New GM, Same Old Union?
I have a forthcoming column on the GM bailout due out in a few weeks,
which I don't want to step all over in this space. So I'm going to
leave aside a lot of the issues surrounding the bailout and focus on
one: how much has the union changed since we bailed the company out?
That's going to matter quite a bit to the company's future. The debate
over the role of the UAW's role in Detroit's woes tends to get quite
cartoonish: liberals saying it's all management's fault, while
conservatives place the blame squarely on the high wages of current
employees. The reality is quite a bit more complicated than that; GM's
death was ultimately driven in large part by how its management
interacted with its unions. You can have quite a bit of sympathy for
both sides--as I do--and recognize that both sides were taking the most
obvious course at any given time, while also realizing that the
cumulative decisions were entirely toxic.
The first thing you need to recognize is that the militant unions of the
thirties were to some extent made more militant by the abuses on the
corporate side--the Battle of the Overpass, for example, where company
representatives beat the crap out of organizers who were attempting to
hand out leaflets in a public space. Over time, that dynamic evolved
into something that was more stable, but also more toxic: a sort of
awful marriage between two sides that hate each other, but hate everyone
else even more.
One of the most remarkable things I learned in writing about GM was that
Ron Gettlefinger was totally blindsided by GM's financial collapse. The
UAW had so often convinced itself that the company's dire warnings were
simply strategic bargaining claims that it didn't understand how parlous
the underlying finances were--and in fairness, in the past, management
had often made exaggerated claims when it was bargaining. One former
auto analyst I talked to said that the company would routinely claim
that anything it didn't want to do was being blocked by the union--but
when the rare equity researcher actually talked to the UAW, they'd often
find that the union had never heard of the issue where it was allegedly
the sole obstacle to change.
That said, by the mid-1950s the Big Three had settled into a relatively
stable relationship with the UAW. When contract time came around, the
UAW picked off the company it perceived as the least able to survive a
strike; used the threat of a strike to get a good contract; and then
demanded the same from the other two. Those companies were now in a bad
position, because if they risked a strike, their competitor, who already
had a contract, would take all their customers.
This relationship essentially meant that the Big Three simply didn't
compete on labor cost, work processes, or any of the other labor-side
innovations that have enhanced productivity over the last forty years.
It's not that contracts didn't vary by company or plant, but the
outlines were broadly similar across the industry. This was good for
the UAW and good for the auto manufacturers, because arguably it
actually helped cement their cosy oligopoly by removing one of the major
competitive pressures. And in many ways, the voter base and political
clout of the UAW was helpful to securing Detroit favors from Washington.
During that period, union peace was very valuable, and management bought
that union peace with concessions that seemed cheap at the time:
tax-favored pension and health care benefits.
In hindsight, this was stupid for many reasons. Automation made it
possible to produce more cars with fewer workers. Meanwhile,
competition cut into market share--the Big Three had about 90% of the US
market at the end of World War II, versus about 45% today. And workers
lived a lot longer than they were expected to. Those factors mean that
the ratio between retirees and workforce became extremely lopsided; at
the moment, GM has a little over 50,000 hourly employees--and about a
half a million retirees. That left the pension badly underfunded, and
meant that either the company or the workers were going to have to
dramatically increase contributions. Meanwhile, soaring health care
costs were making the health care benefits even more of a problem than
Had there been no foreign competition, this wouldn't have mattered so
much. To the extent that companies saved money by automation, this
would simply have shown up in higher profits, which would have enabled
them to make higher pension contributions per worker. Unfortunately for
the Big Three, there was competition, from foreign automakers who didn't
have the same legacy cost structure. That meant that any productivity
enhancements had to be passed on to consumers in the form of cheaper,
better cars. The basic form of the car was almost entirely stable
between 1930 and 1970, with some major improvement coming along about
once a decade. It's improved radically since then, largely because
foreign competition increasingly forced companies to pass along the
benefits of innovation to us, rather than their managers, shareholders,
Critics of the union say that the union should have been willing to give
back more on labor. That's easy to say, but hard to do; unlike many
unions, which put their retirees on inactive status, UAW's bylaws gave
retirees considerable power. Naturally, by the time 90% of your
membership is retirees, those bylaws are not going to be altered.
Critics of the company say that the company could have dealt with these
problems by making better cars. That's also easy to say, sitting in your
comfy office hundreds of miles from Detroit. How, exactly, were they
supposed to make better cars when they were burdened by these huge
legacy costs? GM had these costs not because the US alone doesn't have
national health care--as many critics have bizarrely claimed. We're
talking, after all, about gold-plated first-dollar health care coverage
for people who have generous pensions, and qualify for Medicare.
Rather, the company was burdened with these costs simply because it had
made extraordinarily generous promises in an era when health care was
cheaper--and when the firms and the union had a cozy arrangement that
allowed them to pass any increase in their labor costs onto consumers.
By the time the agreements became a problem, they couldn't go back on
them because the union wouldn't allow it--and because a prolonged strike
would be, if anything, more crippling now that German and Japanese
competitors had arrived on the scene. And the union couldn't be
persuaded in part because past experience had taught it not to trust
anything management said.
The most obvious routes available to the company was the one they took:
they skimped on the cars. That's why they ended up so dependent on
trucks, where the profit margins were fatter. The smaller the car, the
more cost-conscious the consumer--and the harder it is to save hundreds
of dollars on the cost of the car, without noticeably skimping on
quality. In order to at least partially make up for these quality
deficits, they pushed harder on the financing side, until eventually
journalists like me were describing GM as "a bank with a sideline in
auto manufacturing." Those decisions made sense at the time, but left
them extremely vulnerable to the price of oil, and the price of money.
When credit dried up, the company was quite suddenly no longer viable.
I don't think there's much point in trying to figure out whether
management or the unions are responsible; the fact is that they both
drove all of the bad decisions that the company made, even as they were
both also mostly reacting to actions by the other side that had left
them little choice.
In order for GM to thrive post bankruptcy, both management and the union
need to have experienced the kind of deep, soul-searching change that
usually only occurs at the end of ABC After School Specials. If either
of them goes back to the old pattern of doing what is most expedient
right at this second, the company is going to end up back in serious
trouble. It's harder to observe management in the short term; they
don't conduct their strategy meetings in public. But there are some
troubling signs on the labor front:
1) The UAW just voted to allow an old GM stamping plant in Indianapolis
to be shut down, rather than offer wage concessions necessary to attract
a new owner.
2) Labor trouble has flared up at the plant where the new Chevy Cruze
is being made. The Cruze is one of the things that is supposed to save
the new GM: a high quality small car. If they can't get this right
without clashing with the union, what hope for the rest of GM?
3) The administration is reportedly hostile to the UAW--Rahm Emanuel is
famously supposed to have said "fuck the UAW". But they made major
concessions anyway: keeping the pensions intact, giving the union a
giant stake in the company in exchange for concessions on health
benefits, etc. How effectively can the government negotiate with the
union if it remains the majority shareholder for a while? With the GM
IPO reportedly being scaled back, that now looks quite possible.
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