March 31, 2009


“Our recent engagement with the union has been conducted in a constructive and open atmosphere, and I look forward to this continuing”- Henry Ford

While a bit misleading-Henry Ford adamantly opposed unions stating the UAW would organize “Over my dead body,” I bet Ford never imagined that unions would contribute so profoundly in the deteriorating and dismal state of his beloved company today. In an article by the AP and recently updated on MSNBC, President Obama’s pledged to aid the ailing Big Three automobile companies (Ford, Chrysler, GM) given a viable plan. Previously, former President Bush provided the Big Three with a loan of some $40 billion dollars (distributed for the most part between GM and Chrysler). “Obama, responding to a question… said the current was unsustainable and the Big Three would need to change their ways.” Restructuring to cut costs in order “preserve” the “symbol” of what is supposed to be Americana. In many Americans eyes this symbol represents an inability to compete, and a reliance on welfare to avoid Chapter 11. In accordance with the terms of the Bush loan the UAW (United Auto Workers) has adopted “work rule changes and reducing total hourly labor costs to be comparable to those at Japanese automakers with U.S. factories.” Well that’s a start , but it fails to address the fundamental problem and doesn‘t factor the comfortable retirement and benefits of UAW employees. While the Obama administration may suggest restructuring these companies it de-emphasizes one of the biggest proponents on why these companies are failing to compete-- the UAW. The article states that Obama “stressed the large number of jobs connected to the companies and suppliers.” Inevitably this argument is incessantly brought up somehow validating why the government should throw the lifeline to these companies, that their presence fuels X amount of secondary jobs. Arguments, include: are these jobs worth the $40+ billion dollars were loaning these companies, should we reward these incompetent, myopic firms? If people aren’t buying the cars to remain profitable then why should we, as the proverbial saying goes- catch the falling knife? (Recall the 1979 bailout of Chrysler, they sold a large part of their business, Chrysler Defense, to repay the government loan but still resulted in wide spread job loss) Researching the topic further the seemingly straightforward problem evolved in complexity and while I will not assess the history of business/union relations in America or pass judgment I will state the numbers. An explanation for the current domestic automobile situation and the pitfalls of simply eliminating the union is needed. In terms of competition , the once dominant Big Three held a vice grip around the US automobile market and could be characterized as an oligopoly. With an increase in domestic competition, the market changed to one of monopolistic competition. It is here, where the problem to remain profitable castrated the Big Three. Like many unions, industrial unions primary objective is to try to unite all workers in the same industry, to create enough leverage to be taken seriously in their demands (wage increases, benefits, etc.). This market environment while not the most efficient, still provided the U.S. automobile companies to be profitable till an influx of foreign rivals (which possessed the luxury of a non union workforce). With the U.S. governments implementation of VER (voluntary export restraints) on Japanese automobiles, foreign companies started producing cars in the U.S. While I can’t measure the qualitative nature of U.S. cars to Japanese cars during the same period I can tell you since late 2007 foreign automakers held over 50% of U.S. automobile market and is still growing. Assumptions could indicate a change in consumer preference due in part to the lack of quality amongst the Big Three. The once nationalistic cry to “buy American” has been replaced by buying quality (to be perfectly honest I’ve always had a fondness for Ford’s F-series trucks). Even that slogan has been diluted some since those same foreign automobile companies are in fact produced in factories in America (for the most part). Some facts gathered off the internet highlighting the impact of UAW compared to non-unionized Toyota.

  • Increased costs due to UAW benefits-$1,600 every vehicle of GM
  • Average GM worker-$70 an hour in wages and benefits
  • Average Toyota worker- $35 per hour (still making $100,000 in wages, benefits)
(James Sherk of The Heritage Foundation)

From this information we can safely conclude that the increased labor cost has negatively effected the business model of all three companies. Money that could be allocated efficiently for perhaps research and development has been siphoned to provide the demands of the union. The Big Three are at such a disadvantage concerning their labor force that their products are not cost effective in comparison to Toyota or Honda. The large dichotomy, means larger revenue streams for non unionized firms towards the betterment of their companies. The Big Three have little leeway in the matter of eliminating the UAW, the UAW could threaten to strike, rendering the companies futile in a competitive marketplace. Currently, the UAW has placed itself in a position where the companies can not act without it. While the UAW is not the sole reason for the failure of the Big Three it is becoming increasingly apparent that it is a large contributor. Perhaps, the lack of adapting to consumer preferences is amongst the reasons why the Big Three have found themselves in this situation, but we can not ignore the effect of the UAW. With a consumer base increasingly geared towards more fuel efficient cars the Big Three have been slow to react in a competitive manner. While unions protect workers, the unintended consequence is that they could be responsible for the loss of the thousands of jobs they sought to protect. GM, Ford and Chrysler are expected to heed Obama’s advice and cut thousands of jobs.

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