Union-bash or bust?

Jun 8th 2005
From The Economist Global Agenda

General Motors has announced that it will lay off 25,000 workers in its home market, in an effort to arrest its decline. This will help, but GM may need to pick a more serious fight with its unionised workers if it is to survive as a world-class carmaker

THERE is a sickness at the heart of General Motors—the car giant’s generous health-care plan for blue-collar workers. This issue sets the battleground between GM and the United Auto Workers (UAW) union. And GM might decide that it is time for a showdown.

Richard Wagoner, the company’s chairman and chief executive, outlined a four-point plan at its annual meeting on Tuesday June 7th to reverse GM’s ill fortunes: declining sales and market share coupled with rising costs. The success of two prongs of the approach—improving its products and marketing—are firmly within the hands of GM’s managers. But the other two—tackling gargantuan health-care costs and reducing overcapacity through lay-offs and plant closures—will require a degree of co-operation from the mighty UAW that may prove elusive.

GM has had a bad year so far. While overall car sales in North America remain buoyant, the company has seen its market share slip to 25.9% in May, over a percentage point less than a year earlier and a huge slide from the firm’s position in the late 1970s, when it commanded some 50% of the market. A series of mishaps has exacerbated GM’s troubles. The firm was forced to pay $2 billion to free itself from a put option agreed in more prosperous times that would have forced it to buy Fiat Auto, an ailing Italian carmaker. Then, in April, GM announced that it had made a loss of $1.3 billion for the first quarter. The next month, two leading credit-rating agencies cut its mountain of debt to junk status.

There is no doubt that improving GM’s products and sharpening its marketing will help. The firm has lost ground to Asian rivals that are more in tune with what American car buyers want. As demand for sport-utility vehicles, one of GM’s mainstays, has faltered, the firm has been left looking flat-footed while Toyota, Nissan and Honda plugged the gap with their smaller cars. The Japanese are also beginning to challenge GM in exclusively American territory, the pick-up truck.

But much of the advantage enjoyed by the competition is simply down to costs. The Japanese carmakers’ workforces in America are non-unionised, on lower wages, and are offered fewer benefits. Since these firms are relative newcomers to the market, they have a vastly smaller pool of retired workers to pay for and do not suffer from the sort of crippling overcapacity that dogs GM (and Ford). By announcing plans to lay off 25,000 blue-collar workers by 2008 and close some plants, GM is merely advancing capacity cuts that have been in train since the firm’s heyday of the late 1970s, when it employed some 600,000 workers in America alone.

Although the cuts appear steep, amounting to some 22% of GM’s blue-collar workforce in America, the reality is less clear. To push through plant closures before the UAW’s general labour-relations contract with GM expires in 2007 will require renegotiation of that deal. This is not likely. Any job cuts that don’t come about through early retirement or voluntary redundancies will probably face stiff union resistance. Richard Shoemaker, leader of GM’s UAW-affiliated workers, ominously noted that the union is “not convinced that GM can simply shrink its way out of its current problems”.

An even bigger battle looms over health-care benefits. In his speech at the annual meeting, Mr Wagoner repeated the oft-stated fact that $1,500 of the price of every GM vehicle goes towards providing health benefits for current and retired workers and their families—“a significant disadvantage versus our foreign-based competitors,” he noted dryly. But forcing concessions from the unions is sure to prove difficult.

GM recently wrung concessions from its white-collar staff on their contribution to the company’s health plan, which costs it nearly $6 billion annually. These employees contribute some 27% of their health-care costs, close to the national average of 32% according to GM, with the company paying the rest. Meanwhile, blue-collar workers pay a mere 7%. A whopping 450,000 retired workers and their spouses are currently covered by GM’s health plan.

In a management shake-up announced in April, the president of GM’s North American division, Gary Cowger, a company veteran who enjoys a good relationship with the unions, was handed specific responsibility for dealing with GM’s “legacy costs”—ie, trying to persuade the UAW that factory-floor workers need to cough up more. Mr Cowger has a fiendishly difficult hand to play. He may be able to persuade the union that what is good for GM is good for its members too, but that is just about his only lever. Mr Shoemaker maintains that the firm’s salvation lies primarily in making better cars.

Perhaps GM should consider confrontation rather than conciliation. Some argue that forcing a showdown with the unions would provoke widespread retaliatory industrial action that would deal a fearful blow to GM at a time of weakness. But the company has plenty of cash on hand to see it through a protracted strike and could have more if it sells a slice of GMAC, its profitable finance arm. And it has considerable stocks of cars to plug any gap in production—one potential upside of that overcapacity. The benefits of breaking the stranglehold of a union that has turned wages into something approaching a fixed cost are innumerable for a firm that is now fighting the competition with one hand tied behind its back. Added pressure for change may come from Kirk Kerkorian. The wily investor announced on Wednesday that he had raised his stake in GM to over 7%.

The union-bashing option should not be taken lightly. But America’s carmakers—like its airlines and steelmakers—find themselves in an industry weighed down by history. For much of the last century they were coddled by protectionism, or over-regulation, or both, during which time they acquired powerful unions and high cost structures, and took on enormous long-term commitments to cover their workers’ retirements. More recently, deregulation has freed up their markets but has also constrained their ability to pass costs on to consumers. For GM to recover, it must break free from the legacy of strong-arm unions, crippling cost structures and onerous commitments to its ex-workers. And it must do so quickly, with or without the UAW.

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