Monday, November 24, 2008

Unions hamper US car industry

Nov 24, 2008

By Tion Kwa

SHOULD American taxpayers bail out their car industry? In different circumstances, the answer would be simple: No. But these aren't normal times. The United States has probably entered a punishing recession; job losses are already mounting. If any of the Big Three carmakers fail, the effect would ripple across the American economic landscape.

So despite the considerable forces arrayed against a bailout, it's likely that the car industry will receive a handout - eventually. Maybe next month - carmakers have been told to submit restructuring plans to Congress next week. Or it might happen in January, when a new Congress will convene and a new president sworn in.

But whenever the money comes, it would be useful if Congress applied its new-found leverage to wring concessions from the Big Three that would have been impossible to get in normal times. To prevent bankruptcy in the industry, Congress should want to write in changes that might have come out of any bankruptcy restructuring. Principally, the opportunity lies in unclasping organised labour's fingers from the throat of the US auto industry.

Conventional wisdom is that American carmakers are dinosaurs. This view is not just found overseas, but resonates with many Americans too, as they steadily gravitate towards Japanese, European and Korean brands. American lawmakers opposed to a bailout accuse Detroit of failing to invest in research to develop fuel-efficient engines that pollute less, and of failing to build better cars, plain and simple.

The Big Three - General Motors, Ford and Chrysler - make cars that are badly styled, poorly put together and use technology more appropriate to an earlier age.

True, true and true - but also not true.

At a car dealer's forecourt in the US, many prejudices against American cars are borne out. But at the Big Three's dealerships in Singapore, Europe and elsewhere, starkly different cars rarely seen in the US are on offer. For example, GM's European division has a long history of developing well-regarded cars under the Opel badge, which are sold internationally. The same goes for Ford in Europe. Meanwhile, Ford also owns Volvo cars, GM owns Saab and so on.

Either through wholly owned subsidiaries, partial ownership in other companies, joint-ventures or special arrangements, the Big Three either own or have access to some of the most innovative technology in modern carmaking. But little of that makes it into an American car.

The main reason is the car workers' union. With average hourly wages for a unionised worker as much as US$70 (S$107) after factoring in pension and other benefits, carmakers can't afford to produce only relatively inexpensive cars with complex engineering at home. Neither can they import more from foreign subsidiaries to replace domestic models. This will only lead to strife with protectionist labour groups.

Consequently, US domestic production has concentrated heavily on SUVs and pickup trucks - vehicles that sell on the strength of their size, not on the basis of innovations that would allow for smaller engines using less fuel to squeeze out more power. Big vehicles using old technology equal bigger margins.

Indeed, the difficulty of making money out of producing cars has pushed American carmakers to tweak their business model. They make money not just from selling cars, but more and more by lending money to dealers to maintain inventory and by competing with banks to finance car sales. Cars became a way to access a new line of business, the consumer lending market. Financial services increasingly have become a significant part of their business.

Put all this together and it is not hard to see why the auto industry has been so badly hit in the financial and economic crisis.

Car sales are down because of higher fuel prices earlier this year and consumer pessimism. At the same time, automakers' financing units have suffered the same squeeze as the rest of the financial industry. People are finding car loans and lease payments difficult to make. And cars returned at the end of lease periods pile up as the second-hand market is just as adversely affected as new car sales. So, not only are automakers being affected by the problem of selling cars, they are suffering at first hand the difficulties of the financial industry.

If Congress is serious about helping the US auto industry, it has to take a hard look at the one area that causes American domestic carmakers to lose their competitive edge: the car workers' union.

Without the union, Detroit's carmakers would be very different companies altogether. More cars developed overseas would be built domestically, such as Ford's Focus; or there would be more imports like GM's Astra, sold by its Saturn subsidiary.

If - more likely, when - a lifeline is extended to Detroit, it should come with the demand - and therefore the implicit backing and cover - for automakers to make big adjustments to existing union contracts covering hourly wages and benefits, like health-care costs and retirement expenses. Doing this would allow Detroit to take its business in the same direction within the US as it does overseas.

The question is whether Democrats - who have been most keen to bail out Detroit - are willing to take it one step further. This would bring the Republicans on board. Nevertheless, it would also alienate organised labour, with which Democrats have a longstanding, cosy relationship. But failing to do this, a chance arising from the current economic crisis to fundamentally turn around the US domestic car industry will be lost. And the circumstances giving rise to this opportunity are not something anyone wishes to see again.

[Comment: This is a time to bite the bullet and make the US auto industry competitive again. The costs is crippling the future of Detroit. The bosses need to show the numbers to the workers. And explain why it cannot go on. If they Union won't let go, the industry will be in its death grip and there will be no future.]

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