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DR. JIM LEONTIADES
CIIM, The Cyprus Business School
General Motors, once voted the best managed company in the United States has been taken to bankruptcy court, dropped from the Dow Jones Index and ridiculed with a new unofficial name, “government motors”. Along with the sale of Chrysler, the GM saga sees a major portion of American automobile production demolished almost overnight.
Of course, some of the banks have also suffered. Given the nature of the financial crisis this might have been expected. But what explains the demise of the better part of the American car industry – particularly given the fact that many foreign owned plants are operating in the USA quite successfully?
A major part of the answer is to be found in the company’s cost structure and particularly its wages bill. American automobile workers in Detroit have historically been an elite. With a strong automotive union and hard bargaining, earnings of automobile workers employed by the big three (GM, Ford and Chrysler) have been significantly above the national average.
The union agreement covering these companies required that they pay beginning auto workers $28 an hour. Experienced workers could look forward to earning as much as $50 (36 Euros) an hour. This does not take into account health, pension and unemployment benefits far above those in other industries. An unemployed automobile worker was placed in a “jobs bank” and continued to receive almost as much pay as when fully employed. Medical and pension benefits for automobile workers are among the best in the world. Another major cost has been pensions. As the number of retired automobile workers has risen, so have the pension costs. Industry experts have estimated that these “extra” benefits have added $1500 to the cost of producing a car by General Motors over and above the costs of GM’s non-union competitors.
The non-union competitors are primarily Korean, Japanese and European automobile producers. Seeing the wage costs of the American producers, these wisely established themselves in the Southern, non-unionised states. Here they continue to produce cars at a lower cost per unit than the American producers based in the unionised North. The result has been car producers there too weak financially to survive the current crisis. Ford is for the time being continuing to function, thanks to some well-timed borrowing before the financial crisis.
Similar Pattern Elsewhere
A similar destruction of the automobile industry took place a few decades ago in Great Britain. The British automobile plants were at that time located in the British Midlands and the North West, where their workforce was governed by some of the country’s most militant unions. Foreign car producers made it a prime objective to avoid these. They established their new factories in Wales and the North East – far from the unionised shops that had turned British Leyland into a symbol of high cost and inefficiency until it was finally broken up and the pieces sold off. Cars are still produced in Britain. Employed in these new foreign owned factories under new conditions the much maligned British worker has in many cases been able to reach levels of productivity equal to those of the most efficient automobile plants in Japan.
The big losers in both of these cases are the unionised workers who have seen their job prospects disappear. Once totaling over 250,000 workers, GM’s payroll in the USA has been reduced to some 60,000. Current estimates are that this will be further reduced by another 20,000 after the bankruptcy proceedings. As part of the bankruptcy procedure, GM’s automobile unions have agreed to forfeit many of their privileges (new workers will receive half the $28 an hour starting pay of previous years, health benefits are also reduced). Along with the job losses of automobile parts suppliers and those of former car dealerships – it is estimated that altogether some 1 million workers will lose their jobs as a result of the GM bankruptcy.
European Car Companies
But note that in both cases there is a potential gain in efficiency and competitiveness. British automobile factories under whatever ownership are certainly much more efficient and profitable than in the past. Industry experts have voiced their opinion that the new General Motors and Chrysler, freed from previous union agreements, much of their previous debt and their least efficient factories will also be more competitive.
Is there a pattern here that might apply to Continental Europe? There has been no influx of foreign automobile plants and no bankruptcy proceedings such as those in the USA. However, French and German automobile producers under intense cost pressures have already begun to move away from their traditional unionised locations, placing some of their new automotive plants in the lower cost, less unionised, new EU member states. The unions of these car companies in their countries of origin have raised objections. However, since their governments are members of the European Union and as such committed to the free flow of trade and investment across the EU, their power to impede such geographic shifts in production is very limited.
Do the European automobile producers have a choice? The changes seen in the USA and UK mean that they will increasingly find themselves competing against car producers with lower wages and increased efficiency.
