Living Economics

Legacy Curse
The legacy of high union wages and benefits progressive measures has become part of a vicious circle of market-share erosion for old-time U.S. car makers.

It is no secret that U.S. car makers have fallen on hard times. GM (General Motors)'s U.S. market share has fallen to 26.2%, while Ford's share to 18.6%. Only Daimler-Chrysler has registered slight gain in market share. In spite of a much higher price discount per car than the Japanese car makers ($2800 vs. $950) in October 2005, the Japanese car makers captured a 36% market share, an all-time record for the month. The market share for U.S. car sales fell to 52.3%, an all-time low.

The problems facing GM and Ford have been twofold: high cost and low consumer perception. Because of longstanding labor union contracts with their workers, American manufacturers pay out hefty healthcare and pension benefits. Industry analysts estimate that for every car sold by a U.S. carmaker, $1,500 is paid out in health benefits to workers and retired workers. That number climbs above $2,000 per car when pensions are factored in.

Cutting jobs and closing surplus plants may seem to be sure-fire cost-cutting measures. But the cost savings are much less than what could have been. In the early 1980's, the UAW (United Auto Workers) was offered by GM a job-preservation deal known as Jobs Bank to forestall union opposition to automate factories. This deal pays laid-off hourly workers nearly full wages and benefits long after their jobs are eliminated, at a cost of about $100,000 per person. As a result, some plants that should have been closed were put to work just to save the Jobs Bank costs. To move the excess inventory, GM resorted to deep price discounting thus further cheapening its brands.

While the long-established U.S. car makers are saddled with these heavy legacy costs, the green-field Japanese transplanted car makers are getting away with few retirees and lower non-union wages and benefits. Like ships at sea, older ships have a tendency to accumulate more barnacles that slow them down than newer ships. The notion that legacy can be a curse in mature industries is a sharp contrast to the idea of first-mover advantage in new Internet businesses. In its heydays, the idea of higher union wages and benefits was part of a virtuous circle that promoted car ownership by providing workers the means to purchase their products. Today, the legacy of these once progressive measures has become part of a vicious circle of market-share erosion.

GM has gained some success in getting the UAW to agree to a slight reduction of health-care benefits for retirees (see Reality Benefits). But the cost savings paled in significance to what is required to be fully competitive. GM could of course resort to Chapter 11 bankruptcy protection which would allow it to void its existing labor contracts and dictate new terms, including the outsourcing of jobs to countries with lower labor cost. This strategy could back fire if the UAW decides to strike and close down GM completely. As in other mature industries such as steel and deregulated airlines, there is no quick and painless way to resuscitate inefficient firms.

Of course, even if cost can be successfully cut, the U.S. car makers still may not survive foreign competition unless they can come up with cars that the consumers want to buy.

References:
  • ABC News. 11/22/2005. "Toyota, Honda Gaining on U.S. Automakers."
  • WSJ. 1/7-8/2006. "How U.S. auto industry finds itself stalled by its own history."
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