But Can You Control Other Entrants?

The United Autoworkers (UAW) is on a new campaign. The union plans to organize workers in hither-to non-union foreign-owned automobile plants in the United States. This campaign may or may not work, but in the long run it will prove futile unless the union can compete in the international market, against all international auto workers.

There are 575,000 autoworkers in the U.S. Nearly 20% work for foreign-owned plants. All of these plants are non-union. The foreign-owned plants were intentionally placed in right-to-work areas, many in the South.

The UAW is likely to have some difficulty succeeding with this campaign. The non-union workers already earn highly competitive wages and benefits. To date, these U.S. workers in plants owned by Toyota, Volkswagen, Hyundai and Honda have shown little interest in unionization.

Why would the union be so interested in this initiative? To preserve its membership. The traditional problem with unions is less the rate of wages they demand and more about the work rules they impose. These work rules reduce the productivity of the unionized plants. That has certainly been the case in the U.S. auto industry. As a result, the UAW is losing membership as UAW auto plants in the U.S. close under the onerous costs the UAW plants carry. If the union can succeed in unionizing the domestic foreign-owned auto plants to the same extent they have unionized the domestic manufacturers’ plants, they will be able to impose the same work rules and produce roughly the same productivity. The result should, in the union’s eyes, be a reduction in the rate of jobs lost in the union.

But there is a problem here. The UAW has already seen that it was unable to stop new non-union plants in the U.S. How will it stop future non-union domestic plants? O.K., let’s say they can do that. Will they also be able to stop all foreign non-union plants from becoming established and growing? Certainly not. Unless the union membership can compete on an international basis with competitive costs and productivity, this unionization effort is wasted money. If it succeeds, the U.S. loses more plants to plants located offshore. Union membership still falls.

It seems that one of the problems for unionized employees is one of definition. Union members often call their compatriots in competing companies “brothers and sisters.” These are certainly not brothers and sisters. In a marketplace they are competitors. Union employees have to be able to beat, or at least stalemate, these competitors or lose their jobs. This is true as long as the UAW can not control the entrance of other less expensive competitors, either in the U.S. or elsewhere.

The long history of the DRAM semiconductor market illustrates this. The U.S. manufacturers of DRAM semiconductors faced intense competition from the Japanese in the 1980s. The domestic industry succeeded in slowing the Japanese by using the International Trade Commission. Then arose new and equally troublesome problems. These problems were DRAM semiconductor facilities in Taiwan and Korea. Eventually, the U.S. industry evolved to the point where it had only one domestic producer of DRAM chips. Intel was one of the early competitors to get out of that market to focus its resources in the more complex, and much more profitable, domestic micro-processor business. SX4MBURBCAJQ

Situation Bad...About to Get Worse

Over the last year, the U.S. government spent $80 million to prop up General Motors and Chrysler. The intent was to save millions of American manufacturing jobs. The benefits seem to be temporary, at best.

Both Chrysler and General Motors are reducing manufacturing capacity in the U.S. and shifting some of that capacity to Mexico. Over the next decade, Mexico is scheduled to gain most of the GM and Chrysler North American production that is discontinued in the United States. The reason isn’t hard to see. GM and Ford workers in the U.S. earn about $55 an hour, including benefits. The same workers in Mexico earn something less than $4 an hour.

Some in the government are upset about GM and Chrysler opening more facilities in Mexico, while U.S. facilities close. These people simply do not understand global economics. If GM and Chrysler keep their production in North America, all that will happen is that GM and Chrysler, backed by the U.S. tax payers and current shareholders, will pay for the excess wages that the domestic UAW employees now earn. If GM and Chrysler do not move their production facilities to places where costs are lower, other companies will do it for them and take their market share with better cars and lower prices. This has been the scenario for the domestic automobile manufacturers for the last twenty years.

No matter what the U.S. members of the UAW choose to do, their future is going to get worse. (See the Symptom & Implication “Foreign competitors are expanding with low prices” on StrategyStreet.com) Workers in other countries can simply make automobiles cheaper than they can. Chennai, India is a good example. In 2010, this city will produce 1.5 million automobiles. That is well in excess of 10% of the U.S. domestic demand and more than any U.S. state produces. Many major automobile manufacturers have a presence in Chennai.

The investment there is growing much as it is in Mexico. Hyundai, Ford and Nissan are each investing heavily in facilities in Chennai. Hyundai can now produce 650,000 cars a year there. Nissan can produce 400,000 cars annually. This new capacity is coming into a market that already has significant overcapacity in global production facilities. When new low-cost competitors enter the marketplace, they squeeze out the high-cost competitors. Who are the high-cost competitors? Watch where facilities are closing. Oh oh, that seems to be the U.S., where the UAW is holding a significant price/cost umbrella over its low-cost worker competitors, among whom are the Indian and Mexican workers in this story.

This will not have a pretty ending for the United Auto Workers, neither for those working nor for retirees.

How 'Bout We Throttle This Golden Goose?

Now that GM has entered bankruptcy, there are many opinions crossing the wires about the likelihood of the new GM being a successful stand-alone company. I thought I might as well add to this crowd noise.

First of all, let’s consider the problems that caused the bankruptcy. The first, and least forgivable, cause was the management team. The management team, some years ago, gave away the store to the UAW. They promised wages, benefits and work rules that were non-competitive in the world market. They agreed to numerous, costly work rules, high wages, generous time off and extensive retiree benefits. Once they had made these concessions, management was afraid to face the prospect of a long strike that might have recaptured some of the company’s cost competitiveness. Effectively, labor costs became fixed.

The second source of the problem was the UAW or, more specifically, the leadership of the UAW. Once labor costs became fixed, they “owned” the golden goose called GM. They have watched for years as GM gradually ebbed away because of the high costs that the union contracts imposed on the company. They stuck to unbelievably ill-advised programs like the Jobs Bank, even while GM was hemorrhaging losses. Tell me. What did the leaderships of General Motors and the UAW study at school that led them to conclude that they could withstand an uncompetitive cost structure on the world stage? Who teaches that economics course?

Once management realized that it had put itself in an untenable cost position, it made changes to its products in order to reduce all the other costs of the product, other than wages. (See Video #47: Rules for Cost Cutting in Hostility on StrategyStreet.com.) Among these changes, the company created look-alike cars across its various platforms. It reduced the quality of its finished product so that the company developed a reputation among consumers for poor workmanship. This reputation caused the resale value of GM cars to fall below those of its international competitors and raised the cost of ownership for its customers. In another similar move, the company cheapened the interiors of its automobiles so that a customer sitting in a GM car found its quality of finish well below that of its competition. All of these, of course, were self-defeating cost reductions. This is a common phenomenon in tough markets. Common, but destructive. These changes caused GM to see its market share fall by about 1% a year for many years. The further the company’s market share fell, the more onerous was its labor cost structure with its high fixed costs.

So, O.K., the company has entered bankruptcy and most of its investors have suffered disastrous losses. Will GM emerge as a successful company? After all, the UAW has surrendered some of its high wages and some other rights, especially the right to strike for the next several years. And, the UAW is now a major owner of the new General Motors.

We have seen this movie before, however, with United Airlines. The labor unions, especially the pilots’ union, became major shareholders of United Airlines in trade for wage growth, as that company sought to restructure in order to reduce its cost structure. Union members in the airline industry, though, quickly figured out that a dollar of wages was worth a lot more to the union member than was a dollar of profits to all shareholders. High and uncompetitive wage demands continued, despite the fact that United Airlines was losing both market share and profits. Eventually, the pilots demanded, and won, such a high level of compensation that United Airlines slipped into bankruptcy. So much for the benefits of union ownership.

There is a simple test to determine whether GM will be successful as a stand-alone company. It is not a test of management capability or will. It is more a test of the insight that this saga of destruction has brought to the leadership of the UAW. The current contract between the UAW and General Motors is the size of a telephone book. If the company and its key union end up with a contract more the size of a college term paper, the odds of success are high. If the contract remains the size of a telephone book, we tax payers can plan to spend a whole lot more money on GM for a lot more years. It won’t succeed as a stand-alone company.