The critical labor negotiations between the United Auto Workers (UAW) and the domestic OEMs are underway. These talks have been billed as the “most important” negotiations the two sides have faced in the history of the automotive industry. Funny though, that same claim is made every year as long as there have been labor negotiations. Nevertheless, there is no doubt they are important to the future of the domestic OEMs and the UAW.
The stories have been written and the analysts, including myself, have spoken and reported data on what the most important areas of negotiation will be this year. The OEMs have published data with the areas they want to see changed: health care cost for active and retirees, jobs bank, supplemental unemployment pay, work rules, classifications, absenteeism, relief time, quality, and productivity. The OEMs are right. Data from our landmark competitiveness study published in October 2006 shows these factors add up to $1,000- to $1,500-per vehicle gap compared to the New Domestics. So flexibility in these areas is an important negotiating point.
On the other side of the table the UAW has published data about how strong its role has been in making the domestic companies more competitive over the last 10 to 20 years, and they, too, are right. Without the cooperation of the union, the OEMs would not have experienced dramatic improvement in productivity over the last 10 years or the near parity they have reached in initial quality on many product lines. The union has played an instrumental role in assisting companies during their performance improvement paths. In return for this assistance, they have experienced dramatic job losses, plant closings and additional requests for concessions.
You can clearly see the major issues on the table for the ‘07 negotiations. Now in fairness to the OEMs, job losses and plant closings were not what they desired, but with the constant loss of market share and profits, they were forced to make tough decisions to rationalize their business. In fairness to the UAW, they don’t control many of the decisions made by management. Poor product design that does not intrigue the consumer and poorly engineered products that drive up cost are not under the UAW’s control. They simply build what they are given at the manufacturing facilities.
So you can see the potential stalemate that exists. I’ve been often asked about what the UAW needs to concede in order to help the domestic vehicle manufacturers become more competitive. The answer to that question is tough. Concessions are never easy for any side, so the focus must be on flexibility. What areas does the UAW need to be flexible on? All those listed previously (e.g., health care, jobs bank, absenteeism, etc.). However, they are not the only ones that affect these issues, and they are, and should be looking across the table and to Washington for what will be done by both the government and OEM groups.
Our national government needs to look long and hard at the automotive industry and decide whether it wants to step up to the plate to help one of the most important industries in our country. It needs to look at health care, CAFE regulations, national trade policy and several other issues as a critical part of their platforms. Never mind what political party you serve—this industry is in crisis and needs support from all sides.
The OEMs have other challenges besides governmental issues. The domestic companies have a significant amount of inefficiency in their processes that contribute to profitability gaps with the foreign competition. The largest gap exists in product engineering commonality. Commonizing platforms and vehicle architectures within and across platforms is something that the Toyotas of the world have done for years. In addition, they have commonized global components, significantly reducing the cost to design, engineer and manufacture a vehicle program. There is also huge fall out to the supplier community in terms of reduced cost. The domestic OEMs understand this concept and are working hard to move in this direction. General Motors is probably the most advanced in this area and is experiencing significant savings with every new program.
The domestic OEMs will get there, but right now this difference makes up, on a conservative level, roughly $1,500 to $3,000 per vehicle, depending on the program and company. That is a significant amount to return to the bottom line and reinvest in new programs, innovative technologies, and must-have products. So the real question becomes: if the OEMs and the UAW were able to solve their disputes this negotiation year and reach parity with the New Domestics in terms of labor costs, would the OEMs return to profitability and maybe even beat the new domestics? The answer is no. Other aspects of the business must be addressed in addition to labor negotiations in order for these companies to be competitive. The union is a major part of that progression, along with management and the supplier community, but by no means the whole issue.