Persistent
Trouble
by Jim Surowiecki
([email protected])
By the beginning of last November, the Big Three American automakers had
all signed long-term contracts with the United Auto Workers (UAW), the union
that represents the vast majority of their production workers. The contracts
were somewhat revolutionary, since they committed the automakers to maintaining
minimum staffing levels over the life of the agreement. Even GENERAL
MOTORS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GM)") else Response.Write("(NYSE: GM)") end if %>, a company that still has a great deal more restructuring
to do, agreed to keep its workforce at 95% of current levels.
As a result of this agreement, the Big Three have traded a certain measure
of flexibility in revamping its production lines for some measure of stability
in labor relations. Why? With the industry flush from five straight years
of consistently good auto sales, and some Detroit executives eager to disprove
the notion that their industry is cyclical, ensuring that cars would keep
rolling off the assembly lines is the highest priority.
The final agreements between the union and the Big Three seemed to represent
an end to the labor turmoil that had beset the industry throughout 1996,
most notably during the spring. In April, a month-long strike at a Dayton
plant cost GM hundreds of millions in profits. With the contracts signed,
the industry could worry less about work stoppages and more about things
like the strong dollar. Or could they?
For the last month and a half, not a day has passed without at least one
Big Three factory being out on strike. The walkouts have been provoked by
concerns over outsourcing, the industry's preference for overtime work instead
of hiring new workers, and the possible transfer of jobs to Mexico. Just
last week, GM narrowly averted the disruption of its assembly operations
by reaching an agreement with workers at its Delph Packard Electric Systems
parts-making unit. These workers were striking over the movement of jobs
south of the border. Had the one-day strike lasted more than a week, GM would
most likely have had to shut down assembly plants, as Delph Packard is the
largest maker of car wiring products in the world.
Despite avoiding a strike at Delph Packard, GM still has two other strikes
with which to deal. Thirty-five hundred UAW workers in Oklahoma City have
been on the picket lines since April 4, which has crippled the scheduled
launch of the new Chevrolet Malibu and Oldsmobile Cutlass. More importantly,
another fifty-five hundred workers at a Pontiac, Mich., plant have been on
strike since April 22. Labor talks in both places have been slow and
unproductive. GM may also be looking at a strike soon at an assembly plant
in Kansas. Some industry analysts have suggested that the industry as a whole
could see ten or more strikes this year.
Because General Motors is in the worst shape of the Big Three in terms of
its competitiveness and its need to restructure its entire business, it is
both the company most susceptible to labor trouble and the one most likely
to provoke it. As the company seeks to break with the model of vertical
integration and outsource more and more of its work to save money, it risks
sparking expensive work stoppages as a result. However, GM has not been the
only company to struggle with its workers in 1997. While things have been
relatively placid for FORD <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: F)") else Response.Write("(NYSE: F)") end if %>, CHRYSLER <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: C)") else Response.Write("(NYSE: C)") end if %> recently
endured its longest strike in 30 years. The month-long walkout at its Mound
Road plant in Detroit ended up idling not only the 1,856 workers on strike,
but also 22,000 other workers at more than a dozen plants in Canada and the
United States.
The Mound Road strike arose out of a dispute over Chrysler's decision to
contract out 250 drive-shaft production jobs to an independent supplier.
As such, it represented a test both of the UAW's resolve to protect current
jobs and of the corporation's desire to retool its production plants. The
final agreement, which was actually opposed by certain members of the UAW
negotiating team, provided for new work for those workers displaced by the
outsourcing and for a commitment by Chrysler to bring a new engine-block
production line back to the company. The pact did not block the outsourcing.
At the time the Wall Street Journal quoted the shop chairman of the union
local saying, "Chrysler owes our members and they basically got away without
giving them anything."
What Chrysler did give up, to be sure, were profits. On Tuesday, the company
announced that the Mound Road strike will reduce second-quarter earnings
by $450 million, or 65 cents a share, which is substantially greater than
the estimates of most analysts. It also said that the walkout had cost it
the production of 94,000 vehicles, and that few, if any, of those vehicles
will be able to be produced this year.
Those numbers simply underscore what is the most striking thing about the
Big Three's recent strategy for dealing with labor, which is the corporation's
willingness to endure dramatic profit losses in order to pursue their plans
of outsourcing and restructuring. Certainly the 250 jobs that Chrysler is
getting rid of at Mound Road will not save the company the $450 million that
the strike cost it. Nor would the extra hundred jobs that GM doesn't want
to create at the Oklahoma City plant dent its bottom line as much as the
month-long walkout has. The corporations have adopted a hard-line stance
that flies in the face of any financial losses. The automakers feel they
are dealing from a position of short-term strength and can now afford to
do the things that they see as necessary for the future.
There have been some concerns raised, though, that the companies may be acting
penny-wise and pound-foolish. While General Motors almost certainly needs
to reduce its workforce, it's not clear that Chrysler -- which reinvented
itself after its brush with bankruptcy -- has the same concerns. More
importantly, it's possible that the refusal to consider seriously the expansion
of production lines will limit the automakers' ability to take advantage
of a continued robust economy. If, as executives would have us believe, the
auto industry is not a cyclical one, management might want to stop acting
as if it were.
Indeed, when you look at the Big Three in terms of the stock market, their
valuations seem astonishingly low. All three trade at P/Es between 6 and
7.5. All three have massive reserves of cash and all three pay substantial
dividends with yields that are now around five percent. Part of investors'
skepticism about the Big Three undoubtedly does stem from the persistence
of labor trouble, which can cut into profits at any time. If management is
eager to lose hundreds of millions of dollars to prove a point, perhaps things
have not really changed that much for the auto industry after all. The companies'
current valuations have more to do with the conception of the industry as
cyclical than with anything else. With labor and the auto companies at each
others throats, it appears that very little has actually changed. |