233-Green Shoots in Attitudes and Jobs
Here is something that may surprise you. We are now gaining manufacturing jobs in the U.S. Manufacturing employment has fallen every year since 1998, until 2010. Since the beginning of 2010, there has been a 1.6% gain in manufacturing jobs. That’s twice the pace of the growth in other private sector jobs. The unemployment rate for the manufacturing has improved from 13% in December of 2009 to 9.5% in August of 2010. That’s a better performance than that of the overall labor force.
These gains have come primarily in four industries: automobiles, fabricated metals, primary metals and machinery. These industries have all been losing jobs for several years. What is behind the change? Here is a significant indicator. Recently, the United Autoworkers Union has crafted an agreement with General Motors to encourage GM to invest money to assemble a low-priced sub-compact car in the U.S., with unionized labor.
This will be a first. All other domestic and foreign manufacturers have produced their sub-compact cars offshore. GM’s sub-compact, the Aveo, came from South Korea. Ford’s Fiesta came from Mexico. Chrysler and Fiat are planning to manufacture the Fiat 500 in Mexico. The Honda Fit and the Toyota Yaris are imported from outside the United States.
This new agreement is truly ground-breaking. Under the terms of the agreement, GM will pay 60% of the sub-compact plant’s 1550 workers a wage of $28 an hour. The other 40% of the plant’s employees will make $14 an hour. By GM’s calculations, this would enable the company to build a sub-compact at a profit in the U.S.
This new agreement may, in fact, reduce the average wage rate to competitive levels. Before GM’s bankruptcy, the average GM worker earned over $70 an hour in wages and benefits. After bankruptcy, that rate of cost fell to about $57 an hour…good, but not good enough to compete profitably. (See “Audio Tip #163: Introduction to Step 25 of the Basic Strategy Guide” on StrategyStreet.com.) Toyota has average labor costs of about $50 an hour. The Toyota workers are not unionized. This new UAW agreement with GM should make the new sub-compact plant competitive with the cost that Toyota incurs in the U.S.
A change in attitude at the UAW is behind this job-creating agreement. A senior UAW official explained that this agreement was the result of some very difficult decisions the union had to make in order to safeguard jobs. He further explained that the UAW developed a new understanding of the realities of the 21st century global auto industry while living through the GM and Chrysler bankruptcies. (See the Symptom & Implication, “The industry is reducing costs aggressively” on StrategyStreet.com.)
Three cheers for the UAW/GM agreement. Let’s hope that it creates jobs and profits.
The two-tier wage system has been an economic success for the manufacturers but a nettle to the UAW.
The Aveo was an unsuccessful car in the United States due to quality problems and a poor reputation for reliability. It was replaced in the US market by the Chevrolet Sonic. The 2010 two-tier wage system enabled GM to produce the Sonic, a US-made subcompact, in the US and to replace an automobile previously imported from Korea. The Sonic began production in 2011 in a GM plant in Michigan. It was the only subcompact car sold in North America that was built in the United States. Chevrolet discontinued the Sonic in 2020 in order to convert its manufacturing facility to an electric vehicle production facility.
The two-tier wage structure is bitterly resented by the UAW rank-and-file. The two-tier wage concept began in the late 1990s and became common practice in the auto industry in 2007. The wage structure certainly helped the domestic automobile manufacturers who found it very difficult to compete with foreign owned manufacturing competitors in US nonunion states. Union members never embraced the idea. The two-tier wage structure is gradually being worn away with each consecutive union negotiation with the automobile manufacturers. It still exists but probably has a limited life.
The union is in a Leaders Trap here. This never ends well. The leadership can see the economic disadvantage of its unionized company plants. But the majority of the rank and file refused to be reconciled to the long-term continuation of two-tier wages. The long-term outlook for US manufacturers with unionized domestic manufacturing plants is simply not good without some kind of wage accommodation. If the manufacturers incur higher costs because of higher labor rates, they must find other areas where they can reduce costs to remain competitive. We saw in the 80s that this meant a decline in the quality of the automobiles produced by domestic manufacturers. The decline in quality ripped market share from these manufacturers. For example, GM went from holding 50% of the US market in the late 70s to 15% in 2022. See HERE for ideas on developing a successful pricing policy.
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