The Strategic Mistake Which Put Toyota In Its Present Position - Fidelity vs. Convenience

Though a very small part of your post, I wanted to comment on Saturn. You're right that GM created a disaster, though that occurred only as time went on. As originally envisioned and established, Saturn would very likely have succeeded after a few years of "learning."

Saturn was to have access to the best of GM's design, engineering, marketing, parts, etc. etc. information that GM had -- without the requirement that Saturn use them.

The UAW initially negotiated a historic pact for Saturn, allowing Saturn a different pay structure, different benefits, different plant floor responsibilities, etc, than it had even come close to negotiating with the domestic auto's.

What happened, however, is that GM didn't give access to the best info and parts as promised ... failed to keep its hands off the design and engineering process, etc. There was a lot of fear among mainstream GM management that Saturn would succeed -- suggesting the mainstream GM mgt had it all wrong.

At the same time, the Union began to back-pedal on some of the differences it had agreed to. This was at least in part GM's error, as it (stupidly) began trying to use Saturn's UAW pact as a precedent to try to get the same concessions from the UAW's GM Dept. for all GM operations. Well, the UAW set about removing that precedent in each successive bargaining session. This also played into the hands of some UAW leadership who had opposed the Saturn contract pattern from the beginning.

What came after that was Saturn's march towards mediocrity.

 

Absolutely correct, but in practice "top management" includes the Chief Financial Officer (CFO) and usually a few other critical functions. Before the recent shake-up, the VP Human Resources (or equivalent) was included, as was the VP-OGC (the Office of the General Counsel -- the attornies). Also, the background of a CEO was key. Looking at Ford, did you have a CEO from Finance (eg, Red Poling) or a CEO from the Product side (eg, Don Petersen).

Three real exceptions which come to note are as follows.

First, when Henry Ford II ran the Ford, he had unfettered power, but still heavily followed the counsel of the key exec's he recruited. Remember -- Henry II is the one who saved Ford from oblivion after Henry Ford I's old-age management almost bankrupted the company. Henry Ford II hired the "whiz kids" -- US Armed Forces veterans of World War II who became Ford executives in 1946 and straightened Ford out. Robert S. McNamara was one, and later became the Secretary of Defense and the President of the World Bank.

Second is when Lee Iacocca ran Chrysler. enuff said!

Third is perhaps Jacques Nasser at Ford, who I'm told lessened the influence of Ford's Office of the General Counsel which had been a major constituent of top management with some veto power over top decisions. He also is said by some to have run CFO John Devine out of the company. The take on it was that Devine was so trusted by Wall Stret that Nasser found it hard to counter Devine's views. Interestingly, a few years later, in an unprecedented move, GM hired Devine as its CFO.

And, uniquely at Ford, all non-family CEO's were also tempered somewhat by the Ford Family, with it's 40% voting control of the company and seats on the Board of Directors.

The UAW was a major culprit, but it's key to note that in many cases, they were reacting to what the companies were doing. In the early going, gaining health coverage, pensions, etc for their members wasn't a financial threat. Much later, it was a threat because of how much the benefits cost, plus the rigid plant floor rules [the standing joke wasn't far from true ... "Want to hang a picture in your office? Call a UAW carpenter -- only they could use a hammer].

Finally, the costs of retiree health care became horrendous -- but partly because historically the companies had originally only booked for profit and loss what was paid in a given year for that retiree coverage.

That was a ticking time bomb which first went off in the early 1990's when the Financial Accounting Board issued its rule FAS 106 which required profit-and-loss recognition of retiree health benefits. The amounts which would have been booked in prior years had the standard always been there generally had to be recognized in a single year's profit and loss (there was a provision for amortizing it, as Chrysler did).

Per one source: "GM's one-time charge was the largest to date and represented over 80 percent of the company's net worth. Other employers also reported staggering losses that threaten their long-term viability: IBM recorded a $2.3 billion loss; AT&T, $7 billion; and GE, $1.8 billion. Ford estimates a $7.7 billion. The total U.S. liability has been estimated to be as high a $2 trillion."

Even then, FAS didn't require assets to be put aside to later pay the retiree health benefits -- namely, the funding of those benefits. So, the profit-and-loss portion was recognized, but provisions for having the cash to pay the benefits when due still wasn't required.

The cost of UAW retiree health benefits had to be included in each active employee's fringe cost -- not only that employee's cost, but also a pro-rata share of the cost of those already retired. As the ratio of active employees to retirees inched closer and closer to one-to-one, the burden became horrendous. But, the companies did their part by not recognizing or funding the benefits until forced to. The funding was handled a little before the GM-Chrysler bankruptcies by transferring responsibility for the benefits to the UAW, in exchange for funding of cents-on-the-dollar of liabilities, rather than the whole amount needed to date.

As to today, the UAW cost-per-hour worked isn't the major financial problem. One source writes:

"Critics of unionized workers who say they are the core of the U.S. automakers' problems don't have a grasp of the facts, the head of the UAW contends. The labor expense to assemble a vehicle at a Ford, GM, or Chrysler plant is about 10 percent of the total cost, said Ron Gettelfinger, president of the UAW. Gettelfinger believes it makes no sense to blame all of the industry's problems on a group that accounts for such a small percentage of car costs. "Some of the foreign brands operating in this country pay (workers) very close to what American firms pay," he said.

 

Your points are all good ones.

First, you're right, you didn't say the UAW was core problem.

The potential favorable response from the UAW referenced in my other post was for Saturn, and regrettably not the whole industry.

Second, the Jobs Bank. Well, I won't defend it, but I will tell you what I very strongly understand happened ... but it's hard to believe (and note that there were other reasons besides the one I'm mentioning). In each set of national negotiations, in addition to demanding higher wages and more time off etc., the UAW fought hard and bitterly to slow down the outsourcing of parts by the "big three". It also pushed for higher payments to laid-off employees etc.

In past labor contracts, there had been some economic penalties for outsourcing, promises to talk outsourcing over with the union in advance etc., but they weren't effective. After that and many other measures failed, the Union finally decided to stop it once and for all -- by getting it into the bargaining contract that laid off members went into a jobs bank where the company would still have to pay them.

Finally. An answer to outsourcing -- the company couldn't profit from a supplier's lower labor costs, as the company would have to put its dislocated employees into other jobs or put them into the jobs bank until there were jobs open for them.

Only thing was, the companies kept outsourcing and putting members out of active work. Go figure. I've been told that this is at least in part because a company division gained savings from outsourcing, while the cost of the jobs bank wasn't assessed to them by their experience, but was absorbed by the company as a whole and simply charged to divisions as an average assessment for all operations. That was a company problem -- one the UAW didn't create.

Had the assessments been more accurate, plant managers and their division staffs would have had to look at outsourcing much differently -- because they would have been left with the jobs bank costs for each job they outsourced.

Makes my head hurt so hard, I feel I need to get some excedrin.


Third, your comment that "The last statement about pay is also a deliberate attempt to slant the truth." I disagree -- the UAW accounted for only 10% +/- of vehicle costs, despite their excesses.

You also noted "When you account for labor costs, you cannot overlook all the costs. ... The concern about D3 labor costs have always been the legacy costs first and foremost, not the base wages."

This is the key issue, and it was the companies' doing, not the UAW's.

It was the companies who granted extensive legacy benefits without effectively accounting and funding them.

If you go back in time, had the companies accurately accounted and funded for legacy costs, the cost-per-hour-worked going into negotiations would have been much larger, and past company profits would have been lower ... and made it harder for the UAW to make the huge gains it did in other areas. But the companies didn't want the profit-and-loss and other negative effects of reporting and funding legacy benefits until forced to.

As to today's hourly labor rate, I generally see it cited as $55-$60 per hour, with the transplants about $5 lower per hour. It has gone down tremendously -- first and foremost because the responsibility for providing and administering retiree health benefits has been transferred to the UAW -- in exchange for only cents-on-the-dollar of the liabilities transferred, but also because of extensive concessions by the UAW in other areas.