Don't Blame Detroit on the Unions

It’s quite fashionable today to blame the unions for many of America’s economic woes. However, the unions did not bankrupt United Airlines, Delta, Continental, Northwest, TWA, or US Air. Nor did they cause the collapse of Pan Am, Eastern, or Braniff. Southwest, the most profitable airline, is highly unionized while Delta is the least unionized of the major airlines. Labor also did not bankrupt K-Mart or close Home Base and The Good Guys. Blame competition and the failure of management.

Don’t fault the UAW for the recent 30,000 job cuts and 12 plant closings by GM. Nor is it responsible for the 75,000 GM layoffs and 21 shuttered facilities in 1997. The union also did not hand out 75,000 pink slips and close 11 factories in 1986. No, the auto workers are not responsible for the 40 year decline in GM.

Yes, the auto workers are overpaid, have Cadillac class medical coverage (even for retirees), and retirement plans most of us can only dream of. And yes, we caution ourselves against buying cars manufactured on Mondays, Fridays, the opening day of hunting season, and even the first year of production.

However, the real onus is on management, the highly overpaid executives, for creating and tolerating these practices, and more critically, for not producing cars Americans want to buy.

There is nothing wrong with GM that selling more cars wouldn’t solve, but GM does not produce the cars we wish to buy. One-quarter of the vehicles sold in California are Toyotas.

Cars are sold on design, price, quality, mileage, safety, and functionality. When is the last time GM produced a “must-have” car that we rushed to buy? Decades of high-priced, low quality, and poorly designed GM vehicles have no cachet in the marketplace. Ford had the Mustang, Taurus, and Explorer while Chrysler markets the 300. GM gave us the Aztek, Catera, Chevette, Cimarron, Citation, Corvair, Nova, and Vega,

Those of us who are children of the 60”s remember the teachings of John Kenneth Galbraith and Charles Reich that the great American corporations were immune to competition, could administer prices, and ignore consumers. The Japanese, Germans and Koreans did not read their books.

GM captured over 60% of the domestic market at its peak in the 1960’s and had highly profitable operations in Australia, Canada, Europe and Mexico. Today, its domestic share is down to 26% and it is hemorrhaging money overseas. No, the UAW has not killed Detroit. It took four decades of colossal mismanagement to blow a near monopoly. Only gross incompetence could turn Cadillac, the standard of luxury cars, into an also-run behind Lexus, Mercedes and BMW. Only gross mismanagement could shut down Oldsmobile, a brand which was the third largest selling brand with over a million vehicles sold in 1986.

Once GM became a near monopoly, it created a massive bureaucracy stifling innovation. It became, and remains, a follower rather than a leader. Three major vehicles types were created in the past 60 years: SUV’s (Willys Jeep), Pony cars (Ford Mustang), and minivans (Chrysler). Both the Mustang and minivan were creations of Lee Iaccoca. The New Millenium has witnessed hybrids by Honda and Toyota. GM lagged in developing front wheel drive vehicles. It never caught up in minivans, and no longer produces cars to compete with the Mustang.

GM introduced a revolutionary new car, the Saturn, to great acclaim two decades ago, and then proceeded to starve it of new products. Saturn has consistently lost money for GM as the brand has languished in the marketplace.

Charles E. Wilson, the President of GM, stated to the Senate fifty years ago that “What’s good for the country is good for General Motors, and what’s good for General Motors is good for the country.” GM has adhered to the second half of the quote in the face of revolutionary changes in the auto industry, two Arab oil embargoes in the 1970’s, and the onslaught of Japanese cars. Pollution control, safety, and fuel mileage became major concerns. GM did not, could not, change; it stubbornly clinger to the flawed business model that said it knew best what was best for America. It never learnt how to build well designed, quality small cars, and surrendered the mid-size market to Accords and Camrys.

Indeed, fifteen years ago GM quietly disinvested in automobiles to concentrate on large trucks and SUV’s – truly a Faustian bargain. At some point the Japanese would build full size pickups and large SUV’s while the price of gas was certain to rise, thereby imperiling GM’s cash flow. It also squandered billions of its scarce capital in Fiat and Saab. (Of course, Ford has poured $10 billion into Jaguar, but that’s another story.) GM has relied on rebates and fleet sales to car rental companies to sell cars. The rebate costs per vehicle exceed its medical expenses per car sold.

The greatest edge GM had was economies of scale. Whatever its added costs for medical and retirement were more than offset by production efficiencies. Its per vehicle costs for advertising, tools and dyes, and overhead gave it a profit margin greater than any competitor. Only four decades of poor management could squander this cost advantage by producing cars Americans did not want to buy.