252-But Can You Control Other Entrants?
The United Autoworkers (UAW) is on a new campaign. The union plans to organize workers in hither-to non-union foreign-owned automobile plants in the United States. This campaign may or may not work, but in the long run it will prove futile unless the union can compete in the international market, against all international auto workers.
There are 575,000 autoworkers in the U.S. Nearly 20% work for foreign-owned plants. All of these plants are non-union. The foreign-owned plants were intentionally placed in right-to-work areas, many in the South.
The UAW is likely to have some difficulty succeeding with this campaign. The non-union workers already earn highly competitive wages and benefits. To date, these U.S. workers in plants owned by Toyota, Volkswagen, Hyundai and Honda have shown little interest in unionization.
Why would the union be so interested in this initiative? To preserve its membership. The traditional problem with unions is less the rate of wages they demand and more about the work rules they impose. These work rules reduce the productivity of the unionized plants. That has certainly been the case in the U.S. auto industry. As a result, the UAW is losing membership as UAW auto plants in the U.S. close under the onerous costs the UAW plants carry. If the union can succeed in unionizing the domestic foreign-owned auto plants to the same extent they have unionized the domestic manufacturers’ plants, they will be able to impose the same work rules and produce roughly the same productivity. The result should, in the union’s eyes, be a reduction in the rate of jobs lost in the union.
But there is a problem here. The UAW has already seen that it was unable to stop new non-union plants in the U.S. How will it stop future non-union domestic plants? O.K., let’s say they can do that. Will they also be able to stop all foreign non-union plants from becoming established and growing? Certainly not. Unless the union membership can compete on an international basis with competitive costs and productivity, this unionization effort is wasted money. If it succeeds, the U.S. loses more plants to plants located offshore. Union membership still falls.
It seems that one of the problems for unionized employees is one of definition. Union members often call their compatriots in competing companies “brothers and sisters.” These are certainly not brothers and sisters. In a marketplace they are competitors. Union employees have to be able to beat, or at least stalemate, these competitors or lose their jobs. This is true as long as the UAW can not control the entrance of other less expensive competitors, either in the U.S. or elsewhere.
The long history of the DRAM semiconductor market illustrates this. The U.S. manufacturers of DRAM semiconductors faced intense competition from the Japanese in the 1980s. The domestic industry succeeded in slowing the Japanese by using the International Trade Commission. Then arose new and equally troublesome problems. These problems were DRAM semiconductor facilities in Taiwan and Korea. Eventually, the U.S. industry evolved to the point where it had only one domestic producer of DRAM chips. Intel was one of the early competitors to get out of that market to focus its resources in the more complex, and much more profitable, domestic micro-processor business.
The union was unable to stem the growth of new entrants in the auto manufacturing industry. It is difficult in the extreme for the company or even in industry to prevent new entrants from attacking their markets, even in hostility.
In the automobile manufacturing industry, industry capacity, primarily outside the US, continues to expand. 2019 was the last normal year before Covid for light vehicle worldwide production. The industry was shrinking at about 2% a year in total production in 2019. Still, the industry continued to add capacity even though it was already in overcapacity. 2019 saw 50 new light vehicle plants opened compared to 14 plant closures, for a net increase of 36 new plants. This brings the total to 758 light vehicle plants worldwide. 2019 added 3.6 million units of new capacity on top of the already existing 45 million units of idle capacity. This produces a plant utilization rate of 63%. Most of the new capacity went to China where the rate of capacity expansion was running at more than twice the pace of market growth. Other regions witnessing significant plant capacity expansion include the US, India and Mexico.
The light vehicle industry continues to add capacity, even the most expensive form of capacity, greenfield capacity. In addition to this new greenfield capacity coming on stream, it is likely that the industry’s existing plants are becoming more productive every year. This is a form of capacity addition we call “capacity creep”. This latter form of capacity addition occurs in virtually all markets, even the most hostile. See HERE for descriptions of alternatives to add capacity and their implications for industry margins.
The US automobile productive capacity is far more efficient in 2022 than it was 10 years ago, including plants staffed by union members. In 2008, the United Auto Workers had 431,000 members. That number declined somewhat to 399,000 by 2019. The auto industry produced many more cars in 2019 than it did in 2008. In 2008, US market saw about 10 million automobiles manufactured. By 2019 that number was closer to 17 million. Productivity grew enormously in the US auto market.
Despite the impressive improvement in productivity in the US automobile market, the UAW continues to slowly strangle the legacy US manufacturers. GM began contract negotiations with its union in 2019 with the hope that it might be able to cut labor costs to bring them closer to the costs of the US factories run today by foreign automakers. This hope vanished as the union went on strike, costing GM $2 billion. GM’s labor costs, and especially its health care costs, exceed those of its worldwide competitors. Over the long-term this is very bad news for the company’s future.
THE SOURCES FOR STRATEGYSTREET.COM: For over 30 years we observed the evolution of more than 100 industries, many hostile. We put their facts into frameworks applicable to all industries and found patterns. Strategystreet.com describes the inductive results of these thousands of observations and their patterns.