Tuesday, December 23, 2008

UAW a Major Factor in the Big Three’s Problems

Cross-posted from James Shott at Observations

As much as industry executives complain about gas-mileage mandates, emissions controls and safety regulations—all factors in the Big Three automakers’ problems—other factors figure into the equation, too: poor management judgment and strategies, huge legacy costs and high manufacturing costs.

Several years ago none of this mattered much: U.S. automakers were profitable and life was good. But times have changed, and nearly everybody realizes the UAW’s sweet contract is having substantial negative effects on the industry.

There has been some news recently showing just how well auto workers are paid. According to the Bureau of Labor Statistics, the average compensation for manufacturing workers is around $31.50, and the average hourly compensation, including benefits, for the average worker in the U.S. is around $28.50.

University of Michigan at Flint economist Mark J. Perry writes that in sharp contrast to those figures are these from Big Three automakers. It costs more than $73 per hour on average to employ a union auto worker: DaimlerChrysler at $75.86 per hour, Ford at $70.51, and General Motors at $73.26.

More contrast: For non-union US workers at Toyota, the per hour labor cost is around $47.60, about $43 for Honda and near $42 for Nissan, Perry said, for an average of roughly $44, a $29 per hour pay gap between the Big Three and the foreign transplants that are producing cars in the United States.

The average union worker at Chrysler, meanwhile, received 150 percent more in compensation than U.S. workers generally. If you annualize Chrysler’s labor cost of $75.86 an hour per worker over a 35-hour week, for 50-weeks a year, the yearly compensation comes in at almost $133,000 per worker per year. “That’s not necessarily what the worker would receive in a paycheck,” Perry added. “That’s the cost to Chrysler of those workers.”

But wages and other compensation are just one of two major impediments to profitability represented by the union.

Labor unions once were a necessary mechanism to represent the interests of abused workers. But the UAW over-drove its headlights and, like the auto industry itself, has grown fat and happy and negotiated itself into an excessively sweet deal, the provisions of which are no longer supportable.

For example, as mechanization moved into the industry the UAW managed to get automakers to agree to a monstrosity called a “jobs bank” to protect the jobs of its members who were no longer needed to build cars. This surreal mechanism pays nearly 15,000 workers to not build cars while receiving wages and benefits that often reach $100,000 or more per worker per year.

Another reason the Big Three are having such problems centers on union work rules that make it hard for them to constantly adapt and change production processes the way, for example, that the non-union Japanese auto plants in the U.S. do.

In a 1983 Harper’s article by Robert M. Kaus, he explains that work rules are a primary component of the collective bargaining system. Under the Wagner Act, unpopular management decisions become items for negotiation and often become “work rules” that are counter-productive and inefficient. At some GM plants, for example, distinct job categories evolved for each spot on the assembly line (e.g., “headlining installer”). “In Japanese auto plants where they spend their time building cars instead of creating job categories,” notes Mr. Kaus, “there is only one nonsupervisory job classification: ‘production.’”

Ford has a state-of-the-art manufacturing complex in northeastern Brazil that is one of the most advanced automobile plants in the world. It is more flexible than any other Ford facility and can produce five different vehicle platforms at the same time and on the same assembly line.

More than two dozen suppliers operate inside the plant, sometimes producing components alongside Ford’s main production line, allowing Ford to keep inventories at a bare minimum, or eliminate them entirely, along with the associated costs.

So why aren’t efficient, state-of-the-art facilities like Ford’s Brazilian plant built here in the U.S., especially if it could improve Ford’s profitability? Well, because the UAW has historically opposed such supplier integration on the factory floor. And, unlike many U.S. auto plants, where work rules strictly limit what tasks workers can perform, Brazilian workers are encouraged to learn as many different skills as possible.

The American auto industry has to change to survive, and so must the UAW. The days of the sweet deal are over and union members must now ask themselves: Is it better to have a job making $44 an hour rather than $73 an hour, or have no job at all?

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