#205. Car Companies, Who’s to Blame?

Posted on | The Agurban

Car Companies, Who’s to Blame?

Imagine that you had a company that sold the same products all over the world with the same management, labor and dealer network.  What if your international operations were making $1.5 billion/year but your USA operations were losing over twice that at $3.3 billion?  And, your international competitors were growing sales, making money and continuing to build new plants in the USA, even as you were shuttering plants and firing employees?  You wouldn’t be able to blame the government for fuel or safety standards since those same competitors have to abide by the same rules that you do.  Nor could you look to market share, as your domestic business has a very healthy 22% share compared to only 7% to 17% in your major international markets.  Wouldn’t you want to try to find the one major factor that differentiates you from your very successful competitors?  Wouldn’t you want to change it, if you did find it?

The company that I’m talking about here is, of course, General Motors (GM), although I could have done the same research (and probably found very similar results) for either Ford or Chrysler.  I think that I’ve found that one factor and hence this week’s Agurban is on the subject.

I first delved into the productivity of GM, trying to compare how it builds cars compared to the foreign companies like Toyota, which I will use as the benchmark since it is the largest foreign car maker.  We also could have used Nissan, Honda, BMW, Hyundai and other competitors which have very similar productivity to Toyota.

In 2006, it took GM 32.4 hours to build a car compared to Toyota’s 31.2 hours.  Not a huge difference there.  GM pays its workers on the line an average of $28/hour compared to Toyota’s $24/hour, again not a huge difference.

Where GM gets clobbered is their costs over and above what they pay their workers on the line, the money that goes to the United Auto Workers (UAW), and is referred to by GM often as “legacy” costs.  Every hour on the line costs GM a total of $74/hour (compared to the $28/hour it pays its workers), whereas it only costs Toyota $45/hour (compared to $24/hour).  These additional costs include such items as a UAW job bank that pays workers almost their full wage even though they haven’t actually worked in years, union stewards who haven’t built a car in years, full health benefits for life and other costs that continue to escalate upward.  The problem isn’t the workers but the union and their bosses, which got so many concessions from GM that the company’s nickname for years in Detroit was “Generous Motors.”

Today, GM is behind the eight-ball by letting these costs run out of control, putting it at a competitive disadvantage of several thousand dollars for each car that it builds when compared to its competitors.  These “legacy” costs are a burden that in a competitive environment are impossible to overcome.  GM’s only alternative with the situation it currently finds itself, is to go through a pre-arranged bankruptcy, which would allow it to shed some of these oppressive “legacy” costs.

They could have gone down a different path, following the example of another American icon that did just that, an icon that is today worth 9 TIMES more than GM ($23.1 billion to $2.5 billion) with a fraction of its sales volume.  The executive who led these efforts is one of my business heroes and I wish he were better known for what he did to not only save his company, but to set it on the path to success that continues today.

Don Fites was born on a 90 acre sharecropper farm near Bourbon, Indiana.  After college he landed a job with Caterpillar (CAT) in their marketing department.  In his 40+ years at CAT he moved around the world, to places like South Africa (where he met his wife), Brazil, Europe and Japan.  It was in Japan, working on the manufacturing floor, studying the Japanese manufacturing philosophy which resulted in increased productivity that really shaped his vision of what CAT could become.

In 1990, Fites was elected CEO of CAT, a company that was floundering financially.  In his first full year in control, the company lost $404 million and another $218 million the following year.  Fites quickly turned the company from a function-focused, centralized bureaucratic monolith into fourteen autonomous profit centers.  And, when the UAW came to him with their new 1991 contract with John Deere, asking that he accept it as CAT CEOs had done in the past as part of the UAW’s “pattern bargaining” agreements, Fites politely told them that his competition wasn’t just Deere but numerous other international companies.

Fites, who was facing a 25% cost disadvantage in hourly labor rates to companies like Komatsu, didn’t accept the UAW’s contract and the union struck.  For the next seven years, CAT had to contend with one strike stoppage after another, but Fites stood strong and eventually the UAW settled on his terms.

Today, CAT is four times the size of what it was when Fites took over the struggling company and its 100,000+ employees can thank their good fortune to a principled, focused Don Fites who rescued and refocused his company for the future.

What if the Big Three Auto makers had made the same decisions that Fites made in the early 1990s?  The easier path they traveled down was to acquiesce to the demands of the UAW.  Today, GM is asking for an $18 billion bailout, an incredible sum when looked at in the context of the $2.5 billion they are worth.  Congress would be much better served to let them reorganize and refocus themselves in bankruptcy, shedding many costs and refocusing the company back into a profitable one.

Perhaps, even more incredible, is that Congress is giving serious consideration to compounding the problems that the UAW has wrought upon the Big Three, by passing The Employee Free Choice Act, which would facilitate union organizing by eliminating the secret ballot.  Rather than trying to learn from the foreign auto companies that are successfully operating in states like TN, SC, AL, MS and others, this Anti-Secret Ballot Act would probably burden them with the problems that pushed the UAW led Big Three to the verge of extinction.  Shouldn’t Congress be trying to help elevate the Big Three up to the level of the foreign competition, rather than trying to bring the successful foreign companies down to the verge of bankruptcy like the Big Three?

The manufacturing companies that we work with at Agracel are terrified by this major change in labor law and several have told me privately that they will simply close their doors rather than be subjected to having their employees intimidated by card check drives and losing their right to a secret ballot election.  One told me, “It’s as bad as what went on in the old Soviet Union.”

For the sake of all workers in this country, I hope that Congress makes good decisions that don’t hurt our long term competitiveness in the world economy.