The American Big 3 auto companies, part of the American auto industry, are in Congress asking for a bailout of $34 billion to help survive the financial crisis of 2008. Consumer credit was hard hit as banks stopped lending. Credit is a critical element of selling cars. Loan covenants and other factors make survival a factor for these three companies.
The Big 3 haven't had a return to capital that was greater than their cost of capital for decades. They are 'begging' the government for capital because they don't have the balance sheet or prospects to get private capital. They are heavily indebted. They've sold off assets for decades to fund their needs. Their market share in the U.S. has gone from near 60% in the 1970s to about 25% now.
The American auto industry is larger than the traditional Big 3. The Big 3 name harkens to the pre-1980s days before Toyota, Honda and Nissan built their U.S. plants. As an example, this month, Honda opened its 6th U.S. manufacturing plant. Toyota opened a major new plant in Mississippi last summer. The original American manufacturers are shuttering plants and downsizing.
What happened? To understand the predicament a little history is in order. Where it starts might be surprising to you.
During the post WWII years we were just fresh from the communist influence of the 1930s depression years. A lot of people thought, and continued to think, that communism was the best outcome given the failure of capitalism caused the depression. The unions were the major building block of the American socialist world because they fought for the workers. In the post WWII years, the communist influence frightened a lot of people and the hunt for communists started. House UnAmerican Affairs Committee, HUAC, and the McCarthy Army Hearings along with the Taft-Hartley were events and laws that blunted, but didn't wipe out the folks that considered the communist version of socialism the preferred way to organize the society. Central to this movement was how socialism would evolve in the U.S.
The fact that the U.S. had giant corporations and the rest of the world was just rebuilding caused people like Walter Reuther, the socialist head of the UAW, and others, to think the model in the U.S. was control of the workplaces of giant corporations to provide the basis for the worker's paradise visualized in the Communist Manifesto. The goals included full employment, maximum individual security and optimal rewards. These goals became ends in themselves and unions were arrayed against management to get their just rewards. Cooperation with management was anathema and management lost control of the shop floor. The union was 'driving the bus.' Essentially this 'froze' practices and the auto companies became an expensive 'sitting duck' for non-union competitors.
GM was pretty arrogant and wealthy in this post WWII world and simply wanted to produce to meet the world demand. The 'world' was just recovering and the U.S. had a corner on the world's production capacity. The Big 3 bargained with the UAW, but really, to a point they weren't concerned with cost. The key, which UAW and the distorted labor laws guaranteed, is that Ford and Chrysler would pay the same costs and the cost could be shifted to the consumer. The US was the world powerhouse through the 1970s.
So, in the contorted labor market caused by the 1930s Wagner Act, GM agreed to a 5 year pact (unheard of length) in 1950 for a monster pension package called the 'Treaty of Detroit'. That became the basis of negotiating new contracts for the duration- till now. Reuther thought it was fine to build huge benefits, good wages and a great pension in the socialist outpost of giant companies. So the unionized big corporation became the cornerstone of the socialist America, as seen by unions and other leftists.
The control of work rules is key to representing workers and supporting security and maximum employment union goals. The essence was it hamstrung management giving them little control on the shop floor. It didn't matter as much in the 1950s to 1970s as long as all the Big 3 had to agree to the same contract.
The big surprise was the emergence of the Japanese in autos. They produced trinkets and had insufficient capital to compete with the U.S in the immediate post WWII years. Lost in the U.S. view was McArthur's enlightened leadership and the arrival of Deming (quality guru) after WWII to focus an educated population on quality. This all fit together in the development of a Japanese business model based on Deming's principles. This superior model was refined 'below the radar' in the 1950s and 1960s and then the Japanese became devastating competitors throughtout the world in the 1970s and 1980s.
Chrylser's bankruptcy and the near loss of Ford and GM's first loss in the 1979-1982 period scared Congress and the others to develop the US version of the Japanese Deming quality award. They called it the Baldrige (1987). However, except for the surprise Baldrige win of by Cadillac in 1995, the automakers were hobbled by legacy union hand cuffs and were unable to genuinely replicate the flexibility, speed and power of the Japanese model. Toyota won the Deming quality award in Japan several times. They had to add another more competitive level for their award to accomodate the companies that were better than the already severe standards of the Deming.
One of Toyota, Honda and Nissan competitive advantages was its expertise in designing manufacturing processes that optimized the skill of workers (individuals and teams) to solve problems and continually improve efficiency and effectiveness of the manufacturing plant. To this day unions treat suggestions of work teams and any other management intervention on the shop floor as an incursion on their turf. So, the work rules outlined in the union contract severely limited quality and innovation in the Big 3.
There isn't a way for GM to compete with the Japanese firms where it counts- in the processes of designing, producing and delivering autos. They are hamstrung by union rules and regulations and legacy attitudes. The Japanese design new cars 50% faster and at lower cost than Detroit can. The wage rate at Japanese firms are generous but significantly below Detroit's legacy laden hourly wage costs.
The UAW is being brought to the table 'kicking and screaming.' They gave up some benefits and wage rates for new hires last year and will manage the legacy retirement benefits starting in 2010. These are good steps. But Big 3 business models are hamstrung by other major wage and benefit costs that haven't been broached as well as the suffocating work rules. The time warp 1960s union- structure and the historical distortion of norms is a cement jacket when competing in open water with the slick business model of the Japanese.
This is a severe crisis that has everyone's attention. You never want to waste a good crisis. It is likely that the Big 3 will get their $34 B, but if someone doesn't unravel the union cement jacket on the shop floor as part of the deal, the companies will soon be back asking for more capital with as dire a prophecy that they will go bankrupt.
As they say, the fat lady is warming up and ready to sing.
Fire Back
12/4/08
Tuesday, November 18, 2008
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