Monday, December 22, 2008

The Big 3 Auto Crisis

If you attempt to solve a problem without determining the actual nature of the problem, the chances of solving it are not good. That's the situation with the Big 3 so-called crisis. Astonishingly, immediately after there's general agreement that the U.S. financial industry would require almost a trillion dollar "bailout", there's a concerted effort to paint the UAW contract as the cause of the American auto maker's cash flow problems. Let's look at that for a moment.

The figures vary but UAW manufacturers pay significantly more, per hour, for assembly labor, than the foreign manufacturers with plants in this country. Moreover, they are forced to pay most of these costs even if plants are not in production. However, the figure most often seen as representing the cost of assembly labor as a percentage of cost of production is 10% for both groups. In other words, if American manufacturers cut their assembly labor costs in half, their cost of production would drop 5%. Make of that what you will.

The reason that this issue has become headline news is not that the UAW contract has suddenly made U.S. manufacturers totally uncompetitive. After all, they've been operating under similar contracts for years. The immediate cause of the problem is a dramatic drop in sales, almost 41% for GM, but over 30% for Honda and slightly less for Toyota. Nobody is able to move new cars right now, regardless of what their labor costs are.

So, GM goes to the government and explains that they need money. Well, don't we all. If only the UAW would re-negotiate their contract everything would be much better. But would that sell more cars? Probably not. But it might be a first step toward getting rid of the UAW. And, why should the UAW re-negotiate? What would they have to gain? GM, at least, for reasons of their own, does not wish to go into bankruptcy, which is exactly what they have to do. In a capitalist system, companies that can't pay their bills are either restructured or liquidated. Not bailed out by the government.

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