Monday, November 17, 2008

UAW to Gov't: Loan GM Money!

Keeping GM in business -- and any other large employer of its members -- is surely of considerable interest to officials of the UAW (which, interestingly, stands for International Union, United Automobile, Aerospace and Agricultural Implement Workers of America). The reason strangers need to loan GM this money, rather than the UAW or its members, is that they aren't looking to lose money, but to get paid. The union collects dues it spends, and the members collect paychecks they spend. They can't be throwing good money after bad, or it'd quick catch up with them. And they feel they've done enough already to support GM, thank you very much.

That is apparently why loaning money to GM is your problem.

My problem with loaning GM money isn't just that many of its cars are being thrashed in the market by safe, reliable, price-competitive alternatives. This is a problem of U.S. auto makers generally. GM's special problem is sort of interesting. See, GM has been mortgaging its future for a while now.

A few years ago, a friend explained what a smoking deal he got on his new Hummer. He was upside-down on his SUV note, and angry at the dealership, and they worked out a financing plan whose details blew straight past him, but what he remembers is this:
  1. his monthly payment didn't go up (though it was no doubt extended), but
  2. he swapped out his little SUV for a bright new H3, and
  3. GM promised him price protection on the H3.
That third point was the sale-closer. To make him feel confident entering a sale on a vehicle in which he was concerned his collateral would quickly be worth less than the note securing it, and to make sure he came back to GM, GM guaranteed him that it'd give my buddy a trade-in price on the Hummer that was equal to his purchase price. I forget how many years that deal was supposed to last -- maybe the length of his note, or a year after -- but it obliges GM to pay way over market for a used car down the road when it's hungry to sell him some new vehicle. The problem is that GM won't be able to raise prices across all its lines in the face of fierce price competition in the auto business -- certainly not during a credit-crushing recession that drives up unemployment. All that surplus trade-in value is coming right out of GM's future bottom line: right out of the recession-discounted givaway pricing I expect GM to fall into as part of its fight to retain some kind of sales share.

The problem with simply throwing money at GM is that there's no reason to expect different results from the same operations. It's not like auto sales are exploding so greatly that there's good money to be had by every vendor with a product. The auto market is competitive, and everyone in the market is selling a different grade of commodity. Even the luxury vendors are up against luxury competitors; nobody is safe, and nobody's product is so differentiated that it hasn't got competition.

In the 1980s, when the Japanese economic miracle was producing cheap, efficient, reliable cars that were actually beginning to take safety seriously, some folks looked at Japanese organizations to determine what enabled their success. Pursuing Deming's teachings and using a number of innovations to detect, eliminate, and prevent product defects, the Japanese learned to build American designs better than could Americans. Americans who thought implementing quality circles, mixing management and line workers in teams, and broad cross-training to enable people to understand the whole process of a product's creation all tended to run into the same problem: the UAW. Collectively-bargained contracts enforceable under the NLRA specified that certain job titles needed to exist, and protected people from doing jobs outside those descriptions. Allowing (non-union) management to perform line jobs threatened the dues base, and cross-training tended to make people more easily replaceable.


So American auto manufacturers kept with their same old broken systems, occasionally scaring workers into fits of relative productivity but not addressing the systemic issues that led to the defects that embarrassed the non-Japanese manufacturers. I heard a tale from the early 1980s of an observer of an American auto assembly line watching a worker stop bolting fenders onto the passing cars long enough for a couple to go by with no bolts at all on that side. Confronted with the fact, the worker allegedly explained, "I had to light a cigarette." The same collectively-bargained agreements that prevented radical organizational re-engineering also made it extremely costly to threaten a worker's job, so there was no recourse. Even if the tale was apocryphal -- and it may well have been, though it sounded plausible enough when I heard it -- the fact remains that Americans have been unable (despite the famed productivity of the American worker) to build automobiles with as few defects, or for as little money, as Japanese competitors. To the extent that organizational re-engineering was thwarted by job classification rigidity in union contracts, and employers' inability to create meaningful incentives to encourage production quality targets under the union contracts, the industry was essentially destroyed by factional infighting. In theory, management and labor could have worked out a scheme that enabled superior competition; however, to the extent the solution appeared to require blurring the line between labor and management, it was political anathema for a union to accept such a proposal. Labor and management knew better how to exist as adversaries than they knew how to both profit from cooperation.

And the chickens have come home to roost.

While the same political forces keep the business utterly broken, I strongly urge anyone with a voice to speak out against throwing the innocent public's hard-earned and quickly taken tax dollars at an enterprise with such dismal prospects for the future. Americans can make cars, of course -- and without GM, they might have made them even better -- but saving these dinosaurs might not be in anyone's interest. Much better that GM be allowed to go into bankruptcy where creditors can work out how to arrange a future for GM that involves some profit. Saddling GM with its existing array of obligations -- including the collectively-bargained labor agreements that prevent the kind of labor/management admixture needed to duplicate the successes of American firms' Japanese rivals -- is sure to kill further investment just as it has killed prior investment.

What American auto manufacturers and their workers need is an opportunity to begin again with a clean slate. Saddling employees with brainless zombie employers doomed by longstanding agreements to repeat the organizational failures of the last forty years -- or saddling employers with sure-fail organizational designs enshrined in 1950s-style collectively bargained employment contracts full of specialist job titles and limited work duties that preclude process re-engineering -- does no good for employees' job security or employers' fiscal plausibility. We need better than a mere handout to GM.

What we need may turn out to be is a creative bankruptcy judge. Anybody know one?

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