End of the Road: Is the Auto Industry Dead?
Editor's note: As politicians in Washington debate the future of the U.S. auto industry, we are reposting this article from the September 2006 issue of Labor Notes. It spells out the how the Big 3 got into the mess they are in today, and what the UAW -- together with the rest of the labor movement -- needs to do to get us out.
In the 1980s Chevrolet proclaimed itself the "Heartbeat of America." Today many would say that the American auto industry qualifies for life support. Last November, General Motors (owner of the Chevy brand) announced that it was cutting 25,000 jobs and closing up to 12 factories by 2008.
The news came one month after auto parts giant Delphi declared bankruptcy, promising to shutter at least a dozen plants and cut as many as 24,000 jobs in three years time. Ford completed the grim hat trick in January, revealing a plan to cut 30,000 jobs by 2012.
Just months before, GM and Ford had convinced Solidarity House, headquarters of the once-mighty United Auto Workers, to make $1 billion in concessions to help pay for retired auto workers' health benefits. Detroit is abuzz over the additional give-backs the Big Three auto makers (GM, Ford, and DaimlerChrysler) are likely to wrest from the union in next year's contract talks, and the rank-and-file hear no tough talk -- let alone action -- from their leaders.
On the face of it, the industry's problems seem almost insurmountable. Collectively, U.S. car makers are billions of dollars in the red and foreign competitors continue to gobble up the Big Three's market share. America's auto giants boost their bottom line only by selling gas-guzzling trucks and SUVs, and cars would be moving off the lots even slower were it not for thousands of dollars in incentives used to sweeten each sale.
In the face of these pressures, it's no surprise that analysts from the Motor City to Wall Street are convinced that this is the end of an era in the auto industry. There is no alternative, these experts lament. Today's auto workers will have to make do with less or kiss their jobs goodbye.
For over a century the auto industry has been an anchor for the U.S. economy and a trendsetter for corporate America. What does the current upheaval mean for workers? Announcing the company's bankruptcy, Delphi's CEO Steve Miller signaled what was at stake: "I want you to view what is happening at Delphi as a flash point, a test case, for all the economic and social trends that are on a collision course in our country and around the globe."
The auto industry paid out a living wage for millions of working-class people. Is Detroit about to call an end to that life?
What's Good for GM ...
Times weren't always so tough in the Motor City. On the heels of World War II America's auto manufacturers were the undisputed titans of industry. Although UAW President Walter Reuther began his tenure with visions of government-provided pensions and health care for all Americans, that drive was blunted when the union achieved, at the bargaining table, a private welfare state for its members at the Big Three.
In addition to private insurance and 30-years-and-out retirement benefits, they also received "supplemental unemployment benefits" to cushion the blow when the cyclical nature of the industry brought about layoffs -- a step toward Reuther's social democratic dream of a guaranteed annual wage. Besides their 3 percent annual raises to compensate for productivity improvements, auto workers also received cost-of-living increases, and, as the decades rolled on, tuition and legal services were added as well.
Unions in steel and rubber followed suit with similar contracts and, to a lesser extent, other blue-collar workers such as miners, telephone workers, truckers, and electrical workers all attempted to follow the UAW's lead. The pattern of steady wage increases together with health and retirement benefits stretched well beyond heavily unionized industries, setting a higher standard for all the nation's employers, union and non-union alike.
The ratcheting productivity that allowed for these benefits was good for the bottom line but it meant that the factories continued to be, in Reuther's words, "gold-plated sweatshops." The foundry and the assembly line remained an inhuman way to make a living. The common pattern was for workers to sign on, thinking to stay just a few years, but to be seduced by the benefits -- and then say to themselves "it's only 30 years."
The mind-numbing drudgery, the high injury rates, the heat and smoke and oil in the air led many workers to hit the bottle -- and, in one famous case, led black Detroit Chrysler worker James Johnson to pick up a gun and shoot two supervisors and a co-worker. A jury, after a plant tour, found that brutal working conditions and Chrysler's shop-floor racism had literally driven Johnson insane.
Removed from the daily grind of factory life, however, UAW officials became far more attuned to the gold-plating in the shops than to the sweat. They sought gains they could measure in dollars, and Reuther's belief in the benefits of technology and productivity kept him from protesting either automation or speedup. Officials came to see themselves as partners with management, truly convinced that "what's good for GM is good for America," and for UAW members.
This outlook ensured that a host of management initiatives -- and stupidities -- went unchallenged. Early on, the UAW abandoned Reuther's fight for low car prices; later, it joined auto manufacturers in lobbying against higher fuel economy standards. The UAW also embraced its role as guarantor of orderly industrial relations, repudiating the tactics that gave birth to the union in the 1930s.
The Path Downwards
These years of collaboration and quiescence left the union ill prepared for the crisis that shook the auto industry in 1979. The UAW once again blazed a trail the rest of the labor movement would soon follow-only this time it was the path of concessions and explicit labor-management cooperation.
Through postwar recessions and expansions, it had not occurred to American employers that signed contracts could be breached. But when Lee Iacocca's Chrysler Corp. threatened bankruptcy in the fall of 1979, the UAW stepped up to the plate. Chrysler workers and retirees broke the once-sacrosanct pattern contract, taking concessions estimated at $203 million, $2,000 per worker, nonrecoverable.
More cuts soon followed; by January 1981 Chrysler workers were collectively a billion dollars behind. The next year, with the economy and the industry in full-blown recession, the union opened pacts at Ford and GM to make cuts there.
Describing the new bargaining climate, a steel industry official told the Wall Street Journal, "The whole posture of negotiating is changed. Basically we're asking for something that we're not entitled to." A staffer for the United Food and Commercial Workers noted, "After Chrysler, everything changed."
Employers from meatpacking to airlines to education demanded and got wage cuts. In Michigan, the hospital workers union reported that every hospital it bargained with in 1982 used the argument "GM took a wage freeze." Companies used economic hard times to force a redistribution of power in their own favor.
As important as the monetary concessions was an explicit change in union philosophy: acceptance of the notion that it is the union's job to make the employer more "competitive."
Workers were to contribute their ideas for boosting productivity, including speedup and job cuts. This "team concept" quickly spread from auto throughout manufacturing and beyond. The flagship team concept plant jointly run by GM and Toyota in Fremont, California, became the most famous factory in America and the site of manager-pilgrims from every walk of life, seeking the secrets of productivity.
In essence, the UAW's deal with the auto makers was this: do whatever you need to do to boost profits, as long as you maintain the wages and benefits of (a steadily shrinking number of) workers at the Big Three. That "whatever" included lean production, outsourcing to nonunion parts plants at home and abroad, the sale of GM's and Ford's parts divisions in 1999 and 2000 (lopping off 52,000 workers) and, today, buyouts. There were 466,000 GM hourly workers in 1978 and in 2006, 112,000.
Buoyed by the Bubble
After a decade-long downturn, the 1990s was like winning the lottery for Detroit's auto makers. Mini-vans, one of the Big Three's only bright spots in the 1980s, continued to register solid sales, hovering at about 8 percent of the total domestic car and truck market.
And because their Japanese rivals were slow to introduce their own models, Detroit maintained its dominance, with market share never dipping below 75 percent.
But the Big Three's real gold mine was the phenomenal growth of sports utility vehicles (SUVs) during the 1990s, rising from 7 percent of the total car and truck market at the beginning of the decade to roughly 20 percent by the end. And sales really took off in the latter half of the 1990s, when most Americans saw their real wages inch up for the first time in 15 years.
Concerns over fuel efficiency also seemed to melt away, with gas prices averaging a little over a dollar a gallon for most of the decade. As with mini-vans, Detroit's foreign rivals lagged behind, leaving the Big Three to dominate the SUV market.
Bolstered by strong sales in these new niches, together with skyrocketing stock prices, Detroit's auto giants hoped to reclaim the global dominance that had seemed to slip through their fingers a decade earlier.
In addition to expanding their existing global operations, the Big Three also engineered some very high- profile mergers and strategic investments, acquiring the Saab, Fiat, Suzuki, Daewoo, Jaguar, Volvo, and Land Rover brands. Investments, of course, can flow in both directions, and in 1998 Chrysler was acquired by Daimler-Benz.
Spin-offs and Restructuring
Detroit auto makers were also busy reshaping their domestic operations. They spun off their parts divisions into stand-alone companies and then negotiated steep wage cuts for new-hires there. GM hived off American Axle and Delphi, while Ford created Visteon.
Chrysler took outsourcing to a new level by pioneering "modular production" in the U.S. At its Jeep plant in Toledo, body work, chassis and paint -- considered the core of auto assembly--will soon be performed on-site by non-Chrysler workers at lower pay.
GM and Ford also paid less and less attention to producing cars, focusing instead on their financial services arms, with General Motors Acceptance Corporation (GMAC) and Ford Credit adding more and more heft to each company's bottom line. Indeed, by 2000 both GMAC and Ford Credit accounted for a third of net revenue for their respective companies.
Mixed Bag for Workers
For America's auto workers, the 1990s were decidedly more mixed. On the one hand, after a decade of bruising concessions and plant closings, everyone was relieved to see the return of both jobs and steady wage increases.
On the other hand, much of the new investment coming into the industry was from foreign companies -- Toyota, Mazda, BMW, Nissan, Honda, Mercedes -- who sprinkled factories first on the outer edges of the Midwest auto corridor and then across the right-to-work South. These "transplants" kept their factories non-union, as did the auto parts industry that mushroomed in the 1990s, as the Big Three replaced vertical integration with outsourcing.
Union density in auto, which in the dog days of the 1980s declined from 62 percent to 50, fell even faster in the prosperous 1990s, dropping to 37 percent by the year 2000. The UAW proved unwilling or unable to organize these newcomers, and one can only wonder whether things might be different today had the union summoned up some of the spirit, energy, and vision that drew hundreds of thousands of unorganized auto workers into the union in the 1930s.
Instead the UAW concentrated on the state of its existing members, securing promises of new investment and job security from the Big Three both in contract talks and through job actions. For example, a 54- day strike at two strategic GM parts plants in 1998 idled most of General Motors' North American operations, and resulted in $200 million in new investment in the two plants.
Unfortunately for the UAW, its fight to protect its shrinking store of good jobs was swimming against a much stronger national tide. The 1990s witnessed an explosion in income inequality, in no small part due to skyrocketing CEO pay (71 times workers' average wages in 1989, rising to 300 times by 2000) and a stock market run-up of historic proportions. The longest economic expansion since World War II did surprisingly little for those in the lower rungs of the income distribution, in part because of the declining share of the workforce represented by unions.
Adding to the insecurity were large-scale retrenchments by the bulwarks of corporate America, including Xerox, IBM, and ATT.
Underappreciated at the time, perhaps the biggest development of the 1990s was the move from defined-benefit pension plans to 401(k)-style defined-contribution plans. This seemed of little consequence when the stock market was posting double-digit gains year-in and year-out, but when the turn of the century recession hit, baby-boomers across the nation saw their retirements vaporize. UAW members at the Big Three were some of the few to retain their original pensions.
These trends collided with a deflating stock market in 2000 to create a squeeze play for the auto industry and its hourly workforce. The recession hit Detroit particularly hard, as rising gas prices turned consumers off the low-mileage SUVs and minivans that had saved Detroit's bacon a decade earlier. In the last five years the Big Three's market share has fallen from 66 percent to 58 percent, and sales would have been even worse without the deep discounts auto makers felt forced to offer.
At the same time that the domestic picture soured, many of the Big Three's global acquisitions also unraveled. General Motors, for example, paid a cool $2.4 billion to acquire a 20 percent stake in Fiat in 2000, then ponied up another $2 billion to get itself out of the deal five years later.
Ford has injected more than $5 billion into Jaguar and to this day the luxury brand remains stubbornly in the red. Meanwhile the marriage of DaimlerChrysler has hardly been a match made in heaven--the merged company is worth less today in stock market terms than Daimler was on its own before they united.
Hemorrhaging money and with no end in sight, last year Detroit's automakers took desperate measures to become smaller but more profitable companies, with Delphi declaring bankruptcy and GM and Ford putting 55,000 jobs on the chopping block. Since that time, they have all been singing the same tune, blaming their troubles on the generous wages, pensions, and healthcare of their unionized workforce.
In a move whose irony cannot be lost on executives, Detroit has redirected decades of consumer frustration with American automakers for their lackluster designs and poor quality into widespread resentment of rank-and-file auto workers for their company-paid health care and pensions. The auto makers have tapped into middle America's deep-seated anxiety and insecurity with a not-so-subtle message: "If you don't have a pension or any hint of job security, why should they?"
The scale and speed of these changes has left the UAW flat-footed, struggling to get a hearing-much less formulate a strategy-in its fight to save some of the last good manufacturing jobs in America.
So Who Cares?
Cynics might argue, who cares? The UAW represents fewer than 400,000 auto workers in an industry of more than a million, and the concessions the companies are clamoring for will simply bring their wages and benefits closer to what the market will bear for less-skilled workers anyway. Besides, manufacturing is so 20th century. Aren't we a post-industrial economy with a future in services and high-tech jobs? America can design and engineer stuff and let the rest of the world build it (think X-Boxes and Ipods).
This mindset misses most of what's important about the crisis in auto. Downsizing isn't accountants shuffling numbers around on a spreadsheet; the lost jobs are concentrated in specific communities, such as the already devastated Flint, Michigan made famous by Michael Moore in his first film, Roger and Me.
Cuts of this magnitude will reverberate throughout the Midwest, leaving a lasting economic and social hangover. And they will not be confined to auto, as other companies follow the Big Three's lead.
High tech companies can't fill the void. Google, for example, has just announced plans to open up shop in Michigan. But Google employs less than 6,000 people worldwide, a drop in the bucket compared to the 70,000 jobs this round of auto restructuring will destroy.
How could the auto industry right itself without devastating workers and communities? Execs have shown themselves curiously unwilling to campaign for one measure that would save them billions of dollars per year: single-payer health insurance.
GM is the largest private purchaser of healthcare in the country, providing coverage to 1.1 million people. Last year the price tag was $5.3 billion, which, as CEO Rick Wagoner is fond of pointing out, is more than GM pays for steel. Half of those covered are retirees, and the company claims to provide healthcare to 1 percent of America's seniors.
The Big Three say that such "legacy costs," which also include pension benefits, are choking their business, obscuring the fact that all three auto makers have pension and retiree health funds flush with cash--healthy for the foreseeable future. If health care is such a heavy burden, why not join the movement for a far cheaper national health care plan? Canada's single-payer system makes it much less expensive to do business there and has spared most Ford and GM plants north of the border from the ax.
But despite promises to the UAW to pursue "universal coverage" in exchange for the union's $1 billion in concessions on retiree health care last fall, GM's CEO didn't even mention national health care in testimony before a June Congressional special hearing on the nation's healthcare crisis. Either free-market ideology is trumping good business sense, or paying for benefits is not such a burden after all -- or the employers don't mind having a propaganda hammer to use against the union.
When Henry Ford introduced the five-dollar day in 1914 he famously quipped that he wanted to pay his workers enough so that they could afford to buy his cars. Today, a new-hire at Delphi or Visteon now makes $14.50 an hour, a bit more than half his or her counterparts at the Big Three. In 2007, when new agreements are negotiated, the Big Three's new-hires are sure to take a hit.
What will America look like if most workers earn Wal-Mart, instead of General Motors, wages? For those without a four year college degree - i.e., about 70 percent of the labor force - average wages (adjusted for inflation) have stagnated or fallen for the last 30 years, hovering under $15 today. Manufacturing jobs paid wages no better than the economy-wide average when Henry Ford was perfecting the assembly line, but by the end of the 20th century they were about 25 percent above average, in no small part due to unions like the UAW.
A New Playbook
To solve the industry's problems, many analysts have urged Detroit executives to go back to the drawing board and start fresh. This advice applies with even more force to the UAW.
Forged in the 1930s' social upheaval, the UAW's pioneers originally saw the union as just one piece of a large-scale social movement to solve the problems of the Great Depression.
Today the stakes are higher than they have been in 60 years, but the UAW is still fumbling through its golden-age playbook. The rank-and-file revolt after the Delphi bankruptcy demonstrates that members are willing to fight, but they can't do it alone.
Now, more than ever, the UAW needs the audacity and the guts of its founders, who set their sights on more than the survival of their union headquarters. Their fight to build a better world inspired millions.
With health care becoming less and less attainable for more and more working people, the fight for national single-payer health care has the potential to galvanize a new workers' movement. Rekindling such a movement may be the only way to ensure that the UAW founders' legacy doesn't evaporate before our eyes.