Sunday, November 16, 2008

The U.S. auto industry could use some change

If you want to read one of the most insightful posts about what's wrong with the auto industry in the United States, click right here.

I'm not going to rehash that great post over at Arohan's investing life, but I am prepared on adding a bit to his superb analysis -- unions are a large part of what's wrong with the auto industry. We've heard Barack Obama holler about change for quite some time now, but is he willing to do something about the stifling contracts negotiated between the auto industry and the United Auto Workers?

I'm going to go out on a limb and suggest that the Democrats aren't ready for that much change -- unions send a lot of money to Democrats and provide the party with a huge base of support. It's about time, however, for the government to quit protecting unions and let the free market control their fate.

We all know how that would work out, don't we?

The truth of the matter is this -- unions are obsolete. The abuses that gave rise to them have been largely legislated out of existence. Minimum wage laws, child labor laws, regulations that mandate safe working conditions, etc. all add up to one thing -- the unions have been extremely successful in representing workers. They've been so successful, in fact, that it's hard to find a good reason for them to wield the power that they do here in 2008.

We are well past the era in which powerful corporations were able to treat employees as poorly paid slave labor. That era is gone and the only purpose unions really serve is to demand more money for their members.

So, we're left with very expensive labor in the United States, which makes it a problem for American industries trying to compete with the rest of the world. We can send all the bailout money to the auto industry that we want, but it will always struggle so long as unions are around to artificially inflate labor costs.

The problem, of course, is that Democrats are afraid to limit the power of unions one bit as they would alienate a huge block of support. To be fair, the Republicans haven't shown they're willing to tackle the unions, either.

That's a rotten situation, indeed. Here in Saline County, Ark., we know exactly how it plays out when corporations have the choice of either doing what unions demand or closing up shop.

Yes, we had a thriving aluminum industry here in Saline County for a number of years. The Alcoa and Reynolds plants extracted and processed bauxite ore and provided some of the best jobs in the county.

At one point, however, that bauxite became harder to extract, leaving the plants with a problem -- they were losing money. Around 1980, it was common for people working at Alcoa and Reynolds to make $18 or $19 per hour (a lot of money back then) and it was apparent that the plants simply couldn't foot the labor costs and still stay in business.

Of course, the union wouldn't budge, so the plants pretty much pulled out of Saline County in 1981 and set up in Jamaica. The great jobs that were available were lost and most of us in Saline County work in Little Rock these days as we've never recovered those jobs.

It's seems apparent the American auto industry is about to suffer the same fate. Take a good, hard look at the American textile industry for evidence about what's about to happen to automobile manufacturers in the U.S.

Here's an eye opening statistic that just drives the point home. The average GM worker, according to February estimates, pulled in $78.21 per hour, including benefits. Your average employee at a Toyota plant in the U.S. pulled in $48 an hour, including benefits.

No wonder Toyota is the largest auto manufacturer in both the U.S. and the world. The company is stomping Chrysler, Ford and GM on American soil with American labor. The difference, of course, is that unions are strangling the Big 3, whereas Japanese companies like Honda, Subaru and Toyota are able to put up plants free of union labor, pay their employees well and turn out great products.

The conclusion to this tale seems pretty obvious. I wonder if anyone in Washington has the guts to stand up and address this issue.


Da Old Man said...

I have mixed feelings about unions. I've never worked in a union shop, and my last job, management, as a whole, stunk. Wages were not the problem, but instead employees were treated rather poorly.
There was tremendous turnover. It was a social services agency, so, in essence, they had to answer to no one. Some sort of union would have made the agency tolerable, and provided protection against managers that were incompetent.

The Natural State Hawg said...

Valid points, Crotchety. The thing that concerns me, however, is that the topic of unions seems to be taboo.

It's high time a dialog was started about them so that the pros and cons can be discussed and considered.

The Dems have never been willing to do that. One can't help but wonder, then, whether the topic will come up in the current administration, or is that just too much "change" for Obama?

The All Arkie Army

Arohan said...

Hawg, Thanks for the recommending my blog article here. Like you, I am skeptical of whether Obama has it in him to take the unions on. It probably all depends on whether he wants a second term or not. If he wants the 2nd term, he will probably continue to pander to the unions, throw a few coins to Detroit as bailout, and come back few years later saying he did all he could to help the industry and it didn't work. Meanwhile the unions will be happy and fat with all the buyouts that the members received and will vote him back in for the 2nd term. If it happens this way, it will be a real shame. I am not saying shame on Democrats if they are able to pull this off. I am saying shame on us, the people, who keep falling for these tricks over and over again.

The Natural State Hawg said...


You're very welcome. As I said, I found your post very enlightening and thoughtful. Yes, I always try to look good by association, so I had no choice but to urge people to head over and have a look at your article.

I'm not saying shame on Democrats, either. I'm saying shame on Democrats for not taking on the unions, shame on Republicans for not having the guts to challenge them and shame on us for letting our industries get slowly exterminated because of ridiculously overpriced labor.

If Obama has the courage to even open a dialog on the impact of unions on our economy, then good for him. I doubt he will, however.

Karen said...

Yep, unions started out as a good thing. Too bad they got too much power. I don't think unions should be able to use the money they take from their member's paychecks and contribute to political campaigns. I hope the new administration has the guts to cross over a few lines. said...

Today I opened Sunday's newspaper and saw this headline in the business section, "UAW Leader Says No More Concessions."

Even as Detroit's Big Three automakers teeter on collapse, the union president says they will not budge. The union president says the automakers will get back on their feet by figuring out a way to turn around the economy.


And then I read that Detroit is one of the few large cities in America that has the Big Four sports teams - football, basketball, baseball and hockey - and stand a very good chance to lose one or more of those teams, namely the Lions. Why? Because they depend so much on the sale of luxury boxes, which Ford Motor Company is no longer in a position to buy.

It is said American consumers should buy American first. You especially hear that when it comes to automobiles. But if the auto industry does not get its act together, we may no longer have the option to purchase an American car - they all be out of business.

Theresa said...

Crotchety, government social service agencies have never been about being of service to the people - or the workers. I've been there too and left when told not to help a family.

Hawg, eliminating the unions would only address a part of the problem. $18-19 is not that great of a wage. That's roughly $37,000 a year, barely middle class, and not much considering the cost of living in most northern states. The cost of living is so high that it would be impossible for anyone making $10 an hour to support themselves. Where do you think that leaves the people working in the service industries, like Walmart, who are lucky to make $6 an hour?

Sure, labor and raw materials are the biggest costs for manufacturing, and they all moved out of the US, whether they were paying high wages or not, so they could pay third world country labor, where most make a week what US labor was paid per hour. They are also out from under child labor and environmental and workplace standards laws.

IF the regulations to keep manufacturing here hadn't gone overseas, this wouldn't be happening. Our cost of living wouldn't have gone up so much as it has because the consumer market wouldn't be able to handle the 500-1000 percent markup that imported cheap crap makes for the shysters.

The greed factor is the culprit, and unions helped keep that in check a bit. But, they were bit by the greed too. This is all what has contributed to the largest economy on earth literally imploding. It had to happen that way. It was so seriously out of control that there was no choice but for it to freeze up like an engine without oil.

For that reason, I do not believe for a moment that any of these government "bailouts" will do a damn bit of good. None of the $700 billion has gone to anything besides lush vacations and buyouts. And the government just goes ahead and does it despite severe and overwhelming opposition from the people.

Oops, I'm ranting. I'll stop now...

The Natural State Hawg said...

Paul -- Incredible, isn't it? We saw that same kind of stubbornness here in Saline County. If the unions won't budge or the government won't stop protecting them, the fate of the American auto manufacturers is sealed.

It seems that if the choice comes down to no jobs or no concessions, the unions will take the no jobs option almost every time. That's just insane.

Oh, and I've owned four Fords and two Oldsmobiles. I drive a Toyota now. Why? Great gas mileage and a car that holds up under the regular punishment I throw at it. I can get a hell of a lot more for my money with a Japanese car than I can with an American one. My Toyota is great, and the same is true of both the Subaru and Mitsubishi I owned once upon a time.

Karen -- I hope so, too. I wonder if Obama's promise to keep away from lobbyists and PACs will hold water when it comes to unions?

Theresa said...

Paul, there's nothing made in America anymore besides eggs and milk. The parts in those Ford and Chevy cars are made elsewhere too, aren't they?

I was in Flint Michigan in the late 70s, and it was a ghost town then. The auto makers had to cut back from the gas shortage/rationing all the while blaming it on the imports. They didn't start making small, economical cars until after that.

Like Ethan said, they should all just flop since they can't figure it out anyway.

The Natural State Hawg said...

Theresa -- $18 to $19 a year was great money back in 1981. Particularly when you're talking about unskilled labor. Hell, the folks that swept the floors at Alcoa and Reynolds got $10 an hour back then.

According to some estimates I've seen, the average GM worker makes $78.21 per hour including benefits. An employee at a Toyota plant in the U.S., meanwhile, makes $48 an hour with benefits.

Thanks to unions, American auto manufacturers can't even compete against the Japanese on our own soil.

That's a huge problem. And I don't buy for a moment the notion that protectionism is what we need right now. Toyota is crushing the "Big 3" with cars made on American soil with American labor.

Theresa said...

Wow, for $78 an hour, I could work 3 days a month and live better than I am right now!

OK, the unions outlived their usefulness. I have to agree there. Good ol' greed everywhere you turn.

Oh, I'm a Honda person myself...

The Natural State Hawg said...


That's a hell of a wage, isn't it? And how many hours does it take to make a car? The American auto manufacturers are already starting out way behind. No wonder they're having trouble.

My parents both drive Hondas, by the way. They were dedicated Oldsmobile fans until they made the mistake of buying an Omega and had a Cutlass that wasn't worth a damn.

Da Old Man said...

My last take on this mess. The problem is many-fold. GM just cut stock dividends last year. It had been in the neighborhood of 4 bucks a share, and it went down to 2. Please tell me what other company, losing money, pays out such a generous dividend? For that matter, many companies making money don't pay out that kind of a dividend. Just a bad decision.
That, and the President of GM made some unbelievable amount of money. Only in America can a person make so many bad decisions, all but ruin a company, and make millions.
GM has made some awful cars. They continue to make awful cars, and sales plummet. Sure, unions have a hand, but the blame is shared equally by management, too.
Last year, I sold my '89 Toyota for $500, and the person was glad to get it. The year before I gave away a '97 Plymouth minivan, because it had no value. And 2 years before that, I junked an '89 Chevy station wagon, again, because it had no value. I notice a pattern.
BTW, today, I drive a Scion (Toyota product,) and the Mrs. has a Toyota Camry.
The cars are dependable. I haven't had a dependable American car since my 1972 Plymouth. That's a lot of years of a lot of crap cars.

Don said...

I agree that unions have basically outlived their usefulness, and now are more of the problem than the cure. Both sides need to fold shop in my view.
We need to back off and let the economy do what it's going to do. Maybe even at the risk of a depression. That's the only way to get things back on track. The artificial means fueled by socialist greed sure as hell will make matters worse.

Reg Fife said...

I mostly agree that unions have done their job and need to step back, but I think that one more adjustment ought to be made before unions and the government back out of private businesses.

In some places the federal minimum wage is still not enough to support a single person living on his or her own. What I thing ought to happen is each state needs to each have it's own minimum wage, which will be adjusted automatically each year or so to match existing economical conditions.

Erin Tales said...

The unions served a good purpose during the early 19th century, since it protected jobs from tyrannical boss' of the time.

Like anything, the economy has changed and so has labor laws which now protect the labor force. If conditions change in the future it will allow for a resurgence of the unions, but for now it's time to let them go.

We also need to get rid of the teachers union, since it has also strangled our education system.

Matt said...

Hawg, this was a very good, insightful post. Nothing tells the sorry story of unions better than the auto workers story. GM and Ford having to put $1200 to $1500 per vehicle for health benefits for the workers compared to a few hundred per car for Toyota is unbelievable and unacceptable.

But if you want to make some enemies real fast try being a union truck driver anywhere in the northeast and offering to help load or unload your own truck. That's the problem with unions - they actually teach the exact WRONG way to properly run a business. They need to go, and they need to go now!!

The Natural State Hawg said...

da old man -- I won't disagree with a bit of that. Yeah, management does share some blame for the sorry states of GM, Ford and Chrysler.

Want to talk about bad decisions? GM is still advertising Hummers. I'm just amazed that the company continued to churn out those things even when it was obvious that gas prices were becoming a major issue.

don -- I agree. The worst thing we can do is bail out these companies as they'll do nothing different. In a capitalist economy, companies either adapt or perish.

Having the taxpayers prop up these rascals will just lead to more of the same, pitiful behavior.

Meanwhile, foreign manufacturers will still whip the socks off of our American auto companies. So, what will we gain?

reg -- States are free to set their minimum wages, so long as they are higher than what the federal minimum is.

Hey, if that's what the citizens want, they've got the power to make it happen.

erin -- I completely agree. Public education is an absolute mess. My sixth grader was in a panic the other night because he couldn't fine his calculator to work some long division. That's pitiful. What the hell are they learning?

matt -- I think the main problem with unions is they have the naive notion that companies have limitless money and the only reason they don't pay employees more is because they're greedy.

Add some paranoia to that belief and you've got a mess.

Lyndon said...

Unions are good for the masses, but if you have a problem that falls outside their jurisdiction, your screwed.

Ask someone, who's been hosed not once, but twice by unions!! So let's just say I don't have much love for them :(

Not even going to get into the whole great products part of your post. That's just a world of hurt, when you think about the incompetence of the Big 3. Head hurts now, going to get some aspirin. (While I can still afford it)

mcangeli said...

The best solution is that everyone should start buying foreign cars. Anyone who argues that that takes jobs away from americans is stoopid. Most foreign cars for sale in the states are made here in the states. Far cheaper then their american counterparts and far better. (look at nissan, toyota, honda, Mercedes...)

Arohan said...

I saw a pro union bumper sticker here in metro Detroit area sometime ago. It said something like

"Out of a job yet! Keep buying foreign!"

It was stuck on the rear fender of a Toyota Celica

Maybe a sign of times that some pro union folks cannot rationalize buying big 3 products anymore

netta said...

What do YOU do when times are tough and you take a pay cut? YOU DOWNSIZE and RE-PRIORITIZE. Why is this such a hard concept for these companies?

They have not kept up with the demanding changes in the marketplace. They have a bad business plan that is evidently not working and no exit strategy. Bailing them out now is just postponing the inevitable.

What happened to free market? Filing bankruptcy doesn't kill a business, it forces it to re-structure and gives it a chance to find a WORKING business model. Even with the bailout, they will still lay off workers and lose jobs. Where's the gain?

The whole thing is sickening.

The Natural State Hawg said...

lyndon -- I think we've got a county full of folks here who were let down by their union. Had the union acknowledged the economic reality of what the aluminum companies were facing here, things might have been different. Oh well.

Yes, it's getting harder to find an American product that's worth a damn. I've got a Toyota and I'll probably buy another one before long.

Plenty of bang for the buck and mine was made in the U.S., too.

McAngeli -- You're exactly right. The "Big 3" ought to learn some lessons from the foreign manufacturers that are setting up shop here in the U.S.

arohan -- That's beautiful! That's almost as great as a Sierra Club sticker on a Chevy Trailblazer or that "anarchy" sticker I saw on a Jaguar back in college.

Irony, anyone?

netta -- I won't disagree with any of that. Furthermore, filing a Chapter 11 could allow these companies the freedom to renegotiate their union contracts.

At the very least, they'd be forced to come up with a new business model.

If they get bailed out, what motivation do they have to adapt and compete?

The free market is a great thing. It's a pity we're busily forgetting that.