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How Unions Stop The Cars

Big Labor is a big problem for automakers' survival

Shikha Dalmia
December 12, 2008

With the late-night demise of legislation containing $14 billion in emergency loans to Detroit's automakers, pressure is once again mounting on President Bush to step in. And he is reportedly thinking of doing just that. But the very thing that doomed this legislation will also doom any effort to rescue the industry: union intransigence. If Bush cares more about taxpayers than kudos, he should decline.

The legislation, backed by Sen. Bob Corker, a Tennessee Republican whose state itself is home to GM facilities, was the industry's best hope to return to health. It stripped some of the green baggage of the House bill that would have consigned Detroit to producing not cars that sell but what eco-warriors want. Nor would the legislation have handed quite as expansive powers of micromanagement to a car czar, forcing companies to obtain approval for basic product and capacity decisions.

Instead, it offered the automakers a way to restructure their massive obligations to labor and debtors, much like a bankruptcy court would do but without the stigma. Bondholders would have been required to accept a 70% loss--the remainder paid in stock, not cash. And Big Labor's main concession (besides accepting some stock instead of cash for its health care trust fund) was that it set a definite date for a pay cut next year.

At that time, its wages and benefits would fall in line with those that Nissan, Toyota and other automakers pay their U.S. workers.

But the United Auto Workers reacted as if it had been asked to work in a Third World sweat shop and walked away. Sen. Debbie Stabenow, D-Mich., decried efforts to "sock it" to American workers. Never mind that labor costs make every car rolling out of Detroit $1,500 more expensive to produce than foreign cars made elsewhere in the U.S. Indeed, last year, GM and Toyota sold the same number of cars worldwide, but Toyota turned a healthy profit--while GM posted a $40 billion loss.

But the fact of the matter is that the wage cuts are a necessary condition to give Detroit a fighting chance for survival, but they're not sufficient. Indeed, that would require far more from unions.

Car sales next year are expected to drop 40%. This means that if auto companies are going to use any bailout money to restore viability, they will have to be able to shed some of its quarter-million-strong workforce.

However, if the UAW was unwilling to accept a pay cut, there is no reason to believe that it would compliantly accept such massive layoffs. More likely, it will use taxpayer money to keep every job alive as long as possible--and then return for more a few months later.

Beyond job cuts, the UAW will also have to agree to eliminate a whole host of exceedingly rigid work rules for its remaining constituents. Such rules, for instance, had historically made it difficult to train auto workers for multiple jobs to fulfill multiple needs. No less than labor's extravagant wage demands, these rules have crimped Detroit's adaptability.

Ford recently built a facility in Brazil where it can produce five different vehicle platforms at the same time, on the same line. What's more, many of its suppliers are housed in the facility as well, something that allows them to move parts to the assembly line at a moment's notice. Not only has this lowered Ford's production costs and boosted productivity, it has also given it flexibility to adjust its product mix to shifting market conditions. This is important at any time but is especially crucial now, when volatile oil prices are likely to produce abrupt shifts in consumer demand.

But union rules, with their featherbedding requirements and crabbed job descriptions, make it much harder for such a factory-of-the-future to operate in the U.S.

The irony is that foreign car makers are profitable in America--and the Detroit Three are profitable in every country but America. Only Big Labor can position Detroit carmakers for success in their own country. Bush shouldn't ask already-strapped taxpayers to make sacrifices to pull Detroit back from the precipice when its own key stakeholder won't.


Shikha Dalmia is Senior Analyst


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