204-Here We Go Again
The leader of the United Auto Workers is retiring. He is leaving a union under siege. By 2009, UAW membership was about half of the level of 1995. The union has hemorrhaged members as the big three domestic automobile producers have shrunk in market share, lost billions of dollars, and closed plants.
The departing leader of the UAW claims that the industry’s difficulties never rested with the union and its rich contracts. In his view, the crisis that led to the bankruptcies of GM and Chrysler and the near bankruptcy of Ford was strictly the result of an unexpected spike in gas prices and a recession that resulted from the mortgage crisis. He believes that the fault lay not with the union and not with the industry. Following this belief, he is encouraging his successor to begin clawing back the cost-cutting concessions that the union has granted the Detroit big three domestic automobile manufacturers now that these companies are moving toward profitable operations.
The problem is that these concessions did not do enough, at least from the results they seem to have produced. The concessions really got underway in 2003, as the union reduced its wages and benefits and transferred retiree healthcare costs from the automakers to an independent trust. Despite these concessions, union membership fell parabolically from 2003 to 2009, right along with the profits in the big three. In the meantime, German and Asian manufacturers continued to be profitable. These profits included profits in U.S. domestic manufacturing facilities as well. (See the Symptom & Implication, “Some industry leaders have lower returns than the smaller competitors” on StrategyStreet.com.)
The union is heading back to trouble and will take its unionized facilities with them. In an earlier blog (See Blog HERE), we described the hourly cost differences in wage rates between a unionized and non-unionized domestic facility. These cost differences are unsustainable in the longer term. No one can expect that an automobile plant with $73 dollar an hour labor will be profitable enough to compete with another domestic plant producing similar automobiles at $48 an hour. Despite recent troubles, the Asian manufacturers still command a premium price over their big three competitors for their products. So, Toyota and Honda get a higher price and produce with a lower costs. (See “Video #1: The Two Best Consultants in the World” on StrategyStreet.com.) Tell me how GM, Chrysler and Ford can produce an equivalent or better car with these economic conditions. The claw-backs will only make things worse.
The US domestic automobile manufacturers are now at significant disadvantages on both efficiency and effectiveness. They are at an efficiency disadvantage because of their high fully loaded labor rates, even compared to US auto plants operated by their foreign competitors. They are at an effectiveness disadvantage because they no longer have the scale to produce equivalent economies of scale compared to several of their larger foreign competitors. See HERE and HERE for more explanation on the roles of efficiency and effectiveness in creating a low physical cost structure.
While productivity has grown, the long-term efficiency outlook for legacy US manufacturers is cloudy due to high labor rates. Productivity has grown enormously in the US auto market. 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. In 2022, GM is again a publicly traded and profitable company. Unfortunately, it’s long-term outlook for competitive labor costs is not good. 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.
Economies of scale by way of effectiveness may prove elusive for US manufacturers as their market shares fall behind other global competitors. While the US based auto manufacturers struggled, their Asian counterparts continued to gain share. The Koreans have grown their US market shares with high quality products. US manufacturers are also slipping in global share. In 2020, Toyota led the global market with a share of 8.5%. Volkswagen followed at 7.8%. Hyundai was 3rd at 5.4%. Ford was 4th at 5.1% and Honda was 5th at 4.8%.
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