Car Talks

CAR SALESMAN:

It's a Toyota. It's got all of the reliability, all of the safety features.

RAY SUAREZ:

In a time of tough foreign competition and a slower economy, Detroit's big three auto makers completed contract deals this week with the United Auto Workers. GM announced the final piece of the puzzle yesterday. The new contract is similar to agreements made earlier this week with Ford and Daimler-Chrysler. The union represents more than 750,000 workers and retirees.

GM's CEO, Richard Wagoner, praised the tone of negotiations.

RICK WAGONER:

There's nothing like sitting down and talking through, "hey, we see it this way and if you see it differently, let's try to understand and work to solutions that are recognized that by and large our fates as institutions are far more shared than in conflict with each other."

RAY SUAREZ:

Sales of American-made cars have slowed in the past two years. Last month, Toyota passed Chrysler in monthly sales in the U.S. for the first time, making it the third-largest seller behind GM and Ford.

Moreover, the Big Three's U.S. market share has dropped to 57 percent. It's a big change from the heady days of the late '90s, when SUV sales helped create record profits for Detroit.

Details of the G.M. contract were not released, but union leaders said it was similar to one reached with Chrysler. That agreement protects health benefits, but does allow for increases in co-pays for prescription drugs; raises employees' salaries by small amounts in the third and fourth years of the contract; bonuses would be given during the first two years; and includes smaller increases in pension benefits than in recent years.

There's a key victory for auto makers in all of the new contracts as well: The ability to sell or close some plants and cut thousands of jobs. Still, workers were glad to hear of a new contract.

JENNIFER JACOBS, UAW worker: We are just hoping to get a good contract and not lose our health benefit and our wages froze.

JOE PANICK, UAW worker: It is good to be working. I don't know what it is going to cost us with the closing of other plants. I think the American people have got to wake up and start buying American products.

RAY SUAREZ:

UAW workers must ratify the deals in the coming weeks.

RAY SUAREZ:

For more about the auto industry and the impact of these new labor agreements, I'm joined by Harry Katz, professor of collective bargaining at Cornell University's School of Industrial and Labor Relations and Maryann Keller, an industry analyst who heads her own automotive consulting firm. Maryann Keller, let's start with you.

RAY SUAREZ:

What did the companies head to the table to try to win and did they get it?

MARYANN KELLER:

Well, they got a little bit of what they wanted, which was the right to close some factories. But they really didn't win on the big issue, which was to get some concessions on the legacy costs, which are pension and health care benefits for retirees. There was really no progress there.

RAY SUAREZ:

Well, given that the retirees have already finished their careers with the companies how would they lower their costs? How would they reduce their burden on any individual company?

MARYANN KELLER:

Well, for example, the contract actually stipulates that there are higher CO-pays, but for future retirees, not for presently retired people. And second, it has been the tradition of the industry to award current retirees with additional benefits, which is in fact what happened.

It happened in the form of a lump-sum payment, as opposed to a percent increase. But nevertheless, there was another increase in actual pension costs for the companies.

RAY SUAREZ:

Professor Katz, what did the unions go to the table trying to win? And did they get it?

HARRY KATZ:

These tentative agreements, Ray, are quite favorable to the UAW and to the workforce they represent. The union was particularly adamant in trying to defend, as Maryann's pointed out, their important pensions and health care benefits. In particular, they wanted to make sure that the companies would continue to pay 100 percent of the health care premiums. They won on that score. They also wanted to preserve the 30 and out pensions that allow workers after 30 years of service to retire with full benefits. They also won on that score. So the union won a lot through these negotiations.

RAY SUAREZ:

It's been reported, Maryann Keller, that auto sales have softened a little bit, but they aren't terrible. This is a big market, and a lot of cars and trucks have been moving off lots across the United States.

Why have the losses been so large for the Big Three in particular?

MARYANN KELLER:

This has been an unusual recession in that, typically in a recession, we would expect car demand to fall by anywhere from 10 to 15 percent. It hasn't happened this time because the auto companies have chosen to incentivize the market so heavily. In the last two and a half years incentives have gone from $1,000 a vehicle for a domestic vehicle to $$4,000. So this is profitless prosperity in terms of them being able to maintain a reasonable level of production and sales. But it's coming at a very, very high price.

RAY SUAREZ:

So these companies are making product and selling it and making no profit on it?

MARYANN KELLER:

Losing money. Basically, the reason why they've had to provide these incentives, rather than cut production, close factories temporarily because the market's declined, is simply because they have such enormous legacy cost burdens, and it is cheaper for them to keep the factories operating, incentivizing the customer to buy their car than it is to close the factory and still have to pay those huge fixed costs. GM, just to give you some examples, carry each active worker at General Motors — funds the health care and retirement benefits for two and a half retirees. That is a cost on current production of somewhere between $2,500 and $3,000 a vehicle. That is an enormous expense, and it's an expense that the Japanese, frankly, don't carry.

RAY SUAREZ:

Well, Professor Katz, beyond the legacy costs, the costs of supporting retirees after their careers are over, what's the difference in rolling a car off the line from one of the Big Three, as opposed to one of the transplants, the Japanese and other foreign-owned companies that are scattered around the country and also building product?

HARRY KATZ:

Well, the important difference, Ray, is that the workforce at those transplants is not unionized. And that makes a really important difference now because someone considering what kind of car they're going to buy, if they buy a Big Three car that's made by a UAW member. But if they go buy an import or if they buy a product produced by one of those transplants, the latter are not produced by UAW-represented members.

And as Maryann's pointed out, the share of those imports and transplants have grown substantially and that's put increasing pressure on the autoworkers and UAW.

RAY SUAREZ:

It's interesting to note that even the Mercedes plants in the United States, which are after all, owned by the same company as owns Daimler-Chrysler, are not organized by the UAW.

HARRY KATZ:

That's right. And an interesting…

MARYANN KELLER:

The factory in Alabama, it's not unionized.

RAY SUAREZ:

Well, are they trying to get the union in there? Is Daimler-Chrysler actively resisting it?

MARYANN KELLER:

I think as part of this settlement, I think the Mercedes factory will probably be one that the UAW pushes to unionize under a different scheme where workers would just simply sign cards and if enough of them indicate that they want the union to represent them, then that would take effect. There wouldn't be an election. I think that that's part of what's gone on in this negotiation.

But I doubt that the UAW will succeed at the Japanese transplants, and it's rather interesting that you had that little piece where a worker said American consumers had better wake up. Jobs are going overseas. In fact, Toyota has factories in Indiana, Kentucky and is now building a plant in Texas. Nissan is in Tennessee and Alabama and Mississippi are big states for transplants.

These are now foreign-brand cars, but they're built here by American workers. And in effect, what is happening is the American consumer has a choice.

They can either subsidize the legacy costs of the U.S. auto industry, or they could buy another car at a price that they deem to be fair. And if that is a price that does not provide a profit for the U.S. companies, well, so be it. The American consumer is simply going to buy a car that they think is fairly priced for them and the market will dictate what that price is.

RAY SUAREZ:

Well, Professor Katz, where does that leave the American-based companies as they try to respond to these competitive pressures?

HARRY KATZ:

They face a key challenge, Ray, and it deals with a lot of matters that weren't even on the bargaining table.

And that's basically the relationship between workers and managers on the shop floor and work practices and work rules. Those are local matters, plant-level matters. They affect productivity, product quality, and the question now is: Even though there are these agreements signed at the company level, it's very unclear what's going to happen down at the shop floor and plant level. And those shop floor or plant-level interactions between labor and management, they're going to hold the key to the survival of this industry in the United States.

RAY SUAREZ:

Well, they've got four years till the next industry-wide bargaining session. What do they have to do between now and then, professor?

HARRY KATZ:

Well, this round has led to nice conciliatory tone, as represented by the statements in your earlier piece. Mr. Wagoner at GM said they had a nice exchange at the bargaining table, and they did in part because they didn't end up in a strike.

But the key challenge is whether that conciliatory tone will carry over down to the plant level where they can improve worker and management relations and work practices. If they can't do the latter, they are in deep trouble.

RAY SUAREZ:

Well, do those two parties, Maryann Keller, really need each other and have to be ready to work with each other in way that the professor suggests?

MARYANN KELLER:

Oh, absolutely. I mean they really, the UAW is completely dependent on the viability of GM, Ford and Chrysler and some of the parts industry. Without them, they can continue to lose members, as they have for the past 25 years.

RAY SUAREZ:

But it's a great time for buyers, I guess. If you're not involved in this as a UAW family and just heading to a showroom floor, it's probably a good time, Maryann Keller?

MARYANN KELLER:

If you're a consumer and are looking for an automobile, you can get, as of this week, zero percent financing on a car for 72 months. That is absolutely unheard of. So this is the industry assisting consumers in buying more automobiles than this economy might otherwise justify.

RAY SUAREZ:

And picking their own pocket for sales next year and the year beyond that?

MARYANN KELLER:

Well, again, it's a matter of balance. If you can generate some contribution to cover those legacy costs, you will spend money on incentives in order to keep the production lines running. It is more expensive to close the production lines and have people idle. Remember, if the production line is closed, not only do those legacy costs continue, but also the workforce that's temporarily unemployed receives 95 percent of their normal wages. So nobody, in terms of the hourly workforce, or the retirees, loses compensation. It's the company that loses cash revenues.

RAY SUAREZ:

Maryann Keller, Professor Katz, thank you both.

HARRY KATZ:

Thank you.