The bailout has arrived for the Big 3 amidst relief and criticism from every point of view. The unions have to make unprecedented concessions, and the automakers have to figure out where to go from here. GM and, to a lesser extent, Chrysler, have enough cash to make it for a while. But will this action correct years upon years of bad decisions from the American auto industry?
Whether the Big 3 will survive depends on recognizing these problems and correcting them. Many pundits have tried to point the finger at a specific sector of the auto industry such as upper-level management, the United Auto Workers (UAW) union, foreign competition, and others. The truth is that all of these have played a role. But there may be a common theme running through all of these faults.
1. The Union
Critics of the unions are quick to point out that unionized workers earn up to three times as much as the non-unionized workers at foreign plants in the US such as Toyota’s Kentucky plant. However, these numbers are not an accurate representation of what’s going on. Firstly, the actual wage earned by union workers is only about $10/hr. higher than at Toyota. And the medical benefits aren’t significantly greater either.
In fact, the actual amount of money given to individual employees is not enough to account for the $6 billion per month loss that GM faces. The unionized workers could earn twice what they are currently making and would still not account for these losses.
So if it’s not the wages and health benefits per employee, where do the problems lie?
The Jobs Bank is the clearest indicator of how the UAW has helped destroy the American auto industry.
Created in the 1980s, the jobs bank pays wages to laid off employees. Now, at this time, there are only about 5,000 members in the jobs bank. Even if all these members earned the highest possible wage including benefits (approx. $75/hr) that would only account for $62.5 million per month. A drop in a $6 billion/month bucket.
But it’s the reason that the jobs bank was created that indicates what has happened. Originally, the jobs bank was made to help prevent employees from losing their jobs due to increased productivity tools such as TPS, which GM was attempting to implement. TPS, by the way, stands for Toyota Production System. GM and Toyota jointly ventured to create the NUMMI production plant. This plant benefitted both companies. Toyota could investigate whether its production methods could be effective in America, and GM could learn from Toyota how to build cars the Toyota Way.
A number of union concessions were made a NUMMI that allowed a much more open exchange of information between management and the workers, including an agreement for non-confrontational contract resolution. This meant that workers and managers had to work together to resolve safety, wage, and other issues.
The NUMMI plant was a success for both Toyota and GM. Toyota was able to open other factories in America, each with a great deal of success.
But GM was only able to succeed at NUMMI. The TPS practices didn’t spread to other plants, and the UAW asked for provisions such as the jobs bank to make sure that tools to increase efficiency and productivity wouldn’t end up causing employees to lose jobs.
Of course, the UAW didn’t realize that not increasing efficiency and productivity would cause more employees to lose jobs. There is still a chance that all GM employees will lose their jobs and it directly relates to this aversion toward improvement. They also fought against new technologies such as robots or implementation of aluminum because the union workers were not trained in these fields.
In essence, the union helped keep our car companies rooted in the 1960s.
2. Management
Imagine the leaning tower of Pisa is just about ready to topple over, and you are asked to lean against it to keep it from coming down. There is a certain angle where just the weight of your body will be enough to keep the tower up. But it won’t last.
I don’t imagine that any of the managers of the Big 3, barring Alan Mullaly, have believed they could turn their companies around. They’re tied down by the unions who own a monopoly on their labor force, they face strong overseas competition, their stockholders demand high profits, and they don’t know shit about cars.
Bob Nardelli, CEO of Chrysler, was the CEO of Home Depot. Barring a short stint as an entry-level engineer, Nardelli has been an executive his entire career.
Thomas LaSorda (no relation), VP of Chrysler, is an MBA with no previous experience in the auto industry. Enough said.
Rick Wagoner, CEO of GM, was named "Best All Around Student" at his high school. He then went into economics. After starting as an analyst in the finance department of GM in ’81, he became CFO in ’92. From there it was only a few jumps to becoming CEO. As far as I can tell, he has never even seen a production line.
Rick’s former boss, and GM’s former CEO, John Smith, Jr. had both an astonishingly original name and no connection to manufacturing. He started in the auditing department at GM and rose through the ranks. He’s now CEO of Delta. That’s working out great.
Fritz Henderson, the COO and President of GM is another MBA.
On the other hand, Honda’s CEO, Takeo Fukui started as an engineer and remained closely involved with engineering throughout his rise to Grand High Muckety Muck.
At Toyota, though they currently have a lawyer as CEO, everyone else has risen through the ranks of engineers.
The American auto industry’s management believes that cars are just commodities that can be treated like screwdrivers at Home Depot. They continue to offer idiotic rebate programs like Employee Pricing which just devalue the cars themselves. They sell tons of cars to rental companies like Hertz at a loss just to make sure they keep on the Top Ten Selling Cars list.
Ford’s Alan Mullaly is the only member of the board at any of these companies who has risen from the ranks of the engineers. It’s interesting that of the Big 3, only Ford is not asking for bailout funds.
Successful businesses are run by people with ideas. People like designers and engineers. Not MBAs who collectively have never had an idea. Ever.
3. The Shareholders
Shareholders of American car companies are perhaps the least well-informed members of the decision making process. They do not care about the revolutionary Chevrolet Volt. They do not care about cup-holder placement. They don’t care about any of these things because they want the profits from GM, Chrysler, and Ford to go to their BMWs and Mercedes-Benzes.
Shareholders have forced the Big 3 to focus on quarterly profits in sacrifice of a long-term strategy. As a result, the Big 3 have had to focus on the most profitable car at the time. In the ’90s and early ’00s that meant SUVs–the bigger the better.
The problem is that it takes at least three years to build a new car. How can an automaker prepare for a market that might or might not exist in three years when they are hamstrung by the economics of satisfying their shareholders each quarter?
4. The Commonality
Running through each of these groups of people is a shared sense of immediate satisfaction and greed. The unions did not want to plan for the future. In fact, they tried to prevent it from coming because the money they made was good enough. The executives wanted to make as much money as possible in the shortest period of time to satisfy their shareholders and remain in place to support their extravagent lifestyles. The shareholders wanted immediate profits to support their own extravagent lifestyles. They also didn’t want to install someone like an engineer into a position of power because they have an easier relationship with MBAs. (Remember, MBAs don’t have ideas. It’s like receiving a certification for being an uncreative, unthinking dumbass.)
Of course, this shortsightedness has brought us to the state we’re in now. The Japanese automakers, all of which operate on 20-30 year business plans, are strong. The Japanese workers are not unionized because they are integrated into the business.
The best indicator of this is that Toyota may be reporting its first loss since 1938. It took a major upheaval of the world economy to have a negative impact on Toyota. When’s the last time the Big 3 reported a profit?
If GM, the UAW, and the shareholders paid more attention to the successes at NUMMI we wouldn’t be looking at the potential bankruptcy or socialization of one of the greatest auto manufacturers ever.
Yr fthfl bddy,
Mike