The UAW vs. the Big Three: Who’s in Control Here?

Automotive Trendlines: The UAW vs. the Big Three – Who’s in Control Here?
MiBizWest • October, 20, 2003
by Jim Gillette

The recently completed UAW contract with Ford, General Motors, DaimlerChrysler, Delphi and Visteon is deeply disappointing. Another opportunity has been lost that could have significantly bolstered the competitive position of the traditional Big Three automakers and possibly have cooled the intensity of the incentive war.

More than just the cost of labor is at stake. The effectiveness of corporate governance in the context of a competitive global auto­ motive market is at issue. Not all auto companies stand equal.
They vary in the degree to which their management can control their portfolio of product offerings to consumers. Whenever management lacks the ability to close unprofitable or otherwise inefficient assembly plants, the adjustment of the company’s product portfolio to consumer demand is constrained. The result: a weakened financial and competitive position for the firm.

Excess capacity = excess product

Of the various issues on the table during the recent negotiations, only the problem of overcapacity had a relatively straightforward solution. (The pension and health care problems are not as easily remedied.) Going into last summer, the Big Three had excess capacity that equaled the output of seven to eight typical North American assembly plants.

The overt problem with excess capacity is that automakers are saddled with high fixed costs at both the peak and trough of the business cycle. A less obvious problem is that if the carmakers are not allowed to close underused plants, they must either come up with new products to fill the space or continue to make obsolete and often low margin product. Since new products require incre­mental investment, it makes sense that most capital constrained carmakers can only launch a limited number of new products if they are to receive a satisfactory return on their investment. When there are more plants than star-quality products, mediocre vehicles must be sold at deep discounts just to con­ tribute some cash to cover plants’ fixed costs.

Three close instead of six

Prior to the UAW negotiations, we developed a strong case that two General Motors plants and four Ford plants should be on the chopping block. (While some DaimlerChrysler plants are underutilized, Newark, building the Durango, and St. Louis #1, minivans, for example, the need to eliminate capacity is not as pressing as with Ford and GM.) GM’s Baltimore plant where the Chevy Astro and GMC Safari are produced is a good example. The rear-wheel-drive minivan is well past its prime. The plant would have been closed sooner had a prohibition of plant clo­sures not been written into the
1999 UAW contract.

Regarding the control over product port­ folio, GM’s Linden, N.J. plant is particularly troublesome. The plant still makes the ancient Chevy S-Blazer for the low end of the SUV market. The concession in the contract leaving the Linden plant open until mid-2007 forces GM to continue to build and sell an obsolete product. Our fear is that sales of the Blazer at the low end of the market will cannibalize customers from GM’s newer SUVs, the Equinox and Trailblazer models. Whereas Linden may remain marginally profitable, placing old Blazers in showrooms next to more contemporary product does not seem to fit GM’s announced strategy of “reinventing itself.”

Ford got the worst end of the deal

Ford is probably in the worst financial shape of the Big Three and can little afford excess capacity. Prior to the UAW pact, it was clear to analysts at CSM Worldwide that Ford desperately needed to close four assembly plants, deleting upwards of 720,000 units of capacity from its U.S. portfolio. Ford agreed instead to close only two plants, reducing net capacity 440,000 units and leaving 280,000 units on the table. Ford’s paucity of market-grabbing car product and the formidable competition in the SUV segment most certainly will force the company to ask for additional closures in 2007. The cash drain required to operate the additional plants could have been better directed at product development.

Flexibility and control

In addition to control over the product offered, flexibility is needed to adapt plant resources quickly and inexpensively to meet changing market demand. Let me give you an example.

The just-completed Nissan plant in Can­ton, Miss. when fully up-to-speed next year will supply five different vehicles including a passenger car, the Altima, a full-sized pickup truck, the Titan, a minivan, the Quest and two SUVs, the Pathfinder Armada and the Infiniti QX-56. That’s four distinct products (the QX-56 is a re-trim of the Pathfinder) being made at the same plant. Nissan enjoys valuable options in the marketplace by being able to shift resources from one product to another to optimally meet market demand.

You guessed it: like most other New Domestic assembly plants, Canton is non­ union. (And as you probably know, the UAW’s attempts to organize New Domestic plants have been rebuffed on numerous occasions.)

By our calculations, during 2006 the New Domestic Manufacturers (e.g. Japanese, European and South Korean companies) will be operating their North American plants at 97 percent capacity utilization. DaimlerChrysler, Ford and General Motors will be operating at 82 percent, 83 percent and 88 percent respectively. The plants will possibly be above break even, yes (depend­ing on the pricing environment), but far from the efficiency and effectiveness of the New Domestics.

The current operating model of a strong UAW controlling strategic decisions involving whether plants would stay open or closed was formulated during the 1950s and ’60s when the Big Three dominated and were essentially printing money. They no longer dominate and profits are now all but nonex­istent. The industry has changed; the market has changed.

The pay and benefits packages provided UAW members are the envy of working people everywhere. Management need make no apologies for the way labor is treated in modem North American assembly plants. It is time for a paradigm shift and for the automakers’ management to regain control of the most import decisions in corporate governance. The alternative isn’t pretty.