54-Evolution of Markets: Patterns in Steel, Autos and Airframe Industries
The steel, automobile and airframe manufacturing industries illustrate three different stages of the evolution of mature markets. The theme is that mature markets with strong unions eventually end up with the workforce as the only true stakeholder in the business. Everyone else is secondary, and as a result, the workforce is at real risk of permanent job losses over a period of time.
The story of Bethlehem Steel illustrates the end game in this evolution. Through most of the 80s and 90s, Bethlehem lobbied Washington to protect its business against the import of foreign steel, which it argued was subsidized and dumped in the U.S. All along, though, non-unionized companies like Nucor were gaining share rapidly in the domestic market. Bethlehem’s costs were much higher than the industry as a whole. The company suffered from very high wages compared to both foreign mills and non-union domestic mills, and from work rules that reduced the productivity of the workforce. Because the company had no profits, it could not invest in its infrastructure. This low investment yielded older and less efficient mills, compounding the company’s cost problems. As the company faltered, pension and benefit payments to retirees soared, while the active workforce shrank. The unions refused to negotiate away some of these uncompetitive cost drivers. Customers did not have to put up with inefficient costs and the slow reaction to price discounting that Bethlehem imposed upon them. They left for greener pastures. The company filed for bankruptcy in 2003. A financial investor bought the company’s assets, and negotiated new deals with unions who, chastened, gave him a sweeter deal than they gave to the company’s previous management. The retirees lost all or most of their pensions. The steel works have fewer, and lower paid employees.
Ford, and the rest of the domestic automobile industry, is just a few years behind in this same evolution. Recently, Kirk Kerkorian began selling off his investment in Ford. Kerkorian has proven himself to be a very savvy investor over these last thirty years. He sees little future for Ford. Why? Because neither customers nor investors have any true stake in the company. The company is essentially controlled by the United Autoworkers. The autoworkers stand by their demands and inefficient costs despite the fact that the domestic industry is hemorrhaging losses and reducing employee numbers at an unprecedented rate.
What is likely to change this situation? Not really anything. Yes, the government is likely to inject cash into the industry, but this will simply delay the inevitable. Costs are too high, investment and product quality are too low, customers are leaving and retiree costs are becoming a higher proportion of industry unit costs. Haven’t we seen this story before? See above.
Now we come to the airframe manufacturing industry. Boeing is the leader here. The Machinists Union at Boeing is now on strike, largely over the issue of job security. These machinists are well paid by U.S. standards. The average machinist earned an average of $65,000 a year last year, including overtime. The company’s critical issue in this strike is whether the company can turn over more of its work to outside contractors. The union argues that they have already lost too much work because of Boeing’s outsourcing to contractors.
Now, think of the union as a supplier for a moment, offering a service for a price. The union, as the leader, is losing share to emerging contractor-based workers. (See the Symptom and Implication, “New entrants are penetrating the distribution channels of the industry’s leading competitors” on StrategyStreet.com.) The union stance here is that they do not like losing market share at Boeing to other companies who can offer the same, or better, product at a lower price. Sounds like steel and autos, doesn’t it?
Now let’s ask another question. Do you suppose that the machinists would be willing to pay a higher price for a product just because it was manufactured by union employees in the United States? Overwhelmingly, it appears that most would not. It would be interesting to know how many union employees purchased domestic made color televisions during the 70s and 80s just because they were manufactured domestically. Today, all televisions are manufactured in Asia. Union employees are just like the rest of us when it comes to being stewards of their own money. They do not want to pay more for the same product than other people have to pay. Now, back to the Boeing situation.
Boeing’s management has held tight to its position that it must be able to outsource more of its current product manufacturing. They have done this in the face of some cancelled orders and a stock price that has fallen well over 60% from its peak in 2007. Boeing’s strong financial position, high market share, and relative lack of current competition strengthens the union’s position. However, those same economics one time held for both Bethlehem and Ford. Somehow competition found them anyway.
There is now a tentative agreement on the table. Boeing agreed to raise wages by a total of 15% over the four years of the contract and to pay bonuses totaling $8,000 to each worker during the first three years of the contract. The union has agreed to allow Boeing to expand the use of contractors to deliver components directly to assembly lines, but no further. The strike has lasted for 52 days, costing the company about $100 million per day in lost revenue and delays. So, let’s consider the likely fall-out from this settlement.
The union got a very generous settlement that promises to hurt them in the long-term. The wage increases in the face of a stronger dollar and weakening world-wide economies will surely make the Machinists Union employees even less competitive on the world market than they were before the strike. They get money now, but far less job security in the long-term.
The company, for its part, has agreed to pay a higher price for its Machinists Union labor. It won at least part of its battle over the issue of contracting. You can bet that contracting will grow in the future, at the expense of union positions. In addition, the Machinists Union, as a supplier of a labor service in this instance, proved itself to be highly unreliable. The daily cost of the disruption is the equivalent of about three years worth of wages for each employee in the Boeing group of the Machinists Union. That is a stiff price for Boeing to pay, and will certainly play into their consideration of where to place any new manufacturing facilities in the future. Again, this will work against the creation of new Machinist Union jobs in the future.
Unions in mature industries will eventually have to think of themselves as suppliers offering a service for a price. (See the Symptom and Implication, “The industry leaders are losing share” on StrategyStreet.com.) The steel and automobile industries join many other industries, including semiconductors, textiles and paper in suggesting that there is little likelihood that a high-priced supplier can sustain its position, even if the supplier is the workforce.
In 2009 Boeing had 157,000 total employees. That number grew to a peak of 174,000 x 2012. In 2019, before the 737 Max catastrophe, employment had fallen to 161,000. In 2021 employment had fallen further to 142,000.
Union membership has declined in all 3 of these industries. In 2008, the United Auto Workers had 431,000 members. That number declined somewhat to 399,000 by 2019. In 2008 the Machinists Union had roughly 642,000 members. That number declined to roughly 580,000 members in 2019. In 2008, the United Steelworkers Union had 705,000 members. By 2019 the membership had fallen to 575,000.
The worldwide steel industry has been surprisingly dynamic, though not generous to the US manufacturers. In 2016 the world’s largest steel manufacturer was ArcelorMittal with revenues of $76 billion a year. The largest US participant, US Steel, ranked number 24 with $12 billion in sales. By 2020 the Chinese dominated the market. China Baowu Group had become the industry leader with $115 billion in sales. The largest US participant, Nucor, ranked number 15 with about $23 billion in sales.
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.