The Burgeoning Welfare Industry

The Associated Press reported on Wednesday, May 25, about the Fitch Ratings company lowering the credit rating for GM to a 'junk' status.

This decision will likely make it more expensive for GM to borrow money. This will effect the competitiveness of the automaker.

Fitch Raings cites reasons for their decision;
1) Soaring health care costs
2) Higher gas prices
3) Loss of market share to Asian competitors.

B Craig Huton of Gimme Credit cites a a more general causation;
Inability for GM to negotiate concessions with the UAW to reduce "structural costs"

These "structural costs" may be comprehensive, including the soaring health care costs Fitch Ratings had suggested, however I believe it goes deeper then this. The UAW negotiates more then health benefits. Pension, wages, number of workers at each plant are also negotiated by the UAW.

Through higher then market driven wages for the union employees, the UAW itself could be seeding the destruction of GM, Ford, Chrysler and other American companies employing thousands of American and overseas workers.

This may seem to be an extreme synopsis for the future of American Auto Manufacturers, however the possiblity is real.

Popular are the products of the 'Big Three' (I own a Ford), however it is apparent their popularity is waning. Competition is changing things. This is good for customers of all automobiles. It is only bad for GM, Ford, and Chrysler in the short term. If they respond to the competition with 1) increased quality of products, 2) lower relative costs, 3) reduction in their own expenses (increasing profitability) 4) continual adapting of marketing, they will be more competitiv. This will be good for the three in the long run.

The UAW has a key role in this issue. The unions have the ability to make or brake American car manufacturers. Historically the UAW has chosen short term gains for the worker over long term solvency of the companies to which their members work. Bad choice. If a company falls flat, the members are out of work.

I remember talking to my uncle about his work at the Ford plant on the South East side of Indianapolis just West of Loop 465. He described the work in more detail, but the work itself is not as significant as the resulting backlash received from fellow union members when finishing his job early. He was told to slow down in fear of making the other union workers look bad. If he completed his alotment of work early, he was made to sit idle at his station. He was not allowed to do any more work. This was in the 1980's.

An example of mismanagement is told well by Dr. Jim Windle, a Professor in the College of Technology at Purdue University. I asked him for an example of the GM/UAW problem consistent with the theme. Doc Windle responded, "They [General Motors] have always had too many people and too much capacity. In addition, neither their people nor their plants have been flexible enough to produce to customer demands...The Fairfax, Kansas plant was rebuilt at the cost of one-billion dollars to produce 200,000 Pontiac Grand Ams per year. They [GM] could only sell 100,000 per year. Unfortunately, the plant was not flexible enough to produce any other model. They just cannot get it right!"

These mistakes in capacity, driven in part by UAW negotiating, has contributed directly to todays credit rating problems for GM. When one consideres millions of automobiles being produced by our automakers, even $10 of cost per unit due to decreased effeciency in the plant will mean an incredible amount of lost revenue and reduction in competitiveness. In the example above, half the capacity was needed at the Fairfax plant. For argument only, if capital costs were overspent by $500 million, these costs would have to be absorbed by the price tag of each Grand Am, or by other GM products. Additional costs would be the salaries of additional employees the UAW required of GM to staff the plant. Health care costs for the additional workers, HR costs, even the retooling/re-engineering of the plant itself to accomodate additional union workers.

Anyone say what I am seeing?

The Fairfax currently builds Malibu and Malibu Max for Chevrolet. The plant is scheduled to begin production of the Saturn AURA in 2006. "GM is reportedly investing $200 million to expand the plant to build the AURA. An additional 300 workers are expected to be needed to help build the new Saturn," according to PlantSaturnFans.com 'AURA Concept Unveiled to Workers at GM's Fairfax' , February 26, 2005.

How many of these workers will be sitting idle with an hour left in their shift?

MoreThanCorn sees the history of union decisions. After a company hires more union workers then necessary at a tremendous salary, these same workers will go on strike when the company has to make changes in order to stay profitable. The auto industry is becoming a welfare industry. The ones to suffer would first be the union workers when they lose their jobs because the plant closes. The long run benefactors will be the competitive market. It would have shed an old dinosaur who cannot adapt to the changing weather.

How many more years will GM be able to do business with their handicap, the UAW forcing changes in business decisions? The UAW may have great intentions. I just can not imagine any of them being educated in economies of scale.