I’d be doing this for another 10 years.” Buzz Hargrove describes himself as "full of piss and vinegar." Well exactly. The combative Canadian has been instrumental in his country's union movement since 1964, when he represented a couple of thousand employees in Chrysler's Windsor plant. Now, having announced his 2009 departure from the Canadian Auto Workers' (CAW) presidency, Hargrove's enthusiasm for the labour movement remains undimmed. "I still love it," he says. "If I were 55, not 65, I'd be doing this for another 10 years." That said, Hargrove doesn't think Ford, GM or Chrysler will last that long.

Hargrove first came to the national forefront in 1985, when he assisted then-Canadian-UAW director Bob White in the chapter's secession from the UAW, and the subsequent foundation of the CAW. Hargrove recalls the friction caused by the UAW's top-down approach. "They were going down a road we did not agree with," he recalls.

"They were of the opinion that it had to be the same deal for everyone. We're a separate country. Some of the concessions they made, on health, on strike pay, on benefits, we didn't need to make. In retrospect, it was the best decision we ever made," he declares. "We doubled our membership [from 125k to 255k], and the UAW has gone from 1.5 million workers to less than half a million today."

If the monumental UAW/CAW split is Bob White's legacy, Hargrove's is more difficult to define. He's been CAW president for sixteen years. During that time, through tough negotiation and currency fluctuation, Canada has become one of the world's most expensive places to build cars.

Hargrove acknowledges that it's a what-have-you-done-for-me-lately world. GM-Oshawa's fate will weigh heavily in history's judgment.

"One of my big goals was to take care of Oshawa before I left." Hargrove crossed that one off the list back in May, when GM promised to continue production in Oshawa. Then GM reversed course and decided to close the Oshawa plant. Hargrove claims he was stunned by the move. And he's still bitter.

"I don't know if it's Rick Wagoner or someone else, but someone at GM management lied [to us]. They sabotaged the deal."

As for GM as a whole, Hargrove continues to wax philosophical. "The decision making is day-to-day over there. You can't run a company of that size making decisions like that." As I scribble furiously, Hargrove pours it on: "They did it for the shareholder meeting to say ‘look, we're serious about cutting costs'. The stock jumped, but it went back down."

The parallel to the recent GM-UAW deal almost draws itself: "They did the same thing for the UAW. Well, they got their VEBA, they got their two-tier pay, they got job cuts, and the stock price went up to $35. Now, they still have their VEBA and the stock price is down anyway."  

Hargrove was satisfied with Oshawa's eventual semi-reprieve, echoing local president Chris Buckley's assertion that the CAW made the "best of a very terrible situation." Still, Buzz admits the cordial relationship he had with Wagoner was "undermined" by the Oshawa events. The perceived slight prompted some unexpected candour.

"I told Rick it's not a question of if you're going to have to file for Chapter 11; it's a question of when."

My pencil literally dropped on the floor. This from the man whose accountants had a good old look at GM's books before the union signed their latest contract. Recovering, I ask Buzz for Wagoner's response to his comment: "Never." 

 "I know the reality when I sit down at the negotiating table," Buzz maintains. "You can't continue to lose market share and stay in business." Hargrove's delivered the same message to Chrysler and Ford. "They just haven't shown me how they plan to grow the business." Hargrove believes a Chapter 11 filing is unavoidable for all of Detroit's former Big Three. And he thinks sooner is better than later.

"They're delaying the inevitable. They will lose market share when they file because of consumer confidence, but they're losing it right now anyway. Everyone will take a haircut on what GM owes them, but it will allow them to retool and come out stronger."

Canada, he thinks, will be OK. "They're all making money in Canada… partly because of higher prices. It's the U.S. that is losing money, and it makes the North American numbers look bad. The assets, the plants aren't going to go away. The trustee will continue to make a hot-selling Impala until GM is ready to come back."

"What about the UAW?" I ask.

"The UAW already took a haircut on their last deal," he deadpans.

[Part 2 of this interview will run tomorrow. It will cover Hargrove's thoughts on Canadian labour costs, free trade, political involvement, Cerberus, Bob Nardelli, executive compensation and Hargrove's imminent departure.]

By on November 3, 2007

ford1.jpgIn the battle for the American automotive market, Detroit’s fighting for its life, rather than supremacy. The truth is that the so-called domestic automakers are under siege; their non-union competition forced them inside the castle walls a long time ago. And while Toyota, Honda and Nissan are busy unleashing new and improved vehicles to vie for U.S. customers’ patronage, Ford, GM and Chrysler are busy retrenching, regrouping and re-arming, dreaming of both past and future glory. And when they’re not doing that, they’re tearing each other to pieces.

The most recent and obvious evidence of Detroit’s internecine perfidy: Chrysler’s decision to cut 12k jobs, kill models and downsize production just five days after the United Auto Workers (UAW) ratified their new contract. Never mind that the move reveals the UAW’s complete betrayal of their own rank and file, who would have never ratified the Chrysler contract (if indeed they did) if they’d known of the wholesale slaughter to follow. The more important impact of this [necessary] bloodletting will be on Ford.

Now that Ford’s UAW members have witnessed the fallout from the Chrysler contract, they will never ratify an agreement without iron-clad job guarantees. And if you thought that deep-pocketed, privately-owned Chrysler needed a free hand to downsize production, pity poor Ford; the sickest, most vulnerable automaker in the biz. It’s mortgaged up to its eyeballs, losing market share by the minute and drowning in an ocean of red ink. You can see their cash burn from Cincinnati. FoMoCo can afford job guarantees like the average pistonhead can afford a Bugatti Veyron.

Could Chrysler have waited THREE WEEKS before swinging their mighty axe, so that Ford could have secured the same sort of no-strings-attached deal for their UAW members? Sure. And there’s only one reason Chrysler CEO Bob Nardelli didn’t stay his hand: to shiv his cross-town rivals. 

If you read the reactions to yesterday’s Ford – UAW deal carefully, you can see the damage the Three-Headed Dog’s automaker has inflicted on The Blue Oval Boyz. "Our goals for this contract were to win new product and investment, to enhance job security and protect seniority,” pronounced UAW Veep Bob King, director of the union's National Ford Department. Yes, well, would the UAW be stupid/brazen/corrupt enough to ask its Ford members to ratify a guarantee-less contract after the Chrysler massacre? Not if you take UAW boss Ron Gettelfinger at his word: "We encouraged Ford to invest in product and people."

In fact, Ford needs to follow GM and Chrysler and invest in getting RID of products and people. They have too many brands, models, employees and production capacity to survive. While Ford’s new union contract includes a huge payment into the UAW’s inconceivably large, eminently lootable VEBA health care superfund– securing the automaker a cost-reducing two-tier wage system– Chrysler has made sure that Ford can’t downsize in time to reap its benefits.

And what of GM? It must be said that GM’s sitting relatively pretty in all this. With the help of the UAW management, they got away with making empty job guarantees to their union workforce (we’ll give plant X the new car– you know, IF there’s a new car). They’re now free to slice production to match demand, and slice they have. Even better, they’re eating Chrysler and Ford’s lunch. 

Check out last month’s sale figures. Compared to October '06, GM sales rose by 3.4 percent. Did the market expand? No. Did Toyota, Honda or Nissan sales slip, indicating that The General’s much-hyped new or revised products harvested conquest sales from the transplants? Hell no. The salient stat is that Chrysler and Ford sales plummeted. While there’s no hard data on this, common sense suggests that American car buyers who tend towards domestics (a well-documented predilection) are switching their patronage to GM.

We’ve mentioned that old joke about the “buddies” chased by the bear who realize that they only have to outrace each other to survive. Well, there you go. GM’s in the lead and Chrysler’s tripped Ford. Which is all very well and good for The General and The Dog, but Ford still has a secret weapon (that nobody sees): bankruptcy. While GM and Chrysler have dropped some of their union-related baggage through clever negotiation (i.e. paying off the UAW VEBA-wise), Ford could lighten even more of their load through Chapter 11.

I don’t mean UAW pay or benefits; as [non-co-opted] union members maintain, that’s not the real issue. I mean dealers. All three so-called domestics are hamstrung by their bloated dealer network, which prevents them from consolidating models and killing brands. If Ford files, they can ditch their duff dealers, drop bad brands, beat-up (not remove) the UAW and emerge a far leaner and meaner carmaker than either Chrysler or GM. 

Of course, none of this gets rid of the "barbarians" pounding on Detroit's gates.

By on October 11, 2007

gettel.jpgIn this morning's Detroit Free Press, Tom Walsh declares that United Auto Workers (UAW) president Ron Gettelfinger had to "flex worker's muscles" by staging a six-hour strikelet against Chrysler. Gettelfinger "felt compelled to deploy the biggest weapon in his arsenal, the strike" to get agreements from GM and Chrysler. Granted, a strike is any unions' ultimate bargaining tool. But get real. I've had doctor's appointments that lasted longer than the Chrysler "strike." Exactly what did the UAW accomplish yesterday– besides costing its members six hours' pay?

When Detroit was king of the American automotive hill, The Big Three were loathe to shut down an assembly line. Factories were churning out cars 24 hours a day; they were making billions by feeding the American public mediocre products based on other mediocre products. So the automakers gave the union pretty much whatever they wanted, just as long as they helped keep the money train on the track and on time.

Then them damned furriners showed up and spoiled the party. Fast forward forty years and everything is turned upside down. The Big Three Minus Twenty Percent are losing money on almost every car they produce in North America. Their "foreign" competitors have invaded their home turf. With the weak dollar, more automakers are threatening to set up operations stateside.

On the union side, UAW membership is the lowest its been in decades, as factories shut down and workers take buyouts. Apparently no one bothered to tell the UAW they no longer have the upper hand. At the UAW's bargaining convention in March, Gettelfinger said they'd fight in whatever way necessary in order to defend their members' pay and benefits, even "if need be, on the picket line." 

Perhaps he should have taken Teddy Roosevelt's advice about soft talk and big sticks. After issuing nuclear option threats, Big Ron had no alternative but to call a strike at some time during the negotiations. He had to put his members' money where his mouth was. 

So Gettelfinger decided he'd take on GM and call a strike. Industry analysts were all abuzz, speculating how long it would last. The more jaded amongst them wondered how long before GM followed protocol and caved to whatever demands the UAW was making. Two days later it was over.

UAW leadership claims the strikelet broke the logjam with GM and forced their employer to settle on terms favorable to the membership. In reality, shutting down production for two days did GM more good than harm. GM entered September with a 67-day supply of vehicles, most of them 2007 models. The strike gave them most of what they wanted– a two-tier wage system and a health care VEBA. AND it saved them two day's union pay and cleared a bit of inventory. When seen in this perspective, this UAW strike was, at best, a mosquito bite on an elephant's ass.

The six-hour coffee break at Chrysler was even more meaningless. Chrysler had a 72-day supply of vehicles going into September. Six hours didn't even give time for the impact wrenches on the assembly lines to cool down. The details of the agreement aren't available yet, but there's no way the UAW's token tantrum got Cerberus to change their mind on anything.

Ford's next. They had a 68-day supply of vehicles going into September. No question: they're in the worst financial shape of The Big 2.8. The Blue Oval Boyz will be demanding the most back from the union. How will the union respond? Based on performances so far, they'll probably have the workers bow their heads for a moment of silence on the assembly lines, and then capitulate on all fronts (as long as they get some more billions into the plunder-ready health care VEBA). 

The Freep's Walsh sings Gettelfinger's praise. He claims Big Ron "is on the verge of doing something … historic, forging the most important UAW contracts since the GM sit-down strikes of 1936 – 37." David Cole from the Center for Automotive Research agrees: "When all this is over we'll look at Ron Gettelfinger and say this is an amazing guy to have pulled all this off."

The only thing Gettelfinger pulled is the wool over his members' eyes. The entire strike scenario was just a way to get them to buy into a contract that gave up a lot more than it gained. By having them walk a picket line, even for a few hours, he convinced them they had a part in making management cry "uncle."  They'd look pretty foolish to reject a contract they went on strike to get. 

And it worked. Sixty-six percent of GM's UAW workers ratified their new contract. Gettelfinger called the approval a "triumph." He crowed: "we helped protect middle-class manufacturing jobs in communities throughout the United States." Of course, in protecting them, he put their retirees' health care benefits at risk, lowered the wages for many of them and got unenforceable promises of future jobs. That doesn't sound much like a positive strike outcome to me, in either the short or the long-term.

By on September 26, 2007

uaw_gm.jpgThe strike is over. The United Autoworkers Union (UAW) has announced they've reached an agreement with General Motors which will lead to a new contract for their members. Everyone's gone back to work. Everyone is happy, and all's right with the world– at least until the full impact of the agreement hits the workers. At that point, they might realize that they gave up two days' pay and got practically nothing in return. Let's see how it adds up.  

The exact details of the agreement haven't been released. They won't be final until the members ratify the new contract. However, the Detroit Free Press has released what "a person briefed on the deal said" would be included in the new contract. 

The biggest change: the establishment of a Voluntary Employee Beneficiary Association (VEBA). This health care superfund is designed to pay for UAW members' health care for "the next 80 years" (according to UAW boss Ron Gettelfinger). For GM, the VEBA unloads transfers health care responsibilities to the union. Industry soothsayers are currently pegging GM's contribution to the VEBA at around $35b. That's substantially less than the over $50b bill GM faced.

The amount of cash vs. stock GM will use to pay for the VEBA is the big question hanging over this part of the deal. Even if GM has to pile on even more debt to git 'er done, the Street loves this VEBA. So it's a big win for GM– for now. Whether or not it will work out for the UAW is a whole 'nother story, as it puts the union into the unfamiliar position of administering their members' soaring health care costs and raises the possibility of massive fraud and mismanagement. Score: GM 1, UAW 0.

GM and the UAW disagreed over wage structures. GM wanted to institute a two-tier structure where new workers receive lower pay and different benefits from current workers' compensation. Of course, the union found the idea entirely unacceptable. And then gave in. However, since this fits right in with the "just don't mess with my benefits" mentality most UAW members exhibit, GM gets the win. Score: GM 2, UAW 0.

The UAW also agreed on different wage structures for "non-core" jobs: those workers who don't actually assemble vehicles. As compensation to non-core workers who currently enjoy full pay and benefits, GM will offer a "targeted special attrition program" to "relieve the pain of the wage reductions." In other words, GM will eventually pay some of their workers less. Score: GM 3, UAW 0.

The new contract doesn't include any wage increases per se, but it does include a $3k bribe to accept the contract signing bonus. The signing bonus will cost GM much less than a strike or any other form of compensation. Score: GM 4, UAW 0.

The contract contains another bonus: lump sum payments over the last three years of the four-year contract. The bonuses are roughly equal to three percent of annual wages. That works out to an $1,800 payment for someone who makes $60K per year. It's still a lot cheaper than across-the-board raises and if it's tied to profits, well, what profits? Score: GM 5, UAW 0.

Other terms in the agreement include the "possibility" of GM maintaining the level of its union workforce in the U.S. and modifications to the jobs bank program. The details of the jobs bank changes aren't available yet, so it's too early to score that one. Getting even the hint of a promise that GM won't cut its UAW workforce is a major point for the union. Score: GM 5, UAW 1.

The UAW's national leaders will convene late this week to vote on the deal. The full membership will vote on it this weekend. The UAW's president is optimistic it'll be approved. "It's an agreement we're proud to recommend to our membership," Gettelfinger crowed. "This contract will be better in some ways; it will be different in some ways. Our retirees will be exceptionally pleased with the contract." 

Different? Of course, GM CEO Rick Wagoner had his sound bite as well: "This agreement helps us close the fundamental competitive gaps that exist in our business. The projected competitive improvements in this agreement will allow us to maintain a strong manufacturing presence in the United States along with significant future investments."

Wagoner's statement reveals an inconvenient truth: GM management continues to see labor at the root of all their problems. Unloading retiree health care costs, not giving raises and paying new workers less won't close any "fundamental competitive gaps." To be competitive they have to offer a competitive product.

The new UAW contract may improve the bottom line for a few quarters, but until GM sorts out its brands, trims its dealers and starts designing world-class, brand-unique products for those workers to assemble, there's nothing any contractual fine-tuning can do to save the company's failing North American operations.

By on September 10, 2007

denugroove.jpgDesperate times call for desperate measures. Facing falling membership, the United Auto Workers (UAW) is rapidly expanding into non-automotive industries like education and health care. Meanwhile, the UAW continues its full-court press against Toyota and Honda's American factories. So far, the union's attempts to transplant unionism into the transplants' plants have been an abject failure. But try they must. And now there's a new object of their affections: Japanese parts maker DENSO.

Sean McAlinden, analyst for the Center for Automotive Research, outlines the target– and the stakes. "For the survival of the union, they have to start organizing the Toyota system in North America. Right at the head of the line is DENSO.''  

DENSO is Japan's largest auto-parts company. Twenty-one percent of DENSO's total $31.1b annual sales come from North America. Stateside, DENSO has ten factories in six states employing over 6,800 [non-union] employees. DENSO supplies all three U.S. automakers and Toyota (which owns 23 percent of the company). In North America, 45 percent of their business lies with The Big 2.8. And here's where the plot thickens.

The Big 2.8 are currently negotiating their UAW contracts. One of their main goals: dump transfer responsibility for retirees' health care onto the union via a union-administered Voluntary Employees' Beneficiary Association (VEBA) superfund. The union is fully aware that Wall Street is hot for the deal, which means the automakers want the VEBA more than anything else (save sales). The UAW is using this leverage to their full advantage.

U.S. labor laws allow employers to openly campaign against a union's attempts to organize their workers. UAW negotiators have threatened to oppose a VEBA unless the U.S. auto manufacturers pressure DENSO to "remain neutral" while the UAW tries to organize their workers. 

According to Bloomberg, General Motors has indicated a willingness to roll over do as the union asks. No surprise there: GM has the most to gain from a UAW-run VEBA (and the most to lose if they don't set one up). The jury's still out on Ford's and Chrysler's reaction. But let's face it: if a mobster was leaning on sports promoter to pressure a fighter into taking a dive, it would be called  extortion. Apparently, when the union does the same sort of thing, it's called "negotiation."

No matter what you call, this does not bode well. If The Big 2.8 are doing business with DENSO, it's because DENSO can supply the best parts for the lowest price. Applying pressure to DENSO could triger a counter-strike (so to speak). While 45 percent of DENSO's North American business comes from Detroit, that's 45 percent of the 21 percent of the company's total business that's done in North America, or just over 10 percent of the total. If DENSO tells the UAW's Detroit puppets to go pound sand, the company retains 90 percent of their current business. Safe!

But not so safe for Detroit. How long do you think it would take GM and Friends to find other suppliers, and how many UAW production lines do you think they'd have to shut down in the interim?

Alternatively, DENSO could agree to step aside and allow the UAW to plunder organize its workers. The cost of the parts they produce will rise accordingly. The Big 2.8 are complaining that union labor costs are driving them out of business. If Detroit's looking for ways to cut production costs and increase profits, forcing their suppliers into a situation where they'll have to charge more probably isn't a helpful strategy.

Hopefully, GM and the others will come to their senses and refuse to play the UAW's game. If they give on this one, they'll show the UAW how desperate they are. They'll signal the UAW that they're willing to be the union's bitch in other power struggles. But The Big 2.8 want that VEBA so bad it hurts. So is it damned if they do, damned if they don't? More like same old, same old. Once again, it's a question of short-term versus long-term thinking. 

If there's one thing American automakers need to learn, it's how to say no to those forces that have steered them onto the edge of the abyss, and hold fast for a brighter future. While there's no doubt that GM, Ford and Chrysler need to rethink their own role in creating their current predicament, acquiescing to the union's ambitions at this critical stage of the game would be like cutting off their nose so they can smell better. Going along to get along didn't work then. It won't work now.

By on August 28, 2007

uaw-logo-894px-feb-13-2006-15-11-14.jpgSince the late 30's, the UAW and America's home-grown automakers have been locked in a balance of terror. The arrangement has kept the peace- at a price. Which was pretty much anything the UAW wanted. No-cost life-long health care? A "jobs bank" for superfluous workers? Sure! The Mutually Assured Destruction principle worked as long as the automakers could afford it. But now they can't, and the question is no longer who will blink first, but how much the UAW is willing to surrender to survive. 

Going into this year's contract negotiations, GM, Ford and Chrysler have all made it abundantly clear that they expect the UAW to make concessions on health care, wages and working conditions. Of course, the UAW's leadership bared their teeth and growled; workers at several plants voted to strike if necessary. The saber-rattling worked in previous years, so why not try it again?

For one thing, the UAW is a pale shadow of its former self. In 1969, the organization counted 1.53m members. Today, the union can claim no more than 180k dues-paying autoworkers. The days when union bosses could summon powerful politicians with a single Vito Corleone-esque phone call are over. Less contentiously, Dana Johnson, chief economist of Comerica Inc., says the unions are no longer "the pacesetters of the overall economy." 

Equally important, the union's employers are not what they once were, either. Setting aside the fact that all of them are mortgaged up to their eyeballs, staring down the barrel of bankruptcy, The Big 2.8 are no longer land-locked enterprises with distant relatives.

Ford and GM have established production facilities in China, India, Thailand, Brazil, Mexico and other low-labor-cost countries. What's more, U.S. car brands have "gone native," mixing their DNA with foreign-made vehicles. GM sells German Opels as Saturns, Korean Daewoos as Chevrolets, and Australian Holdens as Pontiacs. It's only a matter of time before Chinese Buicks hit the scene.  

Chrysler also sells "hecho en Mexico" vehicles, and recently signed up with a Chinese partner. Ford's moving as quickly as it can towards "globalization." In short, while The Big 2.8 still need their UAW-staffed U.S. production facilities, they don't rely on them to the extent that they did merely a decade ago. The threat of out-sourcing looms large over many a UAW factory, tipping the balance of power in the automakers' direction.

At the same time, the UAW must now deal with the end of pattern bargaining, where all three domestics signed identical union contracts. While the union itself signaled this change by refusing to offer DaimlerChrysler the same "health care giveback" afforded GM, Chrysler's transfer to private equity group Cerberus guaranteed the end of Detroit's "all for one and one for all" arrangement.

For example, Ford and GM will most likely offer to establish a multi-billion dollar union-controlled health care fund to ditch their endlessly escalating health care costs once and for all- eventually. As befits an equity fund, Cerberus is more interested in a short term solution. And no wonder: they had enough trouble raising the funds to buy Chrysler in the first place, and the credit markets have contracted since. A gigantic lump sum payment is simply out of the question.

For the UAW, two- (or even three-) track negotiations are an enormous headache. If the union tries to hang onto pattern bargaining, one or more of the automakers could choose the nuclear option. If the UAW allows different contract terms for different companies, they're bound to piss off part (or all) of their membership. 

In the face of this diminution of their bargaining power, the UAW has tried to open a fourth front: Toyota. This morning, members of [a UAW invention called] the Kentucky Workers' Rights Board submitted a list of "recommendations" for improving working conditions at ToMoCo's KY factory. Needless to say, company executives refused to meet with them. Toyota spokesman Rick Hesterberg stated, "If they have recommendations or proposals for us, they can leave them here for us to review."   

The UAW doesn't stand a chance. If the union looks set to organize their plants, Toyota's bound to retaliate by closing their only UAW facility: the NUMMI plant in California. If it escalates from there, Toyota's top dogs could pull part of their U.S. production back to Japan. And last but not least, Toyota builds Camrys in China; if anyone can export vehicles to the American market from China, it's got to be Toyota.

The UAW's effort to glom onto Toyota is a quixotic campaign that only serves to remind industry observers how the mighty have fallen. In truth, the UAW's hold over domestic automakers is weak, and getting weaker. While none of The Big 2.8 are bound to do anything that looks like union-busting, they're methodically positioning themselves to operate without any UAW members. But even that may not be enough to guarantee their survival. Mutually assured extinction?   

By on August 9, 2007

tommy.jpgWhen Daimler gave sold Chrysler to Cerberus, it seemed as if things were looking up for the beleaguered automaker. With a return to American ownership, they no longer had internal factions gunning for each other. Cerberus spoke highly about Chrysler's leadership; they would take a "hands off" approach to running their automotive acquisition. They offered union leaders assurance: we're in it for the long run. No need to worry about "strip and flip." And then Cerberus announced that Robert Nardelli would take over the reins. Ladies and gentlemen, the three-headed dog is finally baring its teeth.

Mr. Nardelli has a reputation for getting results. Before the exec was asked to leave Home Depot's employ earlier this year, he doubled the company's sales. OK, Nardelli's tenure coincided with one of the biggest building booms in years, but he successfully expanded the franchise into Mexico and China and increased earnings 20 percent for four straight years. The fact that Home Depot's stock price fell eight percent during his reign is irrelevant to Chrysler; Cerberus is a privately owned firm that doesn't have to answer to stockholders. 

While at Home Depot, Nardelli earned a fearsome reputation as an abrasive and ruthless cost-cutter. While profits soared, customer satisfaction and employee morale plummeted as he replaced experienced full time employees with cheaper part-timers. Nardelli also alienated store managers with his insistence on centralized command and control and micro-management. At the Depot's home office, "Boot'em Bob" replaced 98 percent of the top executives within the first five years.

Nardelli's forced departure from Home Depot was as controversial as his tenure. Of his $210m severance package, House Financial Services Committee Chairman Barney Frank said, "Mr. Nardelli's contribution to raising Home Depot's stock value consists of quitting and receiving hundreds of millions of dollars to do so."

So that's who's at the helm now: an ironfisted, hard-charging beancounter who has no qualms about dumping experienced employees to save a few bucks. He's a perfect fit with a company that emphasizes turning a profit as quickly as possible and doesn't mind tearing new acquisitions apart to do so.

And what of former CEO Tom LaSorda, the guy who had to deal with all the crap Daimler dished out, who Dieter Zetsche ordered to cook up a turnaround plan even as Chrysler's German masters were making plans to dump the company? Indeed, it's only been a few weeks since Cerberus Chairman John Snow praised LaSorda and his turnaround plan at a Detroit Economic Club luncheon.

The party line: LaSorda "agreed" to stay on as vice-chairman and president. Nardelli says LaSorda will "continue to have primary interface, responsibility and authority of working closely with UAW."

Of course they're going to keep him around for that.  LaSorda comes from a family of union activists; he has a good relationship with both the United Autoworkers Union (UAW) and the Canadian Autoworkers Union (CAW) leadership.

Nardelli, on the other hand, is about as non-union as they come. During the exec's tenure at GE, roughly six percent of the company's workforce was unionized. It's no secret that Home Depot has an almost Wal-Mart-like aversion to unions. Nardelli may not be the last person the UAW and CAW would want to see sitting across a negotiating table, but he's definitely at the back of the line. 

Given Boot'em Bob's rep for ousting execs, once "Tommy" (as Nardelli calls him) finishes dealing with the unions, LaSorda's golden parachute will unfurl. Gerald Meyers, a professor of business management at the University of Michigan and former chairman of American Motors, sums up the situation: "His days are numbered. I thought they were going to give him six months. They aren't going to give him six days." 

Burnham Securities' auto analyst David Healy agrees.  "It's hard to interpret this move in any other way than they didn't like LaSorda's record. Clearly, they were not happy with LaSorda or they would not be making this change."

How does all this sit with the unions, who are smack dab in the middle of negotiating their new contract? UAW President Ron Gettelfinger is taking his usual ask-me-no-questions, wait-and-see attitude about the management change. Equally characteristically, CAW president Buzz Hargrove hasn't been shy about expressing his "reservations." Hargrove said he was "surprised and concerned" by the choice. "We left [the initial meeting with Cerberus] with an understanding… that Tommy and his team would remain intact."

This doesn't bode well for Chrysler's hopes of remaining a fully integrated American automaker. Clearly, Nardelli is Cerberus' hatchet man. He has no compunction about making changes to produce short-term profits, regardless of the long-range ramifications. "Strip and flip" may eventually look like it would have been the kindler gentler option. Pre-Nardelli, pre-Cerberus, Chrysler was standing on the ledge looking into the abyss. Nardelli is about to kick it off.   

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. 

By on July 19, 2007

gmc.jpgWhen it comes to the United Auto Workers (UAW) contract negotiations with The Big 2.8, employee and retiree health care is the 1000lbs. monkey on the automakers' backs. General Motors' health care obligations total $46b, Ford clocks in at $23b and Chrysler's looking at an $18b tab. And consider this: GM's 432k retirees pay roughly $750 per year out of their own pockets for medical care, while their former employer shells out $3.3b on their medical benefits. That's a Hell of a lot of bananas.

The Big 2.8's beancounters estimate that retiree medical coverage adds $1k to $1.5k to the price of every new car and truck they sell. In response, the UAW has been calling for a national health care policy. But even if Michael Moore's mantra passed into law tomorrow, it would take years for the new policy to have any effect on the automakers' bottom line. And right now is when the automakers need relief.

The Big 2.8 has to do something at the bargaining table; at the least, they must show both Wall Street and their stockholders they're not down for the count. So they've decided to go cold turkey and foist all their retiree health care obligations onto the UAW. 

There is precedent. In last year's contract with the United Steelworkers (USW) union, Goodyear agreed to transfer all their USW retiree medical obligations to a Voluntary Employees' Beneficiary Association (VEBA).

A VEBA is a trust fund set up specifically to pay eligible medical expenses. It's funded by employer contributions, payroll deductions and other sources (e.g. cashing-out unused leave upon retirement). The assets in the account are tax exempt, and they can be used to pay medical expenses directly or reimburse participants.

At the time the contract was signed, Goodyear's total health care obligation to their retirees stood at $1.2b. Goodyear will make a one-time $1b payment in cash and stock into the VEBA. After that, the company will have no further obligation to their retirees, current or future. They get to move a $1.2b liability off their balance sheet. In return, Goodyear's retirees get medical benefits that can't be touched should Goodyear file for bankruptcy.

If The Big 2.8 succeed in setting up a similar arrangement with the UAW, the initial payments would be high, but the long term savings would be impressive. If GM got the same deal as Goodyear– paying 83 cents on the dollar– they'd end up forking out a bit over $38b to rid themselves of a $46b debt. Ford would pay just over $19b, and Chrysler could shell out just under $15b. A lower rate would save even more money.

It's likely the UAW would agree to such a plan. Again, there's precedent. When the UAW signed its "historic health care giveback" with GM (upping members' contributions), the General set up a $3b company-controlled VEBA [partly] to cover members who couldn't afford the additional payments.

The UAW knows they've got to do something. At a union seminar earlier this month, UAW vice president Bob King acknowledged that Ford could easily be forced into bankruptcy. Assuming the UAW wants to help Ford avoid Chapter 11 (and believes it can), and assuming Ford could find the money to fund the plan, a union-controlled VEBA would certainly be viewed as "helpful."

And of course, if Ford gets a health care VEBA, GM and Chrysler will want one too. And that means the UAW could end up running one massive medical fund for all their automotive industry retirees. And, as the UAW has been recruiting members from other industries, it's logical to assume other employers would want to join the VEBA club.

The U.S. health care industry is one of the UAW's growing "partners." That's right: the UAW's organizing an industry they could soon be paying to support. In fact, under the VEBA scheme, the UAW would become their own customer. The prospect of the UAW entering into the health care management business creates some interesting "what ifs?"

If the union went looking for the lowest health care services rates possible (as most medical plans do), would they refuse to pay for care at a hospital where the charges are higher to cover the increased benefits paid to their UAW employees? Would they make their retirees use a non-union medical facility because it costs less? Would they call for a strike at a hospital where it could put their beneficiaries at risk of sub-standard care when the nurses and technicians walk out?

If the UAW balks at a health care VEBA, the automakers may file for Chapter 11. If the union agrees to a union-controlled VEBA and an automaker goes belly-up before the deal goes down, the union's stiffed. Even if everyone stays in business, a UAW health care VEBA will encounter the exact same inflationary pressures formerly experienced by the union's previous employers AND it will generate tremendous conflicts of interest. Regardless of what happens, someone is going to be unhappy with the outcome. 

By on July 3, 2007

07_tacomaacab2.jpgAccording to the now-infamous Georgetown, Kentucky memo, ToMoCo’s brass are concerned that their workers’ wages are growing faster than the company's profits. To rectify this situation, Toyota’s newest plants will pay workers based on local manufacturing wages– not United Auto Workers (UAW) scale. Naturally, the UAW is using this as flamebait to organize Toyota’s stateside operations, starting with Georgetown. Toyota’s launched its next salvo in this ongoing war of wages: they’re contemplating pulling Tacoma production from NUMMI.

GM and Toyota formed NUMMI (New United Motor Manufacturing Inc.) in 1984. The Fremont, California facility was Toyota’s first foray into American manufacturing and GM’s chance to learn about Toyota’s take on lean manufacturing. The 380-acre NUMMI facility currently cranks-out approximately 250k cars (Toyota Corolla, Pontiac Vibe) and 170k trucks (Toyota Tacoma) per year.

The NUMMI plant employs around 5440 “team members.” Some 4550 of these employees also play for the UAW. This makes NUMMI the only Toyota plant using UAW labor and one of the highest-labor-cost manufacturing facilities in the entire American automotive industry.

Some NUMMI workers earn more than $32 per hour, plus benefits. Combine this compensation with the joint venture's location– a high-cost area away from Toyota’s major suppliers– and it’s no wonder the factory’s drawn negative attention from its Tokyo taskmasters. 

In a prepared statement, NUMMI officials recently declared that the plant must do more to improve its “competitiveness” and stated it would only stay in business “only if it is able to do so.” That’s management-speak for “if we can’t get labor costs under control we’re abandoning this turkey.” 

Moving Tacoma production from Freemont to a lower-cost production facility does not pose insurmountable difficulties. Toyota’s Tijuana plant already makes the beds for all Tacomas, along with small quantities of complete trucks (34K in ’06). For the money saved in labor costs, the world’s largest automobile manufacturer could expand their Mexican production facility to accommodate increased Tacoma production.

Toyota also has excess capacity at their new Tundra plant in San Antonio. As the automaker builds Tundras in both Texas and Indiana, they could shift production around to open up some spare capacity for the Tacoma, at either location. And Toyota could also modify plans for their new plant in Elvis' birthplace (Tupelo, Mississippi) to build Tacomas as well as Highlanders.

The UAW knows Toyota’s serious about walking away from NUMMI. Last week, leaders from Local 2244 and 890 told their members that they stand a good chance of losing Tacoma production and warned “we are now fighting to exist.”

There are still a couple of years before the axe falls; the current UAW contract at NUMMI expires in August 2009. In the meantime, a “no layoff” clause means Toyota can’t trim costs by jettisoning employees. So the union must devise other alternatives to entice Toyota to change their mind.

The UAW’s already started making nice with management, offering proposals for the increased use of temporary employees and other cost-cutting measures. These stopgap measures may or may not satisfy Toyota. The Wall Street Journal recently reported that high level Toyota executives are actively contemplating cutting back North American production.

According to the report, Toyota’s U.S. production capacity is growing faster than sales, and a cheap yen makes importing cars from Japan a cost-efficient proposition. Toyota’s pulling back on plans for new plants and revamping pay policies. They’re on a cost-cutting spree, and anything between the Pacific and the Atlantic is fair game. 

NUMMI's Toyota bosses will be watching the outcome of this summer’s UAW negotiations with The Big 2.8 with considerable interest. As Toyota products account for the vast majority of NUMMI production, when it comes to any decisions regarding the facility's operating costs or, indeed, its future, Toyota calls the shots.

Toyota is sure to use the upcoming negotiations as a barometer of the local UAW’s willingness to accept wage or benefits cuts and/or changes to work rules. These concessions will be the deciding factor when Toyota makes their final decision on whether or not to maintain California production.

But two years is a long time to wait if you’re trying to cut costs. And there’s just so much you can do with suppliers, utilities, work rules and other expenses. Short term, Toyota has two choices: coerce the UAW into giving back some of what they gained in the last contract or move production elsewhere. Look for the Japanese automaker to take the path of least resistance.

The uncertainty surrounding NUMMI reflects the fact that the union’s future isn’t looking too rosy right now. Delphi’s UAW workers just took a massive cut in potential earnings and other benefits. The upcoming negotiations with The Big 2.8 seem to have the deck stacked in Detroit’s favor. And in spite of the UAW’s attempts to gain ground in Toyota’s plants, Toyota still holds the trump card. 

By on June 27, 2007

delphi2.jpgLate last week, the United Auto Workers union (UAW) and Delphi signed a tentative contract. Even though the two sides spent 21 months wrangling over the deal, Delphi's remaining UAW workers have only a few days to ratify the agreement. To make sure they do, the UAW has dispatched "national leaders" to perform the requisite "sales job" on Delphi's denizens. Once again, as always, the union expects their membership to do as they're told. Only this time it may not work.

Delphi separated from GM in '99. The newly-independent parts maker inherited a hefty UAW-negotiated wage structure and 4K laid-off employees (drawing full pay in the "jobs bank"). When Delphi filed for bankruptcy in October 2005, the company had 185K workers on their payroll. Of these, roughly 25K were UAW members, averaging about $27 per hour plus benefits. The new management team wanted to kill the jobs bank, cut union wages by more than half and trim benefits.

Bankruptcy or no, the UAW wasn't having it. They threatened an industry-killing strike. Delphi responded by threatening to void the UAW's contracts in federal court. GM and Judge Robert Drain weren't having that. Negotiations dragged on, and on, and on.

Meanwhile, GM shifted away from Delphi as a supplier. Both companies used the interregnum to radically downsize their union workforce (with GM's cash), move production overseas and pay their executives large bonuses (despite ongoing losses) for their amazing management skills. 

Cerberus then made a play to buy the smaller, more Eurocentric Delphi. The UAW balked at a deal that was worse than their current setup, but better than Delphi's demand. When Cerberus pulled out and bought Chrysler, GM finally stepped in and cut a deal that will cost them around seven of their borrowed billions, and just under a billion per year thereafter.  The UAW left singing GM's praises but viewing Delphi CEO Steve Miller as the demon spawn of Satan.

Under the agreement, Delphi will cut all wages to the new-hire rate, about $14 to $18 per hour. Employees with seniority will receive $35K cash annually for three years to "make up" the difference. All workers' health benefits will change to match those of new hires, with higher out-of-pocket expenses. (Needless to say, nothing was said about decreasing union dues for workers experiencing pay cuts.)

The contract also calls for [more] drastic downsizing. Some 4k of Delphi's remaining 17k employees will be offered buyout payments ranging from $70k to $140K (depending on their seniority). Delphi will close up to ten plants, give three to GM (or a third party designated by GM), sell four and keep four.   

Delphi's UAW members will now vote on the contract tomorrow (Thursday). It is NOT a lock. According to the Detroit Free Press, the mood at union meetings held at Delphi plants on Monday "ranged from relief to frustration." In fact, it may be less of a "range" and more of a "transition."

Initially, many union workers are happy they've still got jobs. The old union-bashing tool– accept our offer or we'll close this plant, move overseas and leave you without work–was in full force during the negotiations. Now that the plant issue has been resolved, the workers who've been spared obsolescence will breathe a sigh of relief, have a look at the fine print and say WTF?

For example, the $105K three-year "top up" offered to senior UAW members to compensate for the wage cut is really just a forced landing for GM-era members working at full pay. It also means those 4k higher-paying Delphi jobs are headed for extinction. Which leaves 13k [lower paid] newbies bumping up against a glass ceiling; these union members will NEVER earn the wages and benefits enjoyed by their elder colleagues.  

Back when there were 45k UAW members at Delphi, it's highly unlikely this contract would have been ratified. The UAW– and by extension GM and Delphi– is counting on the malleability of a smaller, psychologically-weakened workforce: the "temps." By offering this majority job security, they hope to overwhelm the GM-era workers, who are looking at three more years of their current compensation before taking a 40 percent cut in their wages. 

But the size of the remaining workforce cuts both ways; it makes it easier for a relatively small group of determined union organizers to mount a campaign against the agreement. The union knows this; hence the 21 month negotiation vs. four-day deliberation schedule. The UAW "Soldiers of Solidarity" splinter group– which published the contract on the Internet (thanks guys)– better watch their backs.

Anyway, why would the UAW agree to this kind of two-tier contract? 

You could argue that the strategy reflects a new realism from the UAW bosses. It provides the union with an exit strategy from the gold-plated wage and health care deals that threaten their host's survival– without alienating their longtime, hardcore members.

Yes but– playing it down the middle is a risky strategy. If this blows up, all bets on the future of the American auto industry are off.

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