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Thursday, May 12, 2005

The CAW Posture

I heard an interesting interview of the Canadian Auto Worker's president, Buzz Hargrove, on the Paul W. Smith show on WJR this morning. Hargove was invited to explain his recent comments that the CAW had no intention of conceding benefits to the American automakers. Memorable quotes (approximate, from memory):

We could work for free, it would not save the auto companies.

The issue is market share. Taking money out of the pockets of working people will not save them.

Malcolm Bricklin is over in Shanghai, talking about bringing 200,000 cars into the U.S. He's just over the water from Japan.. why isn't he going to import cars into Japan? Because the Japanese won't let him. Why will the U.S. let him import cars, and destroy such an important industry?

Chrysler is doing well now, but it is not sustainable. They have a few hits, the 300, the Jeeps are doing well, the minivans. But they can't gain market share.

"We could work for free" was a great redirection, and about 1/4th true. The average car takes about 24 man-hours to build. The average unionized worker is paid something on the order of $25/hr. So the labor cost per vehicle is about $625. However, the "legacy cost" per vehicle is on the order of $2100--GM spends $1500 on healthcare and $600 on pensions, averaged over all of their production volume.

By comparison, the Japanese automakers probably do pay a few dollars less per hour, and use less hours to build each car, closer to 19. That would account for a disadvantage of, say, $30/car. The big ticket items are the pension and healthcare costs--Toyota, according to one article I read, only spends about $300/car on healthcare. and about $200/car for pensions, leaving GM with a cost disadvantage of $1600/car.

That $1600/car is the killer, because that is $1600 that was not used to improve quality, safety, fuel economy, or pay for incentives. Consider: the difference in (street) price between an aluminum block DOHC engine and an iron block OHV engine is about $900 (2005 Taurus example, from Edmund's).

So, Buzz is right--they could work for free, in terms of wages, and only save GM or Ford about $600, 1/4th of the competitive disadvantage with the Japanese. The Canadian Auto Workers probably don't have much to offer GM and Ford, compared to their much larger counterpart in the US--they are a much smaller union, with about 50,000 members working for OEMs vs UAW's 300,000. But if the UAW would agree to some concessions, that could really help the Big 2.5 gain competitiveness.

"The issue is market share..." I don't agree with this entirely. It is true that much of the increase in legacy costs per vehicle is simply due to selling fewer vehicles. Just like the Social Security problems--too many retirees compared to productive workers. But blaming market share is not much of an answer, because market share is virtually impossible to regain quickly, especially when the American companies are working with a large cost disadvantage.

"Malcom Bricklin..." is a very good observation. I am not a fan of trade wars, we need people to buy our stuff. But should it be easy for Bricklin to dump his cheap Chinese cars in the US market? Is the danger of massive economic destruction of a major domestic industry worth a few inexpensive cars, to the average consumer? Ronald Reagan's import tariffs on Japanese motorcycles are credited with saving Harley Davidson.

"Chrysler is doing well now..." I have written before, in my opinion, Chrysler is always one hit away from disaster, but somehow, they manage to come up with the right products at the last moment. Hopefully they will be more of an influence on Mercedes than Mercedes on them.

Hargove's bluster is natural--his job is to represent his workers, not sell them out in public. However, conceding some goodies would definetely help the auto companies. It would free up money that could be put back into the product, to try to increase prices and profitability. The CAW and UAW need to be carefull, and balance their members individual needs against the survival of the industry.


John B said...

Re: "However, the "legacy cost" per vehicle is on the order of $2100--GM spends $1500 on healthcare and $600 on pensions."

Jim Stanford (an economist who works for the CAW) wrote a column in the Toronto Globe and Mail this week. He mentioned that health care costs per car are about ten times in the U.S. compared to Canada. The Canadian cost is about $150 per auto. That's one hell of a difference.

The Auto Prophet said...

That's an excellent point, I wasn't breaking down the costs along national lines, and I was assuming implicitly (US centric guy that I am) that the Canadian economics wee similar.

I was unable to find the article, the Globe and Mail requires a subscription to view archived stories.

Since Canada has nationalized health care, and a much smaller number of Big 2 employees, they probably don't contribute much to the problem.

The Auto Prophet said...

I did a little more research, and tidied up the post a bit.

John B said...

BTW – hat tip to Glenn Reynolds for leading me here.

Regarding health care costs – in Canada it’s government paid (well actually taxpayer paid) so the direct costs to the employer are minimal. There is a small employer tax but I don’t know what it is and it may have changed somewhat in the last Ontario budget but it’s relatively trivial in comparison to the U.S. Health care is a provincial responsibility and all Canadian auto production is in Ontario so that is really the only jurisdiction in Canada that is relevant.

Regarding the Globe article – registration sucks when you are having discussions with people all over the world and you want to reference an article. I have the hard copy in front of me and I can try to scan it. It’s a wide (physically) article so OCR may be out but I can try to save it as a JPEG and e-mail it to you as attachment if you wish.

Nice blog and good luck – I’ll be a returnee.