Government Motors- unions and government in the auto industry

There is huge potential in the future auto market. The rapidly emerging economies (China and India) hold the key to the growth going forward. Mature economies (U.S. Europe) will be a stable/declining demand. In the midst of this opportunity, the U.S. domestic companies are failed.

Most domestic car companies are truly international companies and spotted globalism into their strategies a long time ago. GM and Ford both have modern flexible, customer-centric plants world-wide along with more entrepreneurial, local efforts of competitor companies in India and China. Chrysler's difficulties over the years make it mainly a domestic producer.

The Big 2's efforts internationally have been mostly a success. These international initiatives have been hobbled by domestic production in union plants. The world's biggest market, the US, is fair game for all companies. Instead of being 'owned' by domestic companies, America has been opened up to other competitors who have been uncommonly successful here. All the reasons for weak domestic competition were self-inflicted. First, by the arrogance of the managements of the incredibly successful Post WWII auto companies that thought the world revolved around them.

In the '60s and '70s they had a major share of the world's car market. Second, because of the companies restrictive UAW labor agreements. The U.S. market was invaded by the Japanese in the 1970s. They built an increasing manufacturing base in the 1980s and expanding that base rapidly in the 1990s and 2000s to the present.

Third, domestic auto companies were crippled by government policies. One of those restrictive policies is what is called CAFE standards. This policy dictated the average fuel economy required of the portfolio of cars offered by car companies. This distorted the allocation of resources as companies balanced the government requirements with customer needs.

The demands of U.S. consumers who have busy families, long distances to drive (a big country), safety as a concern and increasing wealth from a very productive economy, resulted in several cars per family. The autos produced for this market met these consumer demands and violated CAFE standards. Consumer needs and government policy are at odds forcing cars to offer smaller, more economical cars at a loss to try to meet CAFE standards. This is one of several factors that put auto manufacturers in a bind. A major factor, though, in all of this is the union.

Unionism is an old and ideological institution in the U.S.. The union's history show it was a factor in the decline and mediocrity of many industries like airlines, steel, autos and education. Except for education, they all visited the bankruptcy court to shuck the companies of devastating costs and work rules. The inefficiencies of Government represented by the SEI union (service employees international) is inefficient and non-responsive. So, any argument that they are not THE factor in the loss of US manufacturing advantage has no credibility. Unionized industry after unionized industry has failed. Not all managements are stupid. "It's the union, stupid."

Most of the union issue can be attributed to the U.S. flirtation with Marxism in the 1930s. FDR is the major architect. From NIRA to the Wagner Act the union was placed in a powerful position in the labor marketplace and sustained there for decades while the unions eroded company cultures and sucked the flexibility and competitiveness out of companies for selfish reasons.

The modern day is distinctly non-union because literally we know how to manage large scale organizations now. Although Harvard business school has been around for decades pre WWII, business research and education is a distinctly post WWII phenomena.

Wal-Mart has about 1.2 million employees non-union. "We only need one hand on the steering wheel of Wal-Mart- managements," is a quote from Lee Scott, ex-CEO of WMT. More pertinent to this auto story is the rapid growth of Toyota, Honda and Nissan in the U.S. From exporting cars to us in the 1970s, through Toyota's 'camel's nose under the tent' partnership with GM in the 1980s, to a well-established manufacturing base in the U.S. currently. All this with a non-union, non-UAW, workforce.

Until the mid 1990s, Toyota's strategy was timid for fear of generating 'buy American' fears from the American public. A change to non-family leadership at Toyota and a critical mass of plants in the U.S. led to aggressive market share expansion strategies and leadership in several size categories. All this success was based on quality principles applied in the supply from the customer through suppliers. Knowing the customer and their needs is one part. The other is a competitive advantage from the design of the supply and management of their employee base.. This they built with a combination flexibly designed manufacturing shop floor combined with a skilled work force. These factors were integrated by a manufacturing philosophy of just-in-time manufacturing and a quality culture of 'continual improvement' or kaizen. A true work of art.

Most important, the recipe above rolled out into a devastating world competitive advantage. With the highly paid and highly skilled workforce operating in continual improvement culture made a very productive and the product high quality. The Japanese shop floor had 'one hand on the steering wheel'- the managements and shareholders. They designed the core technology to respond to the customer with a non-unionized work force.

The U.S. companies have nothing to compare to the Japanese innovations. The US companies were like a swimmer with a concrete vest trying to compete with 'Michael Phelps' like Japanese companies. Now, all US auto companies but Ford, have visited the bankruptcy court this decade. However, unlike some of the other unionized industries which visited bankruptcy, GM and Chrysler have not shed themselves of any but a few work rules and given up limited union wages and benefits.

The naive capital holders were punished and the unionists rewarded because of the biases of the Obama administration's dictated pre-planned bankruptcy. So the American manufacturers might have shed one layer of their 'concrete' swimming vest, but there are 'multi-layers of concrete' left and they still have to compete against the 'Michael Phelps' of manufacturers- Toyota/Honda.

Tata and other Indian auto startups, the Chinese Hummer manufacturers, other Chinese manufacturers, South Korean are all equipped with up-to-date automation and manufacturing philosophies and non-union work forces. They soon will be here in the US, manufacturing cars at higher quality and customer attractiveness than GM and Fiat Chrysler. Fiat? Fiat as a merger partner was selected by the government and not Chrysler. Taking two average companies and merging them is still average.

Has management been competent over the years? Strategies can be criticized, but the managements have had few degrees of freedom. They have a 'hand tied behind their back,' so to speak, by having little flexibility in the design or management of the shop floor. They had to sign the labor agreements and can be criticized. The Wagner Act and ensuing legislation, NLRB and court history has maintained a contorted power of the UAW union in the labor market. A bargaining strategy, pattern bargain, allows the union to whipsaw companies to agree to union demands.

The unique post WWII situation, which pitted US firms against a rebuilding international world, played a role. Within reason, it didn't make much difference in what union demands a company agreed to, if all companies had the same provisions and costs. So the concern was keeping the plants producing and not get struck or saddled with unique work rules, not gaining flexibility and competitiveness. The managements were short sighted. But with the power of the unions, standing on principle might have been devastating.

So, because of the unions, first, and because of Obama's dictation of bankruptcy court positions, second, the US auto companies are not likely to succeed going forward. Why? ]They can't keep up competitively and no serious capital will find its way to those companies. Soon, the people will tire of giving their capital in the form of taxes to the losing enterprises, so the government will withdraw. The only solution is 'kill' the domestic unionized companies (they are all but 'dead' now) and let capital flow to viable competitors than will return more than the cost of capital. For as smart as we are in this country, we sure did screw up the domestic auto industry.

Bill Vroman