New GM, Same Old Union?

By Megan McArdle

I have a forthcoming column on the GM bailout due out in a few weeks, which I don't want to step all over in this space.  So I'm going to leave aside a lot of the issues surrounding the bailout and focus on one:  how much has the union changed since we bailed the company out?


That's going to matter quite a bit to the company's future.  The debate over the role of the UAW's role in Detroit's woes tends to get quite cartoonish:  liberals saying it's all management's fault, while conservatives place the blame squarely on the high wages of current employees.  The reality is quite a bit more complicated than that; GM's death was ultimately driven in large part by how its management interacted with its unions.  You can have quite a bit of sympathy for both sides--as I do--and recognize that both sides were taking the most obvious course at any given time, while also realizing that the cumulative decisions were entirely toxic.
The first thing you need to recognize is that the militant unions of the thirties were to some extent made more militant by the abuses on the corporate side--the Battle of the Overpass, for example, where company representatives beat the crap out of organizers who were attempting to hand out leaflets in a public space.  Over time, that dynamic evolved into something that was more stable, but also more toxic:  a sort of awful marriage between two sides that hate each other, but hate everyone else even more.  

One of the most remarkable things I learned in writing about GM was that Ron Gettlefinger was totally blindsided by GM's financial collapse.  The UAW had so often convinced itself that the company's dire warnings were simply strategic bargaining claims that it didn't understand how parlous the underlying finances were--and in fairness, in the past, management had often made exaggerated claims when it was bargaining.  One former auto analyst I talked to said that the company would routinely claim that anything it didn't want to do was being blocked by the union--but when the rare equity researcher actually talked to the UAW, they'd often find that the union had never heard of the issue where it was allegedly the sole obstacle to change.

That said, by the mid-1950s the Big Three had settled into a relatively stable relationship with the UAW.  When contract time came around, the UAW picked off the company it perceived as the least able to survive a strike; used the threat of a strike to get a good contract; and then demanded the same from the other two.  Those companies were now in a bad position, because if they risked a strike, their competitor, who already had a contract, would take all their customers.

This relationship essentially meant that the Big Three simply didn't compete on labor cost, work processes, or any of the other labor-side innovations that have enhanced productivity over the last forty years.  It's not that contracts didn't vary by company or plant, but the outlines were broadly similar across the industry.  This was good for the UAW and good for the auto manufacturers, because arguably it actually helped cement their cosy oligopoly by removing one of the major competitive pressures.  And in many ways, the voter base and political clout of the UAW was helpful to securing Detroit favors from Washington. During that period, union peace was very valuable, and management bought that union peace with concessions that seemed cheap at the time:  tax-favored pension and health care benefits.  

In hindsight, this was stupid for many reasons.  Automation made it possible to produce more cars with fewer workers.  Meanwhile, competition cut into market share--the Big Three had about 90% of the US market at the end of World War II, versus about 45% today.  And workers lived a lot longer than they were expected to.  Those factors mean that the ratio between retirees and workforce became extremely lopsided; at the moment, GM has a little over 50,000 hourly employees--and about a half a million retirees.  That left the pension badly underfunded, and meant that either the company or the workers were going to have to dramatically increase contributions.  Meanwhile, soaring health care costs were making the health care benefits even more of a problem than the pensions.

Had there been no foreign competition, this wouldn't have mattered so much.  To the extent that companies saved money by automation, this would simply have shown up in higher profits, which would have enabled them to make higher pension contributions per worker.  Unfortunately for the Big Three, there was competition, from foreign automakers who didn't have the same legacy cost structure.  That meant that any productivity enhancements had to be passed on to consumers in the form of cheaper, better cars.  The basic form of the car was almost entirely stable between 1930 and 1970, with some major improvement coming along about once a decade.  It's improved radically since then, largely because foreign competition increasingly forced companies to pass along the benefits of innovation to us, rather than their managers, shareholders, and unions.

Critics of the union say that the union should have been willing to give back more on labor.  That's easy to say, but hard to do; unlike many unions, which put their retirees on inactive status, UAW's bylaws gave retirees considerable power.  Naturally, by the time 90% of your membership is retirees, those bylaws are not going to be altered.

Critics of the company say that the company could have dealt with these problems by making better cars. That's also easy to say, sitting in your comfy office hundreds of miles from Detroit.  How, exactly, were they supposed to make better cars when they were burdened by these huge legacy costs?  GM had these costs not because the US alone doesn't have national health care--as many critics have bizarrely claimed.  We're talking, after all, about gold-plated first-dollar health care coverage for people who have generous pensions, and qualify for Medicare.  Rather, the company was burdened with these costs simply because it had made extraordinarily generous promises in an era when health care was cheaper--and when the firms and the union had a cozy arrangement that allowed them to pass any increase in their labor costs onto consumers.  

By the time the agreements became a problem, they couldn't go back on them because the union wouldn't allow it--and because a prolonged strike would be, if anything, more crippling now that German and Japanese competitors had arrived on the scene.  And the union couldn't be persuaded in part because past experience had taught it not to trust anything management said.

The most obvious routes available to the company was the one they took:  they skimped on the cars.  That's why they ended up so dependent on trucks, where the profit margins were fatter.  The smaller the car, the more cost-conscious the consumer--and the harder it is to save hundreds of dollars on the cost of the car, without noticeably skimping on quality.  In order to at least partially make up for these quality deficits, they pushed harder on the financing side, until eventually journalists like me were describing GM as "a bank with a sideline in auto manufacturing."  Those decisions made sense at the time, but left them extremely vulnerable to the price of oil, and the price of money.  When credit dried up, the company was quite suddenly no longer viable.

I don't think there's much point in trying to figure out whether management or the unions are responsible; the fact is that they both drove all of the bad decisions that the company made, even as they were both also mostly reacting to actions by the other side that had left them little choice.  

In order for GM to thrive post bankruptcy, both management and the union need to have experienced the kind of deep, soul-searching change that usually only occurs at the end of ABC After School Specials.  If either of them goes back to the old pattern of doing what is most expedient right at this second, the company is going to end up back in serious trouble.  It's harder to observe management in the short term; they don't conduct their strategy meetings in public.  But there are some troubling signs on the labor front:

1)  The UAW just voted to allow an old GM stamping plant in Indianapolis to be shut down, rather than offer wage concessions necessary to attract a new owner.

2)  Labor trouble has flared up at the plant where the new Chevy Cruze is being made.  The Cruze is one of the things that is supposed to save the new GM:  a high quality small car.  If they can't get this right without clashing with the union, what hope for the rest of GM?

3)  The administration is reportedly hostile to the UAW--Rahm Emanuel is famously supposed to have said "fuck the UAW".  But they made major concessions anyway:  keeping the pensions intact, giving the union a giant stake in the company in exchange for concessions on health benefits, etc.  How effectively can the government negotiate with the union if it remains the majority shareholder for a while? With the GM IPO reportedly being scaled back, that now looks quite possible.

This article available online at:

http://www.theatlantic.com/business/archive/2010/10/new-gm-same-old-union/64088/