Friday, December 12, 2008

Auto industry bailout fails as US Senate Republicans demand more concessions from unions

The New York Times reports that the proposed bridge loan to GM and Chrysler has failed to pass the US Senate. The House passed the legislation last night.

Senate Republicans were demanding larger wage and benefit cuts from the UAW; Republicans wanted the auto companies to bring their worker compensation levels in line with those of the foreign automakers.

I have to wonder if the Senate Republicans are letting their traditional hostility to unions get to their heads. People often throw around the statistic that UAW members at the Big 3 make $73 an hour, compared to $48 an hour at the foreign auto makers. The problem is that the raw average wages made by current employees at the Detroit 3 are far more comparable to wages at foreign automakers. The NY Times says that foreign automakers' laborers take home about $45 an hour, compared to about $55 an hour at the Detroit 3 after the last round of labor cuts. The graphic to the left shows figures for Ford. The Detroit 3 pay they equivalent of about $15 an hour in costs related to retiree benefits. They can't do anything about this - the Detroit 3 accumulated those liabilities because they were operating when that's what companies did. These days companies shift the retirement burden to employees.

It's true that the UAW should reduce their wages to be in line with their foreign competition. However, it's also true that labor costs make up only 10% of what it costs to build a vehicle. The Times states that having the UAW take a cut to $45 an hour equivalent and having the government subsidize $10 an hour equivalent of retiree benefits would save the Detroit 3 only $800 a vehicle - and they already sell their vehicles about $2,500 cheaper than foreign competitors on average.

And so, it isn't clear to me whether the Republicans wanted the UAW to cut wages exclusive of benefits, or to cut wages so that wages plus benefits would be in line with the foreign automakers. The latter would be asking way too much. In my view, the former would be reasonable.

The main problems here are that the domestic automakers have massive overcapacity and that Americans aren't buying their cars. Although the Detroit 3 have made significant strides in improving quality, they've done so too late, and consumers still have the perception of a quality gap. Reducing labor costs should be done, but I don't think that a possibly critical bridge loan should have been held up over labor costs - it raises the question over whether some Republicans are simply trying to bust the UAW. Of course, a number of the things the UAW has done over the years don't exactly encourage public sympathy. Alternatively, a number of Republicans oppose the bailout on ideological grounds and may have made unreasonable demands just to scuttle it.

The White House now says that it will use funds allocated for the bank rescue plan to prevent immediate bankruptcy at the Detroit 3. The White House had previously refused to do so.

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