Starting on the Shop Floor

The U.S. Auto Industry Shakeup: An interview with economist Sue Helper

This article is from the September/October 2007 issue of Dollars & Sense: The Magazine of Economic Justice available at http://www.dollarsandsense.org

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This article is from the September/October 2007 issue of Dollars & Sense magazine.

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Detroit, 1970. The United Auto Workers has over 1.6 million members, representing around 95% of all U.S. auto workers. Typical of the industry, blue-collar workers at General Motors have seen their wages rise by more than 70% over the past two decades after adjusting for inflation.

Fast forward to 1990. UAW membership has fallen to about 950,000. Real wages at GM have continued to rise, but far more slowly—by only 30% since 1970. Foreign car makers like Mercedes and Toyota have opened nonunion assembly plants in the United States. Of course, their workers still benefit from the existence of the UAW: to keep the union at bay, the foreign companies pay wages comparable to those at GM, Ford, and Chrysler—the "Big Three." Perhaps more important, auto parts manufacturing, once fully unionized, has spun off into a lower-wage, often nonunion sector.

Today, these trends have intensified to the point of significant qualitative change. UAW membership is now below 600,000. The union is contemplating the once unthinkable: taking over liability for retiree health care costs from the Big Three. Chrysler was acquired in 1998 by the German firm Daimler, then traded off this year to a private-equity firm, Cerberus. Several large parts manufacturers have filed for bankruptcy protection. Parts maker Delphi insisted it would have to slash wages by as much as two-thirds in order to emerge from bankruptcy; Dana is emerging via a partial private-equity buyout. The big news this summer was that for the first time, a foreign car company, Toyota, was #1 in U.S. car sales. Yet it is less and less clear what even makes a company "foreign" or "American."

In this context of turmoil and loss of labor power, we turned to economist and D&S associate Sue Helper for an in-depth perspective on the industry and its workers. Helper is SBC Professor of Regional Economic Development at Case Western and was an expert witness in the Dana and Delphi bankruptcy proceedings this summer.

DOLLARS & SENSE: You've conducted case studies and done a lot of onsite research in auto assembly and auto parts plants. Can you start by describing what auto work is like today?

SUE HELPER: People who don't work in manufacturing may think of manufacturing work as pushing a button every 20 seconds on some machine. You push the same button every 20 seconds for 20 years and it never changes, so there is not much discretion or skill required. A number of things follow from that picture of manufacturing work. One, maybe people who do it should not get paid very much. And two, why should we try to keep these jobs—who cares if China does them instead?

I think that picture does not have to be true, and in fact is not true in much of U.S. manufacturing today, especially in the auto industry. And there are a number of policies that could incorporate workers' knowledge and skill into the production process further. That would be good for workers, and it would be good in other ways as well.

So let me talk about what these jobs could look like, what in fact some of them do look like. All of the automakers have adopted in some form or another the Toyota "just-in-time" production system: assembly plants keep little or no inventory of parts on hand, and the lead time to make parts is very small. That means that if a line gets shut down, say, at a supplier, then that's going to shut down the line at an assembly plant, and can cost that assembly plant up to thousands of dollars in lost profits for every minute the line is not working. That's a lot of pressure on a worker. On top of that, the quality requirements are quite high. In part because of this problem with the line possibly being shut down, just-in-time increases the stress and the skill requirements for workers.

The bottom line is that workers can either benefit the company well beyond the cost of their wage if they make a good suggestion that allows things to run more smoothly, or they can cost the company a lot more than their wage by making some kind of mistake that causes the line to shut down.

D&S: You're talking about a line being shut down not only because a part runs out, but maybe because of a quality problem?

SH: Yes. And one reason that a part might run out is that the supplier has been unable to make it in a high-quality way.

D&S: To what extent do jobs in the auto industry already draw on workers' knowledge and discretion in the way you're describing, and to what extent are you saying that they do not, but that with the right kinds of training and investment, they could?

SH: Some of both. For instance, American Axle is a large, unionized parts supplier that is not in bankruptcy—even though it pays higher wages than the ones that are, like Dana, Delphi, and Tower. I think one of the reasons American Axle is not in bankruptcy is that they've done more incorporation of workers' knowledge and skill into the production process than have the Danas and the Delphis.

Part of the problem is that managers don't want to recognize that they depend on workers. Some managers don't really understand how their production is organized—that there is a lot of informal fixing that happens on the shop floor. Auto workers do a range of things that keep the production process going but that top managers are not aware of. If everything is going smoothly, then there's no need for worker discretion particularly, but when things don't go smoothly, that's when worker discretion becomes important.

D&S: In your work, you place a lot of emphasis on Japanese production methods and their potential benefits for workers. Can you explain those methods a little bit further? How has their implementation affected the workers?

SH: The key to Toyota's success is the rigorous adoption of a production system that relies heavily on continuous improvement—that you're always coming up with new ideas for improving quality and productivity. Low inventory is a key to that end. It's not the only key, but if you have low inventory you're also likely to get higher quality, for a couple of reasons. One is that when you find a bad part, it won't have been very long since that part was made, so you can go back and see what conditions triggered the defect. There's also a kind of "worker stress" effect: workers know that they can't just reach back into the box and get a new part if the first one turns out to be bad. So those are a couple of reasons why just-in-time is important for continuous improvement.

But Toyota also does other things that allow workers to use the knowledge that they've gained—when you have 20 years on the shop floor, you learn a lot about how things can be done better. If you go into a Toyota plant in Japan, you'll see that each worker will have a cart that has some special tools for doing their job; many of those tools may have been designed by that worker. You may have to tighten a bolt in some awkward place, and so you'll devise a special lever or something that will make that easier. And there are organized suggestion programs in which small groups of employees get together to work on particular quality problems or particular ideas.

In this approach, what you might call a high-road production process, the idea is that you involve workers' skill and knowledge in a way that allows you to make higher quality products that you can sell for a higher margin, so that you can benefit consumers and workers and managers at same time. But there is always a struggle between this high-road strategy and a low-road strategy where managers try to maximize their profits at the expense of workers' wages, and often at the expense of consumer quality. Even Toyota is facing this dilemma. They're very worried about competition from Korea. So for one thing, they're using more temporary workers. They are also non-union in the U.S., although not in Japan.

So I don't want to paint Toyota as a perfect company. But they are a company that has found ways to use and incorporate worker skill and knowledge into their production processes in a way that I think has been very productive for workers, for consumers, and for Toyota management. To some extent, American firms are also moving in this direction.

Today the UAW is struggling to defend the gains that they've made in terms of wages, benefits, etc. I think that this may require somewhat of a change in the union's strategy. In the past, the idea was that managers manage, with little or no participation from workers, and workers just take a cut of the resulting profits. What's important now is that it has become much harder to separate the production process from the distribution of income.

D&S: Can you explain that?

SH: In the fifties, the UAW basically said to managers: We don't care how you run the plants. We are not going to insist on seeing the books. We are not going to become involved in training programs. And later: We are not going to have a lot of job classifications. You manage the plants as you see fit, and we'll just take a cut of the profits, say, a guaranteed 3% raise every year.

But today, in order to create the process of continuous improvement that I'm talking about, workers and managers both have to participate. Managers have to manage differently. Instead of telling workers "You do what I say," there has to be a systematic cultivation of worker input. The workers have to believe that management is going to incorporate their ideas.

This is a difficult transition that is being made in pockets in the United States. In order for the transition to become more widespread, one of the things unions and management together have to figure out is how to negotiate improvements that the union can actually deliver through an experienced and trained workforce—and how the union can then hold the company accountable for living up to any commitments management has made. The UAW has in fact negotiated this kind of deal: We will figure out how to save you money, whether it's through wage cuts or suggestions for improvement, and in return we want to see a certain number of new jobs created. In some cases such agreements have worked, but in other cases management has basically reneged on their commitments to save or create jobs.

So unions need different ways of negotiating, and effective ways of enforcing agreements they do make. But we also need changes in national policy—especially, making health care universal and shoring up Social Security—to cut overall labor costs and take away some of the price pressure on unions. We need to change labor law so that it's easier for people to unionize—polls consistently show that a much higher percentage of people would like to belong to unions than currently do.

We also need programs that train managers to work in a collaborative way. One problem right now is that most skilled workers do not know how to utilize their knowledge and experience in an organized way to bring about systemic improvements in quality or productivity. Because there's no supply of these workers, the ones who do know how to do this, there's no demand for them; because there's no demand, it's hard to create a supply.

D&S: We'd like to shift gears and ask you about the industry's overall situation. Deindustrialization and falling UAW membership are trends that have been going on for over 35 years. How would you characterize this particular moment in the history of labor, of the auto industry? Are we in a new phase?

SH: It's always hard to figure out when there's a break point, when you're in a new stage. I would say that today, there is an intensification of trends that have been going on for a long time around the rise of low-wage competitors to the United States, particularly China.

The current competition from China and a number of other very low-wage countries is different from the competition in the 1980s from Japan. The competition from Japan was arguably a competition largely based on skill and on production methods. In retrospect, I think that American consumers benefited a lot from that competition. Eventually the U.S. auto industry caught up, when they were finally and slowly able to adopt some of the methods that the Japanese, particularly Toyota and Honda, used. With China, it's much more a straight competition based on wages. That's much harder to respond to in a way that protects the living standards that people have fought for over years in the U.S.. This competition is sometimes portrayed as a fight between greedy U.S. and poor Chinese workers, but in fact, most of the money saved by lower wages goes to enrich already-wealthy multinational firms.

There are a number of forces at work. The United States could have a relatively worker-friendly form of capitalism in the 1950s and 1960s in part because we didn't face competition from abroad. The fifties were a pretty nice era for American workers, at least white male workers. Unionization rates were high. Health care costs were not that high, in part because there wasn't nearly as much that doctors really could do to help people.

All of these factors are now different. We are facing competition from low-wage nations, with a trade regime that strongly fosters competition on the basis of wages. (If a trade regime contained protections for workers' rights, Chinese and Mexican workers would earn more and could afford to buy more goods made in the U.S.) We are blessed with more effective health care, but cursed with a system that makes it profitable for insurance companies to put a lot of resources into figuring out how to deny people care, for instance skimming off the healthiest people to insure. All of this puts some of the successes of unions in raising wages and providing health care at risk.

D&S: Is China a big player in terms of auto parts?

SH: Not right now. Just a couple percentage points of an average car sold in the United States would have inputs made in China. That's different from many other manufactured goods. Because the weight of many of the parts makes them expensive to ship, and also because of this need for just-in-time production, Mexico is more important right now as an exporter of auto parts.

But actually, a surprising amount—about 80%—of the value-added of a car produced in the United States comes from within the U.S. or from Canada. That's true whether the producer of that car is a Big Three company or a Japanese company. To be fair, this may be a little bit of an overestimate, because the trade statistics don't do a great job of catching imports that come at a second- or third-tier level. Still, direct competition from imports right now is not as great in autos as in other industries, like toys or furniture. But there's the potential for more in the future. One of the Chinese auto companies, called Chery, has said it's going to start exporting cars to the U.S. in a few years, although I don't necessarily think that's going to succeed.

D&S: If the UAW could organize the workers at Toyota and other foreign-owned plants in the United States, what kind of difference would that make?

SH: The workers at Toyota plants in the U.S. make wages pretty similar to what workers in Big Three plants make. That's not accidental; it's a union threat effect, something Toyota does to try to keep the UAW out. The benefits at Toyota are less generous, though. So if these plants were organized, the companies would likely be forced to pay higher benefits, and so it would be harder for them to undercut Big Three and other domestic U.S. plants in price.

Unionizing those plants might also be beneficial in that it would allow the UAW to have more experience with a different way of managing. And it would also give the Japanese companies experience with U.S. unionism. One difficulty that the UAW has had with organizing auto parts suppliers is that the Japanese automakers claim not to want to deal with unionized suppliers. They are worried that doing so would mess up their just-in-time production system, for example, through strikes, even though they coexist with unions just fine in their plants in Japan and in Europe. For that reason, if their plants in the U.S. were organized, that could open up opportunities throughout the supply chain as well.

D&S: Do you think the UAW has any real shot at organizing Toyota or other foreign car companies with plants in the U.S.?

SH: Toyota in particular has been very careful to avoid the kinds of incidents that get workers mad, and all of a sudden interested in organizing. Toyota pays the prevailing industry wage here even though their plants are located in areas where typically pay is quite low—in other words, they pay an automotive wage rather than a local wage. Of course, that can change. A document was discovered that someone had left on an overhead projector, where Toyota management was questioning internally why they are paying above the local wage. The document said: We could still have thousands of job applicants even if we cut our wages to $10 or $15 an hour. That's possibly a sign that these jobs are not going to be the kind of plum jobs that they have been in the past.

Still, these are very well-managed companies, and they have decided they would prefer to be non-union in the U.S. I think Toyota and Honda will be particularly hard to organize. I think some of the smaller and less financially stable companies like Nissan may be easier targets for union drives.

D&S: Can you comment on the recent contracts at parts suppliers Delphi and Dana, especially the wage and benefit cuts? At Delphi, for instance, the cuts were very deep, although not nearly as deep as Delphi's original offer. So it's hard to know how to view the results.

SH: It's also hard for me to understand. At Delphi, about two-thirds of the senior UAW workers retired. And so what happened there was that many thousands of years of experience walked out the door. Now the company is hiring some of them back as consultants, because they need that knowledge to run the plant.

This is going to have consequences for the options that Delphi has. The company has made it harder for itself to move in a high-road direction because they just said goodbye to a huge amount of skill in their workforce. I've heard informally that their quality has suffered.

Certainly the final settlement is much better for workers than Delphi's initial proposal to pay workers $12 to $13 an hour, which is not much more than McDonald's wages in some parts of the country. And you're talking about workers who work with dangerous chemicals, who have the stress of working with the just-in-time production process, who are required to keep things to very tight tolerances—the width of a human hair in some cases—, who schedule their own production. These are highly skilled jobs. Such a low wage means it's going to be hard to attract a qualified workforce at Delphi. So I think that both the company and the union are better off with the settlement they achieved. I still worry that the new wages are too low to attract a qualified workforce, and certainly low enough that it's going to be hard to raise a family on them.

D&S: Do you think that the cuts they are making are really necessary? Management would say that they have to slash wages this much in order to remain competitive. Do you buy that argument?

SH: No, in many cases I don't. I teach in a business school, so I've seen these documents where management assumes that if you cut wages by 10%, then you will see labor costs fall by 10%. That is just not true. When you cut wages, you lose the ability to attract a good workforce. You also lose some of the loyalty of the existing workers. One of the reasons they work hard is that they want to see an employer they value thrive. Once the job is more or less like one they can get anywhere else, they don't have so much of an interest in keeping that employer in business.

Plus, in manufacturing, labor costs are often a small percentage of the total costs, between 5% and 30%. As I said, if you have a worker who makes a mistake or fails to make a suggestion, that can have an impact on profits far beyond their wage. So in my view, this focus on cutting wages, and wages only, is penny wise and pound foolish. It reflects the fact that we have a lot of professional managers who know about finance but who don't really know about the details of their plants. In the Delphi bankruptcy trial, it came out that the chief financial officer of Delphi could not even name Delphi's plants. It suggests he doesn't really have a clue about how these things operate. You can look at a spreadsheet and see a big charge for wages, but what you don't see is the charges that you're avoiding—the quality problems, the recalls, and so forth—because you have a qualified workforce.

D&S: What will the private equity buyouts of Chrysler and of a portion of Dana mean for the structure and the future of the U.S. auto industry—particularly for workers?

SH: It's too soon to tell. There's potentially a way that private equity can make things better, and also a way that it can make things worse.

The way that it can make things better is that now the company does not have to provide quarterly financial reports. Stockholders want to see steady income growth, and a lot of managers of publicly traded companies feel forced to focus on that at the expense of longer term technologies. So to the extent that these hedge funds actually want to turn a company around, they have the flexibility to make long term investments. At Chrysler, at least some of the managers that Cerberus has put in place actually do know a lot about auto production. So that's a good thing.

The bad thing is that the way these private equity firms typically make their money is that they have a whole bunch of bets going at the same time. They control a number of companies. If one company succeeds, they make a lot of money. So, in contrast to a manager who has a job at, say, Chrysler, and who will probably lose that job if Chrysler goes down, these guys are managing multiple deals. As a result, they can bargain pretty hard with labor. They can make a very credible threat: Unless you are willing to cut your wages to x, we're not going to invest. We have lots of uses for our money, and we don't have to put it here.

So private equity is a double-edged sword.

D&S: What impact would a universal health care plan have on the U.S. auto industry?

SH: It would help a lot in the case of the Big Three. They are now paying $1,000 to $1,200 per car in benefits, of which a large portion goes for retiree health care. If that were taken over by a universal health care plan, or parts of it were, that would dramatically lower the cost.

One of the things that we've done with our public policy in the United States is make it very expensive for a company to shrink. Once a company starts shrinking, as in the case of the Big Three, they start to have a larger number of retirees compared to their active workers. And so then their costs go up. These are fixed costs: they've agreed in the past that they are going to provide these benefits to retirees. As the company starts to shrink, that fixed burden gets bigger. So the company thinks they need a bigger markup on existing sales to meet that fixed cost, which can result in lost sales and drive them into being an even smaller company, which just makes the problem worse. By making these health and pension burdens private, in contrast to what other countries do, we increase the costs and the risks of doing business—at least to responsible companies that actually pay these benefits.

D&S: What's your take on the new health care trusts, or VEBAs?

SH: I'm not an expert on those, but I think there are a couple of questions to ask about them. What percentage of the liability is the company actually willing to put in to set up the trust? If the company is willing to fund it at a pretty high percentage of the liability that they're giving up, then I guess I don't have a problem with it. It is a new challenge for unions to manage them, and to manage them transparently to their members. There are some tax benefits of setting up these VEBAs. I think it's a big experiment; it carries both some benefits and some risks.

D&S: How do you view the whole question of the pension obligations that the Big Three say are a big drag on their ability to move forward and compete?

SH: It comes back to what I was saying before about the penalty a company faces for shrinking in this country. In the late 1990s these pension obligations were of similar size, but there were a lot more active workers involved and they were selling more cars, so the burden was more like $500 per car rather than $1,200, and that was manageable.

I also think that management is overly focused on this issue. They think that blaming the union is a way to get out of their problems, so there has been a focus on that rather than on designing exciting new cars that people want to buy. The focus on pensions as the sole cause of the Big Three's problems is much overplayed.

D&S: What are the most important things to look out for during the current UAW talks with the Big Three? What kinds of provisions in the final contract would mean that the union had done pretty well or what kind of results would mean that the companies had done well?

SH: I think there are going to be concessions. The question is, how much of it will be in wages; how much will be in health care; how much will be for current workers versus retired workers.

Another set of issues stems from the fact that suppliers are not organized, so there's a lot of competition for that work. Automakers can take advantage of that by shifting out work that used to be done in assembly plants. There's this whole hype around supplier parks and modular production, supposedly a newfangled way of doing production. The idea of modularity is to make cars like computers so that you can sort of plug and play. Rather than having huge 10,000-worker assembly plants, where tiny little parts come in the door and finished cars leave, you do some of the subassembly somewhere else. Like, you build up the instrument panel at a supplier plant, and have whole instrument panels arrive at the assembly plant. Or the whole front corner, which is the tire and the fender and sometimes part of the steering and the axle.

To some extent this is new, and there can be some quality benefits. One is that you design things better if you have people who are focused on just one chunk of the car. For example, automotive seats are a lot more comfortable and a lot more innovative than they used to be because they are not made by people who are also trying to figure out how to make the rest of the car. Johnson Controls and Lear make really great seats.

But this is also a way of taking work out of assembly plants and giving it to workers at supplier plants who will do it more cheaply. It's a way of getting out from under union agreements where the unions have the ability to strike and shut down assembly plants. There are many ways that this could play out. One is that you just have a smaller and smaller core of people making about the same wage, and the automakers keep chipping away at that core group. And another possibility is that you actually try to organize more of the supply chain. The UAW has won neutrality pledges at a number of the suppliers and has organized a number of new plants at these first-tier suppliers, the ones that directly supply the assembly plants. And so I think there will be some bargaining about how much the UAW can get the Big Three automakers to put pressure on suppliers to not block unionization drives.

And another question is how much effort the companies will put towards increasing the skill of the jobs. A study just came out showing that in the United States, those auto plants, stamping plants, and transmission plants that are run by unionized workers are actually more productive than plants that are not. To some extent that is not so surprising, because when workers are paid more, that induces management to invest more in capital. But I think it's also a tribute to the skill and experience of the UAW workers. The Big Three products tend not to be designed as well; they're harder to make. It's only with a lot of effort that you can overcome some of those design problems. I think you are going to see the UAW arguing, "Look, we are productive, and you should pay us that way." And there may be some provisions in the new agreement that may increase that productivity and increase the skills of the workers, along with their ability to translate the skills they already have into ideas for improving the production process, and to then get managers to listen to their ideas.

D&S: How important is it that the Big Three were so late in introducing gas/electric hybrids?

SH: In hindsight it's easy to say, "Boy, that was really stupid; you missed this one." To defend, uncharacteristically for me perhaps, the Big Three: they wanted to "leapfrog," to move right to a brand new technology. The hybrid is in some sense an ungainly marriage of different technologies. If a camel is a horse designed by a committee, that seems like what the hybrid is like. So driving around with two different power plants seems kind of inherently inefficient. The Big Three thought that they could bypass that stage and move on to fuel cells and batteries and so forth. But that's turned out to be a lot harder than anybody thought. So I'm not sure that I fault them for that. I do fault them in other ways.

But I think it's important not just to blame auto companies but to think about public policy that has made it artificially cheap in this country to drive huge cars and to drive a lot. Gas is way too cheap: people do not pay the full cost of a gallon of gasoline in terms of the pollution that it spews out, the global warming that it causes, the sprawl that it causes, the roadways, the national security implications. The Big Three certainly have not fought those policies, and to some extent those policies benefit them because we are the only large market in the world that has gas at this price. One reason that Toyota and other foreign companies have been slow to move into some of the core markets like the minivan, the SUV, and the large pickup trucks is that they can't sell them anywhere else in the world. So this is the niche that the Big Three have been left with. Of course this makes climate policy difficult for supporters of U.S. unions, because the one niche that's left to the Big Three are these large cars.

Where I do fault them is in not designing innovative small cars and marketing them. The argument they will make is, "Yes, we can sell a sporty small car in Europe, but that's because they are willing to pay more for them." But I think it's partly that they haven't marketed them in a way that would be appealing to people in the United States. I think that in general the automakers need to blame the union less and focus more on making good cars and having good production methods, the basic blocking-and-tackling of good management. end of article