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

Creating Economies of Scale in the Auto Industry

The German automakers are under some pressure. They need to have a small car in their product line-up in order to respond both to consumers’ growing preferences for smaller cars and to government pressures to reduce fuel consumption and carbon emissions. BMW has answered with its One series. Volkswagen has taken a 20% stake in Japan’s Suzuki Motor Corporation, which is a small car specialist. Mercedes Benz has decided to go an alliance route.

Recently, Daimler, the maker of Mercedes Benz automobiles, announced an alliance with Nissan and Renault to create a common line of small cars. The companies will also share engines and work together to create small commercial vans. To do this, Nissan and Renault will invest about $1.6 billion in Daimler who, in turn, will invest about $1.6 billion in Nissan and Renault. These investments will have a good pay-off. The two sides of the alliance estimate that they will each save about $2.7 billion in costs over the coming five years. This alliance creates new economies of scale for each side by increasing their productivity, as measured by units of input costs over units of output product. (See “Audio Tip #187: The Components of Productivity” on StrategyStreet.com.) In this case, they improve productivity by spreading fixed cost activity such as design of new products over more sales output.

In analyzing several thousand cost reduction approaches, which companies have employed over the last twenty-five years, we have seen two basic approaches to the task of increasing the output over which fixed costs investments are used. First, the company may acquire a similar organization to spread fixed costs over more units of sales. Second, the company may form an alliance of some kind to spread these fixed costs over more sales output. This small car alliance is an example of the second approach. In turn, we have identified three ways that companies pursue this second approach of spreading fixed cost. First, the companies may use their fixed cost with competitors who employ outsourcing. Second, the companies may combine fixed cost with competitors into separate businesses. Third, the company may use its fixed cost with new customer segments by turning some of their cost centers into profit centers. This small car alliance is an example of the second of these techniques, combining fixed costs with competitors into separate businesses.

Other examples where companies have employed this cost management approach include Sony and Sharp partnering in the flat panel TV business two years ago. Sony invested in Sharp’s plant to make LCDs. This gave Sony the option of buying the panels for its TVs while Sharp reduced the investment burden for panel production. In another example, General Mills and Land O’Lakes combined their distribution networks, improving their scale economies. In this later case, the companies were not direct competitors as are the companies in the small auto alliance.

You may find many more cost management concepts and examples in StrategyStreet.com/Improve/Costs.