Will The UAW Destroy Detroit Automakers?

There is an article in 7/24 Wall St blog about the confrontation coming to Detroit’s Big Three with the UAW.  The article asserts that since the automakers have actually seen an increase in profits the union, whose membership gave back wage and other concessions, will demand at least a wage hike at the end of the current contract.  The article hints that the union could eventually destroy the automakers with continued higher wage and benefit demands.  The real victim will be Volkswagen who has been foolish enough to want a worker’s participation committee like it has in Germany.  Unfortunately, such a company created committee is illegal under the NLRB laws but Volkswagen, driven in part by its own German auto union, has pushed the point.  Hence, the UAW, whom a majority of the plant’s employees rejected, managed to convince about 45% of the employees to sign representation cards and is now part of that committee system.  The UAW is playing nicely now but when it can obtain a majority of the employees vote it will press Volkswagen hard on the issues of wage, benefits, and work rules.  The UAW will give the German unions a very black eye.

Of course one of the reasons why the big three automakers are selling more cars and trucks is due not to the lower prices reflected by lower costs but by the extension of credit, particularly high risk/high default credit.  The other motivator has been the return to easy leasing terms.  One might ask at what point these two promotions of credit will reverse sales of new autos.  The last time we had a large spike in new car sales was the incentive passed by congress in which one was suppose to trade in an older vehicle that did not comply with the new smog rules.  Those used cars and trucks were then scrapped for metal and not for parts.  This drove up the price of used cars and trucks while easy finance terms promoted more sales of new cars and trucks.  Presently used car prices have returned close to normal rates.

The most troubling aspect of the UAW is that; one, its members are at best semiskilled; two, the lower quality of its members’ output; and three, the low rate of participation in their own retirement.  Quite frankly put, Chrysler has a severe quality problem in that many of its models are rated very poor in quality.  A number of its models carry the stigma of a 25% rejection rate by American owners, meaning that they would never buy that model again.  And both Ford and GM are not immune in this matter as witnessed by the ignition switch debacle and other recalls.  But it is the retirement of its former members that is most likely to break the bank.  Some of its members took early retirements at the automakers behest with added benefits.  As fewer members have continued to work and the companies contribute to their pensions, the retired members are eating quickly away the bulk of the past pension contributions.  That means that when workers strike, they will demand higher contributions from the Big Three.

GM, Ford, and Chrysler/Fiat will always make and sell automobiles and trucks, although the demise of Chrysler would be a boon for both GM and Ford.  But Chrysler proves that consumers will always buy poor quality if the vehicle is cheap enough.  It is the price break that matters and once pushed to the wall, automakers will downsize again.  Right now union work rules prevent the type of production operations used at Toyota and Honda.  In the long run, lack of quality will kill Chrysler and perhaps either GM or Ford.  The Japanese and the Koreans are pressing the market very hard with higher quality and in many cases lower cost.  American unions have been amazingly short sighted and their membership will suffer in the long run.

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