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
The whole situation is decidedly a mess, no doubt.
I’ve always been a union supporter, in spite of the fact that my father was semi-management. (My older sister held very high office in her own union before early retirement.)
But unions have a lot of issues, just like management. I’ve seen these pretty close up. (I used to work for a union office for several years…)
I do hate union busting — and the unions have certainly served an important purpose over the years for this country. But they can be their own worst enemy much of the time. (sigh)
Greed is certainly part of the problem, of course. And I don’t think we can constantly blame management and shareholders only when it comes to greed!
I found this a fascinating read — thanks for sharing. I’m adding it to my Memories.
Hey thanks, Charlie, for your kind words!
I think you’re dead on about greed being the problem and that management and shareholders aren’t the only ones guilty of it.
It’s funny, but the only legal monopolies in America are either regional monopolies granted by the Government (for instance, cable companies owning exclusive rights to a region) and unions owning a monopoly on the labor force.
Having worked for a big cable company, I can tell you that the MSOs (cable companies, and the like) certainly enjoy their special advantage by operating at ridiculous profit margins (up to 85%).
I don’t think it’s a reach to assume that unions are doing the same thing.
But, on the other side, I agree with you about busting on unions. Generally, the folks who grouse about unions have no real reason to. For most, unions are just another liberal or conservative talking point. Depending on who you ask, unions are flatly bad or corporations are flatly bad. Bah.
It’s when either organization quashes individual rights and free thought that we run into trouble.
Okay, I’m blathering.
– Mike
“They do not care about the revolutionary Chevrolet Volt.”
This is a point you should’ve jumped on more. The car industry is basically centered on producing a product who’s fundamental design hasn’t changed for over 100 years. The practical use of oil lead to a major revolution in the economy – the auto industry. And as a practical extension of the petroleum industry, how much available oil has helped the automakers decide what kind of car to build and market (e.g., oil was plentiful in the 1990s, so SUVs were the big sellers).
I forget which senator pointed it out at the hearings, but he argued that if the big three were more dedicated to developing innovative vehicles (e.g., fuel cell engines, etc.) and less on maintaining or profiting from the same infrastructure (i.e., based on gas-reliant vehicles), then the last five years of high fuel prices (in addition to the sudden credit crisis) may not have impacted cars sales and leave the big three in such a lurch.
Granted, significant changes to the infrastructure to retool factories, showrooms and repair garages and produce new products like this is primarily based on cost effectiveness (i.e., it’s cheaper to keep designing and building gas-reliant cars but much more expensive to develop and produce new technology cars). If the auto industry (and this may be more of an international concern as opposed to just American automakers) were truly thinking ahead, they would embrace and encourage new technologies or at least more strongly encourage research and development in them.
The Volt is a nice first step, but the technology should’ve started being phased into products long before oil prices impacted sales as hard as they have. To remain reliant on one fuel source means you’re at it’s mercy when supply is diminished (whether manipulated by oil producers or not). This and the “pain” of cutting into profits by using more funds for R&D seems like an unthinkable option for the big three (and much smaller golden parachutes and bonuses for execs).
In short, I think what the auto industry is starting to feel is the price of not investing in the future, or at least, a future not based on oil consumption. It’s like a rock star who’s enjoying his fame and money, spending his money wildly instead of investing it for his retirement later.
Not that it’s all the auto makers’ fault.
Many Americans who have been devastated or hindered by the economic downturn are reducing spending, which means less money is going into the every market, not just cars. The car industry is a big example of this, just like chain stores at the malls are closing because fewer people can or want to spent $200 on iPod accessories when mortgages and credit card bills are hitting them hard.
I’m curious to see if we’re either looking at just a painful “bump in the road” or if this is all going to herald significant changes in our economic structure and society in general. I don’t see another Great Depression happening, but clearly how we do things needs to be re-evaluated and improved for the future.
Hey Scott.
Thanks for the great response. I ended up basically writing another article in response to what you wrote. So, that’s coming up in the next post.
– Mike
Nice essay, Mike.
Who would have thought back in High School that we’d be writing essays for free on Blogs 15 years later?
Anyway, I’ve always disliked the fact that American corporate politics, not just in autos, has been very much short sighted and focused on quarter-to-quarter.
When we look at companies like Toyota and Honda, they don’t just have 1 plan for the next quarter they unveil to the shareholders, they have 5 year, 10 year and 100 year plans in place, and have people dedicated to those further out goals.
Statements from Honda on their robotics division read something like this – “While we realize that robotics is not immediately profitable, we concentrate on the future, where we estimate that in 30 years our division will be a world leader in robotics and become profitable.”
Any American company that did that would get their board lynched by the shareholders. I really do think that we have some work to do in our corporate culture or else we’re going to see all of the different American sectors fall behind other countries as their forward-looking leadership allows them something akin to the tortoise and hare story.
Yup, that is absolutely one of the biggest problems with American businesses.
I think part of it stems from New Business-itis. When a company first starts up, their goals are necessarily short-sighted. You can’t really predict 30 years in the future when you barely know what is going to happen 30 days from now.
I’m trying to take a different approach with Alambria (the software company I’m starting), but the furthest out I can really predict is three years. It’d be great to have a 30 year plan for Alambria, but there are just so many variables right now that it’s not a possibility.
But the mentality of, “How are we going to make money RIGHT NOW” lingers long after it should. Once a company becomes stable they need to change their focus, and they need to stop paying attention to quarterly earnings statements.
Toyota is the best example of this working. They’ve got a 30 year plan, and they pay no attention to stock price. By sticking to their plan they’ve been able to ride out every prior economic downturn and will probably do okay during this one.
– Mike