Management—bad management—crippled the auto industry’s Big Three, not the UAW
Many in the media have accepted the notion put forward by conservatives and business associations that unions make businesses uncompetitive by raising wages and benefits irresponsibly. The poster child for this view of the world is the auto industry, where the United Auto Workers supposedly drove the “Big Three” (Chrysler, Ford, and General Motors) into the ground while foreign competitors ate their lunch.
This is false history. As Case Western Reserve University manufacturing scholar Sue Helper has helped me understand, the auto industry’s problem stemmed from decades of mismanagement, and regardless of the UAW contracts, the Big Three made choices that doomed them to lose market share and the ability to compete.
The biggest element of mismanagement was designing and selling poor products. Anyone who lived in Michigan in the 1970s remembers when Detroit began building truly terrible cars, like the Chevy Vega, the AMC Gremlin, the Chrysler Imperial, and the Ford Pinto; it was the beginning of what became a slow-moving train wreck. As the Economist published in the May 2009 story, “A Giant Falls,” Detroit began making cars that were both dull and unreliable:
“Only in the 1970s, after the first oil shock, did faults start to become visible. The finned and chromed V8-powered monsters beloved of Americans were replaced by dumpy, front-wheel-drive boxes designed to meet new rules (known as CAFE standards) limiting the average fuel economy of carmakers’ fleets and to compete with Japanese imports. As well as being dull to look at, the new cars were less reliable than equivalent Japanese models.
By the early 1980s it had begun to dawn on GM that the Japanese could not only make better cars but also do so far more efficiently. A joint venture with Toyota to manufacture cars in California was an eye-opener. It convinced GM’s management that “lean” manufacturing was of the highest importance. Unfortunately, that meant still less attention being paid to the quality of the cars GM was turning out. Most were indistinguishable, badge-engineered nonentities.”1
Bad design and engineering were accompanied by disastrous pricing decisions, which further jeopardized quality:
“As the appeal of its products sank, so did the prices GM could ask. New ways had to be found to cut costs further, making the cars still less attractive to buyers.”
Autoworker wages didn’t make the Big Three uncompetitive by driving prices up; poor value drove prices down. As prices and quality fell together, consumers fled. The UAW’s contracts were almost irrelevant. One way to show this is to compare the pricing of the competitors’ vehicles with the size of the labor cost differential bargained by the UAW. Labor costs make up only 10 percent of the cost of a typical automobile. Before the auto rescue, the Big Three paid $55 an hour in compensation per auto worker while the Japanese paid only $46 an hour. (Company lobbyists and publicists inflated the total Big Three labor cost to $71 by attributing the unfunded pension and health benefit costs for decades of retired workers to the much smaller currently employed workforce2; the legacy costs for Japanese transplants were only $3 an hour.)3 But even if, for the sake of argument, we accept the unfairly inflated $71 figure, the difference in the cost of a vehicle attributable to the UAW (the UAW premium) would be 30 percent of the average 10 percent labor cost, or 3 percent of total cost.
In 2008, according to Edmunds, GM sold its average large car for $21,518. Assuming GM sold its cars at cost, the UAW premium would have been only $645 (3 percent of $21,518). Did the UAW premium raise the selling price so high as to make GM cars uncompetitive with Toyotas? Not exactly. Toyota sold its comparably equipped average large car for $31,753—$10,000 more than GM.4 It wasn’t price that made GM cars uncompetitive, it was the quality of the product and the customers’ perception of quality.5
For nearly 30 years, the Big Three’s market share fell steadily, from 77 percent in 1980 to 45 percent in 2009, almost entirely because the U.S. companies built cars that were noisier and less comfortable, had poorer fit and finish, poorer gas mileage, more defects, and a poorer repair record and resale value.6 Helper has documented the hostile relationships the Big Three developed with their suppliers,7 which led to the provision and assembly of parts that did not work well together, did not fit seamlessly, and whose inherent quality was sometimes substandard.8 In 2006, before the auto industry collapsed (and before gas prices skyrocketed), economists Kenneth Train and Clifford Winston did a careful econometric analysis of buyer preferences and concluded that:
“… the U.S. automakers’ loss in market share during the past decade can be explained almost entirely by the difference in the basic attributes that measure the quality and value of their vehicles. Recent efforts by U.S. firms to offset this disadvantage by offering much larger incentives than foreign automakers offer have not met with much success. In contrast to the numerous hypotheses that have been proffered to explain the industry’s problems, our findings lead to the conclusion that the only way for the U.S. industry to stop its decline is to improve the basic attributes of their vehicles as rapidly as foreign competitors have been able to improve the basic attributes of theirs.”
The authors conducted a simulation to determine “how much U.S. manufacturers would have to reduce their prices in 2000 to attain the same market share in 2000 that they had in 1990 and found that prices would have to fall more than 50 percent.” In other words, reducing the cars’ price by the UAW premium would have had no discernible effect on market share. The Big Three were building cars that most people simply didn’t want to buy, and only by cutting the price in half could they have retained their market share.
What happens to a corporation that sells its products at a low price while losing market share for 30 years? It goes bankrupt.
Fundamental mismanagement and building cars that customers didn’t want doomed the Big Three, not the UAW.
1. Badge-engineering is a common practice in the auto industry where the same vehicle is essentially marketed and sold under different names and brands.
2. The companies failed to fund retiree pension and health benefits on an accrual basis and loaded those costs onto current employee contracts. Workers should not be blamed for the failures of GM’s financial management and accounting systems.
3. Any measure constructed so that the hourly compensation of workers rises as the ratio of retirees to workers increases, even though the wages and benefits of the workers do not increase, is misleading. Attributing the “legacy costs” of 60 years of retired autoworkers to the current workers’ compensation is inflammatory, but not instructive.
4. At the low end of the market, the average transaction price for Ford and GM compact cars in 2008 was about $15,000, while Toyota sold its compacts for $3,000 more.
5. A car with a U.S. nameplate could be perceived to be lower quality even when it was virtually identical to a Japanese nameplate vehicle, as in the case of the Toyota Matrix/Pontiac Vibe. The cars were built in the same joint venture plant in California by the same UAW members, but the Toyota sold for about $1,000 more than the Vibe. http://consumerguideauto.howstuffworks.com/deep-drive-2009-pontiac-vibe-and-toyota-matrix.htm
6. The Detroit manufacturers also chose to focus on the very profitable SUV and truck market, ceding the small-car market to the foreign competition.
7. As Helper explains: “A key additional problem is the automakers’ relationships with their suppliers, who account for over 60% of the cost of the vehicle. The automakers have tried to cut costs with suppliers by squeezing suppliers’ margins — the difference between the suppliers’ cost and its selling price. They’ve been successful at this, to the point that many suppliers are in bankruptcy. But this method doesn’t produce good cars — it doesn’t even produce cheap cars, since the price per piece of the component is only a small part of the true cost associated with a part. Also important are the cost of installing that part, of fixing production problems as they arise, and of repairing finished cars should the parts fail while still under warranty. Most automotive components aren’t modular; they don’t simply snap together like Lego pieces. They are part of a tightly integrated machine — they must be designed for a particular car model, and often a problem with one part will mean that several other parts have to be redesigned to make everything fit.
The Detroit Three’s approach to suppliers stands in stark contrast to the approach Honda and Toyota have taken. These automakers make very strenuous performance demands on suppliers. But they do so in ways that reduce defects, improve design features to make products more attractive to consumers, and yield profits that sustain suppliers throughout the business cycle.” http://feministing.com/2009/04/05/susan_helper_understanding_the/
8. Even today, Detroit lags the Japanese and most German companies in supplier relationships. http://www.freep.com/article/20120514/NEWS06/205140351/GM-and-Chrysler-improve-relationship-with-their-suppliers