UAW Suicide Wish: The Union Will Die and Take Detroit With It
The United Auto Workers have recently broadened their strike against the Detroit auto makers, GM, Ford, and Stellantis (Chrysler). These were at one time known as the Big Three for the reason that not only were they the biggest auto makers and sellers in America, but they were also the biggest in the world.
I went to Conrad High School in Wilmington, Delaware when it was located about a mile from a GM assembly plant. Upon graduation, most of my male classmates just walked down the street and signed on to work on the GM assembly line as members of the UAW. Their timing was great. Because the Big Three were the dominant global auto producers at the time (1959) they had the lowest costs of production despite paying the highest wages in the global auto industry. They could do this because of the phenomenon known as “economies of scale”, meaning that the more you produce the lower the cost of production of each unit produced.
ECONOMIES OF SCALE
Here is how it works. Suppose you build an auto factory that costs $100 to build. If you produce only one auto, it would have to be priced at $100 just to cover the cost of construction let alone the labor and management that must go into making the car. But if you produced 100 cars, the factory cost per car is only $1. Let’s suppose you have hired 100 auto workers and pay them $100 per day. If you produce only 100 cars, you would have to price them at a bit over $100 to break even. But if you produced 200 cars, you could easily cover the costs and still make a tidy profit. This is economies of scale at work. When my high school pals went to work on the GM assembly line in Wilmington, Delaware they were perhaps the highest paid auto workers in the world, yet because of the high volume of production they made the world’s least expensive autos. That is the glory of economies of scale. If you make the most of something, you probably also make the lowest cost items. You can be rich and yet quite competitive in the global market place. That is what the United States did when I was a kid.
Of course, over the past sixty odd years this picture has changed dramatically. Other auto makers like the Germans, Japanese, and Koreans had need of a different kind of auto than those used by Americans. Of course, the Big Three set up operations in Europe, but were not allowed to do so in Japan or Korea. But, even in Europe, where car designs, sizes, and quality requirements are quite different from those in the U.S. the Big Three managed to gain substantial market share and thus to become the biggest global makers – for a while.
Many factors changed this. The failure of the U.S. government to prevent the dollar from becoming hugely overvalued in the 1960s-70s (the global exchange rates had been set in 1948 when Europe and Japan were still partially destroyed with the dollar at 4 D Marks and 360 yen. Twenty five years later, these exchange rates were ridiculous in the face of the rebuilt industrial economies of both parts of the world. In addition, the U.S. had reduced tariffs and other barriers to imports of autos while Europe and Japan had kept some significant barriers to their markets in place. Perhaps most significant was the fact that both the Japanese and the Germans had figured out how to make high quality, technologically advanced cars that appealed to Americans both because of their relatively low prices but also because they needed less repairs and maintained their value longer. Consequently they began to get a real grip on the American car buyer.
THE AUTO WAR WITH JAPAN
In 1981, I was appointed Counselor to the Secretary of Commerce in the Reagan administration and was assigned the task by Secretary Malcolm Baldridge of reducing the ballooning U.S. trade deficit with Japan. Autos were at the core of this problem. The Japanese autos were inexpensive and of high quality, and Americans were buying them like hotcakes while almost no American autos were being sold in Japan. The major reason for this was that Japanese dealers, unlike those in the U.S., were essentially barred from selling autos made by competing companies. Unlike in the U.S. where Ford dealers would readily also sell Volkswagens or Toyotas, Japanese Toyota dealers sold only Toyotas and Nissan dealers sold only Nissans.
But there were other considerations as well. The Japanese trade negotiators would argue that U.S. cars were not being sold in Japan, because the quality was poor, delivery always late, and the steering wheel was on the wrong side (Japan like the UK drives on the left). These were mostly just standard negotiator talking points, but not entirely. The truth was that the Japanese were more prompt in meeting delivery deadlines, and far more fastidious about the quality of the product.
On top of all that, Japan did not and does not now have an auto union. Each company had its own union. Toyota had a Toyota workers union, Nissan had its inside union as did Honda, Subaru, and so on. But there was no United Japanese Auto Union standing outside of the producing companies nor is there today. So, nothing like the UAW ever has existed in Japan.
This meant and means that the livelihood of say Toyota workers depends very strongly on how Toyota does in the market place. The Toyota in house union includes all the workers plus a large percentage of the executives. The income, standard of living, and future economic outlook of all these people is linked to the relative performance of all of them and to the ultimate performance of Toyota. The same goes for Nissan, Honda, Subaru, etc. Mind you, Toyota top executives are not paid anything like what top executives at Ford, GM, and Chrysler are paid. On the other hand, they do have lifetime employment and excellent health and social benefits. The main point, however, is that the future welfare of Japanese employees from top to bottom is highly dependent on how their companies perform and thus on how they themselves perform. They have a rea incentive to work as hard as they can and never to “steal” from the company.
The German auto workers are not quite as tied to their companies as the Japanese, but there is a much stronger tie than is the case with the U.S. auto industry and UAW. In Germany, for instance, labor is often represented on the corporate Board of Directors and worker income is significantly dependent on corporate performance.
THE JAPAN SOLUTION
By the time of the advent of the Reagan administration, Japan’s conquest of the U.S. auto industry had gotten to the point at which even the avowedly “free trade” leaning Reagan team was ready to put a limit on auto imports from Japan. But, of course, the United States being a leader of the global free trade crusade, it would have been highly embarrassing for a Republican free trade champion like Ronald Reagan to impose limits on imports into the United States. Thus, with no concern for hypocrisy, we pressured the Japanese to adopt “voluntary export restraints” (VERs) for the Japanese auto industry. Of course, there were intense negotiations between the Japanese and the U.S. Trade Representative and Commerce Department over the “voluntary” number of autos that could be exported to the U.S. market.
I was deeply involved in these negotiations and worked closely with Chrysler’s Lee Iacocca, Ford’s Don Peterson, GM’s Roger Smith, and also with the UAW’s President Owen Bieber at the time and also later in the 1988-1994 period when they all became financial supporters of my new think tank (The Economic Strategy Institute) and cheer leaders for my best selling book: TRADING PLACES; How We Are Giving Our Future to Japan.
Having lived and worked for a long time in Japan, I was well aware of the way Japanese managers and workers think about their companies, their relationships with each other, and their duties. I particularly remembered a lunch I had had with Sony founder Akio Morita. He had explained the problems Sony had had when it opened its first factory for producing televisions in the U.S. He noted that the quality of the production in the U.S. was far below that of production in Japan despite the fact that the factories and equipment in both countries were identical. The problems could, thus, only have arisen from the performance of the workers. At first glance, it appeared that American workers were just no match for their Japanese counterparts. But closer examination solved the problem. It seemed that Japanese workers automatically as a matter of habit aimed to place and fasten a new part exactly in the center of the space provided on the production machine. The Americans were less exact and thought it would be fine if the part was a bit off center. Sony’s solution was to reduce the space available for the placement on the American production line. At the time, I wondered how that might have worked out had Sony been an American company with a work force of members of an outside, independent labor union.
I was particularly impressed by Ford’s Don Peterson who put himself through production quality training three times and required all of his key executives to do the same. Lee Iacocca also put enormous pressure on his executives to produce quality, quality, and more quality. GM’s Roger Smith acted similarly. I never imagined that these guys and their key executives wanted to produce crummy or mediocre vehicles. Nor did Roger Smith strike me as a guy who wanted to sell trash. Yet, the Anglo- American tradition of war between corporate executives and their labor force produced negative results for both the executives and the labor force for many years and seems to be continuing to do so.
MOST RELIABLE AND MOST AMERICAN
In the wake of the “voluntary restraint” of Japanese auto exports, the major Japanese producers, Toyota, Nissan, Honda, and others undertook to put factories in America and produce cars and parts in the U.S. market so that they would not have to “restrain” themselves indefinitely. Interestingly and of great importance is the fact that they built their factories in locations and under circumstances that did not require them to have labor contracts with the UAW. Thus they did not have to pay the same high wages and offer the same extensive benefits as the Big Three. That doesn’t mean they paid poorly or unfairly, only that they were able to put more emphasis on reward for performance, on mutual sharing of responsibility of labor and management, and on everyone being in the same boat. For example, the average Ford worker today makes about $75,000 annually all in. For Honda, that number would be about $51,000. The Honda number is close to the average pay for a manufacturing job in America. Thus, Ford and GM and Chrysler are paying well above the average and keep in mind that their compensation is fixed. It gets paid regardless of the results of the corporation as a whole. Not so with the Japanese. Last year, Honda asked employees to pay back some of the year end bonus they received because it had miscalculated the year end earnings.
The point here is that UAW workers are not being paid like paupers. They are high on the scale of all American wage earners. Yet the system is set up to be a continuing war between the union and the car makers. To keep its members loyal the UAW has to show that it can get them higher wages and benefits and that they should therefore owe their first loyalty to the union and not to the employing corporations.
The results of the competition between the Detroit auto companies and the UAW on the one hand and the Japanese producers operating in America on the other are striking and damning for Detroit and the UAW.
When all this began back in the late 1970s, the Detroit makers totally dominated the market. GM all by itself accounted for about half of total U.S. auto sales and the U.S. was by far the world’s biggest auto market.
Today, sales of the Detroit makers in total are only about half of total U.S. sales. In 2021, Toyota became the biggest single American car maker, dethroning GM after its dominance for many, many years.
Why has this been happening? Simple. Quality, American content, and price. The Japanese, South Korean, and German auto makers are superior pretty much across the board. If you want to be patriotic and buy the car with the most American content, you will almost surely buy either Tesla or Honda or Toyota. In the top 25 cars, only three are made by the Detroit three. The list of Consumer Reports most reliable car brands runs like this: Toyota, Lexus, BMW, Mazda, Honda, Audi, Subaru, Acura, Kia, and, hold your breathe, Lincoln. Finally, because they are less expensive to make, the Japanese cars made in America also generally are sold for lower prices than the Detroit made cars, unless the Detroit cars are actually made in Mexico like the new Ford Mustang that I would buy if it were made in America as I explained in an earlier article.
ON LIFE SUPPORT
In 1981, the UAW had about 1.5 million members. Today, that number is down to about 450,000 active (meaning working) members. It may succeed in gaining some increase in pay and benefits in the current circumstances, but unless it recognizes that its fundamental structure and doctrines are bankrupt, it will be getting down to pretty close to zero members in the next decade and Detroit will no longer make autos. This will be especially true if laws are amended such that GM, Ford, and Chrysler can open auto factories in the U.S. without UAW employees as Tesla, Honda, Toyota, Nissan, BMW, Mercedes, Hyundai, Kia, Volkswagen, and Subaru are already doing.
I find it all very sad.
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About Clyde Prestowitz
Clyde Prestowitz is a leading analyst and commentator on foreign affairs, globalization, the Asia-Pacific region, Europe, Mexico, technology, and international economics. He has spent many years living and working abroad as a sales, marketing, and corporate planning manager for companies like Scott Paper and American Can Company in Switzerland, The Netherlands, Belgium, Japan, Mexico, Brazil, Venezuela, Hong Kong.
He was a White House adviser in the Obama administration and served as Vice Chairman of President Clinton’s Commission on Trade and Investment in the Asia-Pacific region. He was also a director of the Export Import Bank of the United States under Clinton and served at the same time as the President of the Pacific Basin Economic Council. Earlier, during the Reagan Administration he served as Counselor to the Secretary of Commerce with a special focus on Japan with which he was the lead U.S. negotiator. Among other things he succeeded in halting the dumping of Japanese semiconductors in the U.S. market and in obtaining an agreement under which Japan guaranteed U.S. producers at least a 25 percent share of their market. Then he became a leader of the first U.S. Trade Mission to China in 1982 and helped to arrive at agreements that enabled U.S. companies to establish operations in China.
Clyde Prestowitz writes frequently for the New York Times, Washington Post, Boston Globe, Wall Street Journal, L.A. Times, The Washington Monthly, Foreign Affairs, Foreign Policy, The American Prospect, The Spectator, and other leading journals and newspapers.
Aside from writing, he has served as a member of the Policy Advisory Board of Intel under Andy Grove, as an advisor to Fedex Chairman Fred Smith, as an advisor to former AIG Chairman Hang Greenberg, member of the Board of Lanxide Corporation, and advisor to Form Factor Inc.
His major books are: Trading Places: How We Are Giving Our Future to Japan (1988), Rogue Nation (2003), Three Billion New Capitalists: How Wealth and Power are Flowing to the East (2005), The Betrayal of American Prosperity (2010) and Japan Restored (2016). His upcoming book The World Turned Upside Down: America, China, and the Struggle for Global Leadership is expected to be published in January 2021.
Clyde Prestowitz is a graduate with honors of Swarthmore College, holds an MBA from the Wharton School of Business, and an MA in Asian studies from the University of Hawaii.
He speaks five languages, including German, Dutch, French, Japanese and English.