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  • Unions and Ford

    Posted by Carl from Chicago on July 4th, 2011 (All posts by )

    A couple of years ago I went to the Chicago auto show with my brother and he follows new cars quite closely. His summary on Ford was:

    “Their prices are about $5000 / higher per car”

    Recently I bought a 2011 Jetta. The base Jetta starts at just under $16,000; a minimally equipped one is about $17,000 and the style I bought is about $20,000. Volkswagen is pricing this car very aggressively, attempting to take market share from US and Japanese manufacturers. The Jetta I bought is built in Mexico; VW just opened a plant in Tennessee, where of course it is non-union in a right to work state, to build the Passat. VW used to assemble cars in the USA back in the 70’s and 80’s in Pennsylvania, and the linked MSNBC article summarized the outcome:

    Aiming to challenge even the domestic makers, VW opened up a plant in Westmoreland, Pa., and began preparing a second factory in suburban Detroit. But the twin oil shocks of the ’70s, rather than boosting demand for Volkswagen, opened the door for its Asian rivals. Demand began to slump, especially when Japanese makers like Toyota shifted focus from fuel economy to quality, VW’s Achilles’ heel. Sales plunging, the maker decided to scuttle the second plant before it opened. Then it closed Westmoreland, where constant battles with the union drove up wages and prevented the implementation of much-needed steps to improve quality.


    No non “Big Three” auto maker would ever consider making any sort of investment in a union state in the USA for fear that they would be dragged down into the same UAW demise that took down the US auto makers and almost Ford, too. VW has clearly learned their lesson and is opening their plant far away from the UAW agitators. Also from that article:

    But as with the Jetta it will be cheaper than the model it replaces. The new Passat is expected to carry a base price of about $20,000. That’s roughly $8,000 less than the current version, which should make it more competitive with Asian and Detroit models such as the Toyota Camry and Ford Fusion.

    One of the ways in which VW is making these new cars price-competitive is through reduced labor costs. Per the article:

    VW also should save as much as $500 or more per vehicle simply by paying $25 an hour for its Tennessee workers — including wages and benefits. That’s less than half what workers cost manufacturers at a Big Three plant or one of the so-called Japanese “transplant” assembly lines. VW plans to boost its wages by a third over the next three years, bringing total labor costs to $38 an hour, but that’s still significantly less than much of its competition.

    Another advantage of VW’s higher profile here is the fact that their cars can “step up” into the Audi line. In the past I heard horror stories about Audi reliability but if I have a good experience with my VW on that dimension I will be inclined to move up to the Audi lineup, which goes all the way up to some of the most high performance cars in the world.

    So what are Ford’s unions doing to help their employer prepare for the new, low-cost competitor? And one who has a line up that is upscale and can entice auto buyers to stay within the VW / Audi “family” for years to come?

    Demanding higher wages, of course. This article from the Chicago Tribune titled “Ford, UAW gear up for negotiations” summarizes the initial contract positioning:

    As the United Auto Workers union and Ford Motor Co. kick off contract talks, union representatives are expected to push Ford to restore a vacation day, cost of living adjustments and bonuses that they gave up in 2009 to help keep the company financially stable.

    Of course. As long as the company is alive, the UAW wants to extract every drop of value and potential value from the carcass. Per the article, here are the wage gaps BEFORE the negotiations:

    Ford maintains that the two-tier pay system and the temporary workers are needed. That system and creation of health care funds for retired workers managed by the UAW have allowed Ford to lower labor costs — wages and benefits — per employee to $58 per hour, or $17 less per hour than in 2007. Ford said those savings narrowed the labor cost gap with its foreign competitors to $8 per hour from $27 per hour.

    Um… of course they were comparing against the existing competitors, which Ford is trying to get near, and not the NEW competitors like VW, which blows away Ford and the UAW in terms of labor costs.

    Let’s put it another way… Ford is happy to average $58 / hr and hopes to barely keep it (if they can keep the current deal terms with the union), while VW in Tennessee is at $25 / hr and plans to increase this to $38 / hr. That is a severe disadvantage.

    One element that is completely absent from even the most pro-union, UAW materials or articles, is that traditional shibboleth that somehow unions produce higher quality cars. The foreign transplants have built plants throughout the south and in right-to-work areas and no one has ever shown that their quality is compromised in any way by the absence of a union; in fact you likely could graph and show that having a union is inversely correlated with quality (unions are obviously inversely correlated with profitability at the parent company).

    It is astonishing to me how the fact that the unions are killing all of the “blue” states isn’t a completely obvious and talked-about fact; all incremental investment that could possibly be done over the last few decades was either overseas or in non-union states. All of that investment COULD have benefited Michigan or Illinois or Wisconsin or Pennsylvania (in the case of VW, where they had a manufacturing base) – but instead it went to the US south, or overseas.

    They are just strangling the life out of the remaining US manufacturers that took US government funding (GM, Chrysler) to survive and Ford, the only one that didn’t take the money, has to move to a high-cost model just to attempt to recoup a profit after paying above-market wages (for work quality that is no better than is found elsewhere).

    New competitive entrants like VW will tilt the playing field ever further from the union states. I am certain that their will be “no learning” from these unions until their once proud cities turn to grasslands, like Detroit today and the old South Works plant in Chicago.

    Cross posted at LITGM

     

    15 Responses to “Unions and Ford”

    1. Michael Kennedy Says:

      Several cousins worked at that plant and my uncle and his father were each superintendent of bricklayers at Wisconsin Steel, the International Harvester steel mill in South Chicago. His father came to Chicago as an indentured apprentice about 1880 from central England. The family has his indenture papers somewhere.

      In 1912, my uncle’s parents took him back to England for an extended visit in hopes his infatuation with a Catholic girl named Marguerite Mileham would fade. It didn’t but fate intervened in an odd fashion. They were booked on the Titanic in April for their return but were bumped as the ship was overbooked. They returned on the Olympic and the families were joined.

      When I was a child, we used to drive out to the plant at night to watch buckets of slag dumped on a huge mound. It was quite a sight at night. Sort of like a volcano erupting.

    2. Shannon Love Says:

      Unions are based on taking from other people. Primarily, they take from customers by government granted monopolies. After several generations of taking, taking, taking, they’ve forgotten that they actually have to make something, and make it more efficiently than someone else if they want to have good jobs.

      They’ve all been indoctrinated with the idea that companies and rich people always have a secret trove of magic money somewhere and if they just scream and threaten enough they will get some of it. They’ve lost any concept that there is some relationship between the quality, scale and efficiency of one’s work and the income one receives in trade.

      Old unions had a good 20 year run after WWII when there was no competition and they could extort any price from their customers via their monopoly control of American heavy industry. During that time, not a single increase in wages or benefits resulted from the unions doing more valuable work. Instead, they improved their own lot purely by making other people worse off. They are little better in mindset than medieval aristocrats whose only mode of gaining wealth was to conquer more agricultural peasants and extort more taxes from them.

      So, I don’t find it surprising in the least that they completely ignore their real world effects of their competition. They simply have lost any intuitive idea that competence and industrious matters when getting ahead. They think its all about aggression and taking.

    3. Polybius Says:

      My understanding is that GM and Chrysler are zombie companies. All the bailouts did was postpone the bankruptcy reorganization. The only thing Obama is truly concerned with is buying votes.

    4. Carl from Chicago Says:

      Actually GM is alive because they have substantial assets in China – their “Buick” brand is highly valuable there (don’t snicker, it is true, although I had a hard time believing it, too).

      Chrysler is sort of being resurrected by Fiat. No joke. Plus they bought it for literally nada.

      But don’t have a lot of hope for any of the big 3 as long as the unions exist to extinguish the life out of them.

      Car building in America, on the other hand, is alive and well, and will only grow as the dollar cheapens because it will be cost effective to assemble here and export overseas. It just will only happen exclusively in states where there are NO UNIONS.

    5. Jim Miller Says:

      FWIW, I owned a 1985 VW GTI built in that Westmoreland plant. (The salesman assured me that it had been mostly built by reliable robots, rather than sloppy UAW employees.

      The design was quite good, the quality so-so, and the styling needed help. Most of all, it was fun to drive.

      It will be interesting to see how the introduction of two-tier pay scales affects the competitiveness of GM and Ford.

    6. Whitehall Says:

      I too had a 1985 GTI.

      The paint would rub off on your hand and you could, from the outside, push the closed door windows down. Why lock the door?

      Sure, fun to drive but…

      So now I have a 2009 VW CC – a rebodied Passat, very pretty. The rear brakes needed new pads and rotors at 35,000 miles. and you can’t just change them yourself! You need a special computer tool and a service manual with the magic numeric codes and a 14 mm triple square socket.

    7. Seppo Says:

      I had a 1985 GTI, it was the best car I have ever had. It had better than average reliability, was cheap to run, very practical, and tremendously fun to drive. I had none of the paint or window issues Whitehall experienced, just normal replacement items. The original clutch lasted 216,000 miles, the body was past economical repair after eighteen years of winter salt. The drivetrain was still excellent at 267,000 miles.

      My present 2006 Jetta diesel still has its original brake pads at 142,000 miles and returns 46 MPG.

      It will be interesting to see how the Chattanooga plant performs. Ford and GM may be able to compete as the workforce turns over, and high-wage workers retire while competitive wage workers move up. The UAW may well try to push up those wages on more recent hires.

    8. Michael Kennedy Says:

      I bought my daughter a VW Jetta when she was 16. It was supposed to be a two year lease; her mother convinced me that all the other doctors were doing this so the kid could get another car at 18. Well, VW leasing would send the statement on the first of the month and expected the payment before the 15th or they would charge a $117 late fee. The US Postal Service could not cope with this demand. After several telephone calls, I gave up and paid off the lease.

      We replaced the brake pads on the car every three months for nearly two years. For some reason, they have lasted longer lately. Fortunately, VW paid for the brake jobs those first two years.

      No more VWs for me. I have probably owned a dozen over the years but no more.

    9. Seppo Says:

      Michael Kennedy, I would guess that your daughter’s car was from the A4 generation of Jettas, model years 1999 through 2004. Nice looking cars with lots of equipment, and they sold like hotcakes, but they were junk compared to some other generations of this model. Volkswagen tends to drop the ball when engineering some generations, and I know lots of people who had bad frustrations with the A4 line.

      The later A5 models from 2005 through 2010 were much better cars in all respects, and far more reliable. The new A6 model for 2012 have been aggressively “price engineered” to sell profitably at the new, lower prices, but most of the main mechanical systems remain, it is in the interior and suspension and hardware for seats and doors that they cut costs. It’s reliability remains an open question, time will tell. The new Passat will incorporate learnings from the Jetta cost reductions, but will be built in a brand-new factory, so there are more variables at play.

      Of the eleven cars by five different manufacturers I have owned, the most reliable one was a Volkswagen. The least reliable one was as well, so the distribution curve is a little wonky.

    10. cjm Says:

      just check the latest j.d. powers ratings for vw’s

      my advice: never own a vw that is out of warranty.

      you can apply that rule to all german built cars.

    11. ElamBend Says:

      @ Shannon:
      The little factoid that I love to share with people is that after the end of WWII 75% of the worlds industrial capacity was located in the states surrounding the Great Lakes. Now that is a heck of a head start on everyone one else and sure give you a lot of pricing power; but as we saw it can (and did) lead to a lot of complacency.

      @ Carl:
      I’ve read that the Buick brand’s popularity stems to the early part of the last century when Sun Yat Sen and Chiang Kai Shek both drove around in Buick limousines. (I would add to that Thai-blooded Tiger Woods endorsement also)

    12. Michael Kennedy Says:

      My daughter has put a lot of miles on that Jetta the past couple of years and it seems to have settled down. She had to replace the door locks about 6 months ago.

      For the past 18 months, she has held a job as a waitress in Mission Viejo, where I lived until last summer, while going to school and living in San Diego. Thus her commute was 60 miles each way. My gas bill has been averaging $1300 per month for her and her mother who drives little. Of course, I would never say this to her but I would have saved money by paying her not to work.

      Anyway, the Jetta now seems to be holding up.

    13. Ralph Says:

      If union workers were concerned about fair wages, they wouldn’t be unionized. They don’t want what the market will bear, but more.

      I’m sure the UAW believes they are the heroes in Ford’s survival. The only reason they negotiated is because Alan Mulally left Washington to either make or break Ford on his own, and they had no choice but negotiate. The UAW is mistaken if they believe the warm feelings for Ford is because of their concessions. It was because of Mulally’s leadership and guts, something rare and lacking in today’s corporate climate, yet still appreciated.

    14. Carl from Chicago Says:

      Michael – ha ha you should be careful you never know when your daughter might read the blog :)

      As far as Mulallay, funny you mention him, I diatribe about him stiffing the debt holders at our other blog http://www.trustfundsforkids.com

    15. morgan Says:

      My experience with VW’s was limited to the “Bugs.” I drove nothing but them until last Novemebr when my mechanic retired. For the last 38 yeears he only worked on “Bugs” and probably knew more about them than the VW people in Germany do today, and I wouldn’t trust my 1975 model to ny other mechanic. My current vehicle is a Hyundai, which I call a “rice-rocket.” I didn’t get a newer model VW because my old mechanic didn’t think much of them and I trust his judgement. But I miss the “Bugs.”