The GM Strike: What Are the Mounting Costs?

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Wharton's John Paul MacDuffie, UC-Berkeley's Harley Shaiken and Wayne State University's Marick Masters discuss fallout from the GM strike.

As the strike at General Motors continues, the costs mount — and not just for the company and its striking workers: There is also the threat of a wider impact across the U.S. economy. Some 46,000 full-time workers walked out September 15 at 30 factories across 10 states, a day after the previous four-year agreement with the United Auto Workers expired. The GM strike is the first in the auto industry since September 2007, when GM workers went on a two-day strike.

The overriding issue between the two sides is to rebuild trust, because that will be needed over the longer term as the company adjusts itself to demand cycles, newer technology, and the economies of closing unprofitable plants and making new investments, including at overseas locations. Experts at Wharton and elsewhere discussed the GM strike and the nuances of the events that led up to it on the Knowledge@Wharton radio show on SiriusXM. (Listen to the podcast at the top of this page.)

Estimates of the hit to GM’s operating income range between $50 million and $100 million a day. The company has stopped health care coverage for the striking workers, although they would continue to have some union-paid benefits. It is only a matter of time before the strike threatens the jobs at GM’s roughly 10,000 suppliers, and it could trigger a recession in the Midwest, where most of those suppliers are based, a CNN report said.

Growing Resentment

A confluence of factors have contributed to the tensions at GM, said John Paul McDuffie, Wharton management professor and director of the Program on Vehicle and Mobility Innovation at Wharton’s Mack Institute for Innovation Management. First, the UAW wants GM to pay back a good deed from workers during the 2008 financial crisis, when the union “made a lot of concessions,” he said. “[When] they renewed the contract in 2014, they did not go on strike and they didn’t press for very many changes. So, the [union] members feel that some changes are long overdue.”

The UAW helped GM negotiate its 2008 bailout with the government by agreeing to accept delayed contributions to a health trust fund for retirees and reduced payments for laid-off workers as part of a broader corporate restructuring effort, according to a report in The Balance.

GM last November embarked on a reorganization plan to close four of its U.S. plants, and one in Canada, by January 2020, lay off 14,000 workers and retire six of its 15 car models; it had hoped to save $6 billion by 2020. The four U.S. plants are in Lordstown, Ohio; Warren and Detroit-Hamtramck in Michigan; and Baltimore. GM said it has re-absorbed most of the 3,300 people laid off thus far at its other plants, according a Wall Street Journal report. In fact, the company said that the reorganization would hurt only 500 jobs if those eligible to retire do so, according to a plant-by-plant count it provided for a Reuters report in March.

GM felt compelled to restructure its manufacturing operations with the growing trend of internal combustion engines being replaced by electric and hybrid cars. “GM is like all the incumbent automakers, having to maintain a balance by keeping the legacy business going while investing massively in these new technologies, which are going to be so important in the next stage of our mobility,” said MacDuffie. “Whether it’s electric or autonomous vehicles, or connected vehicles, [investments in them are] massively expensive.” At the same time, the record-high sales of conventional vehicles in last few years are starting to decline, both in the U.S. and globally.

“The industry enters its predictable cyclical downturn right at the time of this strike as well,” MacDuffie continued. “So, it’s not so surprising that the two sides are pretty far apart at the moment and that the strike has resulted.”

The GM strike also happens to be a wedge for the UAW to broaden its push in the industry. “Picking one company first is common and then you hope the pattern holds with the others, and GM has been the most profitable [of the major auto companies],” said MacDuffie.

Workers Want Payback Now

“General Motors is here today in large part because of UAW workers and the union when it slid into bankruptcy in 2009,” said Harley Shaiken, professor of education at the University of California at Berkeley and a labor economist. “The workers made very large concessions at a moment of real crisis, and it was very painful to get it through. GM has viewed those concessions as a normal way of doing business.”

“General Motors is here today in large part because of UAW workers and the union when it slid into bankruptcy in 2009.”–Harley Shaiken

Shaiken pointed out that about 30% of GM’s workforce, who make up about 46,000 workers, “is earning significantly less than senior workers earn,” and that another 7% to 10% are temporary workers, earning $15 an hour. “The union and the workers are aware of all the crisis that’s taking place in the industry and the challenges for GM,” he said. “But they’re also aware of GM’s record profitability of $35 billion dollars over the last three years. If they can’t get some of this return now, [then] when?”

In fact, back in 2010 after GM had its $20-billion initial public offering, MacDuffie predicted that the union could come back to claim what it might see as its rightful share. “The big question on everybody’s mind is, if GM returns and is highly profitable, will the union want to revisit some of the concessions that they’ve made, and what will the company’s stance be to that?” he had said in a 2010 interview with Knowledge@Wharton.

Smaller Is Bountiful?

GM for its part would point out that each union member has received about $11,000 a year under a profit-sharing feature in the previous agreement, said MacDuffie. He noted that “Wall Street has been happiest with GM’s strategic moves over this period of time.” Investors are pleased that GM has “a leading electric vehicle” in its Chevrolet Bolt, its 2016 acquisition of San Francisco-based self-driving vehicle startup Cruise, and its OnStar subsidiary that offers a range of in-vehicle services such as communications, security and navigation tools.

Investors also liked it when GM shrank operations around the world to improve profitability. “When GM got out of Europe and some other markets, the stock market applauded because that’s been a source of profits,” said MacDuffie. “The days when growth in scale was viewed as a sign of success have at least partially changed.”

The UAW, of course, didn’t relish all those developments. “They’re seeing product move to Mexico. They’re seeing GM downsizing. They’re seeing big executive bonuses,” said MacDuffie. “And, they said, ‘You have to invest in the future, but you’ve got to invest in us too, if you want to have good quality products and keep loyal customers.’”

Hopes of a Settlement

Even as both sides are “in a difficult position” an agreement is achievable, said Marick Masters, director of Labor@Wayne at Wayne State University, where he is a professor of management and adjunct professor of political science. “It’s just a matter of the parties trying to work through them. Both parties, although they seemed far apart a couple of days ago, may be making some progress toward narrowing their differences.”

Talks between GM and the UAW on a fresh four-year agreement that began in July had stalled, but resumed this week. The UAW demands cover “fair wages,” job security, health care benefits, profit sharing and “a defined path to permanent seniority for temps,” according to a news release. Earlier that day, GM had outlined its offer of “improved wages and health care benefits, over $7 billion in U.S. investments and 5,400 jobs,” including “solutions” for two plants in Michigan and Ohio whose closure the UAW had opposed.

“Negotiations have resumed. Our goal remains to reach an agreement that builds a stronger future for our employees and our business,” GM said on its website on Monday. GM has offered a 2% wage increase for the first and third year of the four-year contract and 2% lump sum payments the second and fourth years, but the union finds that unacceptable, according to a report citing unnamed sources in the Detroit Free Press.

“Fair or not, Ford and Chrysler look a little better from the UAW point of view. It is easier to cast GM as the villain in this particular plotline.”John Paul MacDuffie

The White House has tried to play a role in mediating between GM and the union, but with little effect. President Trump met GM CEO Mary Barra last month as fears of a strike loomed. In one of his dozen-odd tweets on GM, he expressed his displeasure with the company moving operations to China, and said his apparent attempt to mediate in the negotiations was not well received. GM has 27 plants in China to serve that domestic market, and did not “move” any plants to that country, according to a CNN report.

The Top Issues

Two issues are particularly important in the current negotiations — protecting health care benefits and ensuring fairness of wages for temporary workers, MacDuffie told Knowledge@Wharton in a separate interview. Workers are worried amid rumors that GM may require them to pay up to 15% of their health care costs, he said. Already, they were feeling restive with the broader debate in the U.S. in recent years of employers responding to rising health care costs by cutting back on plans that are more generous, he added. “With projections of health care costs going up 6% a year, holding the line on health care packages is almost equivalent to a large pay increase,” he said.

The issue of both fair wages and a path to permanent employment for temporary workers is especially sensitive, said MacDuffie. While it is not uncommon for wage agreements to have differential wages between different classes of workers, they usually have provisions for temporary workers to be made permanent after a certain number of years of service, and for their wages “to creep up higher and closer to the normal, so the gap closes,” he added. But in GM’s case, the agreement struck in the bailout after the financial crisis did not provide for that parity over time, he noted.

The UAW feels that as GM’s financial condition has improved since the Great Recession, it ought to pay temporary workers the same wage as permanent workers doing comparable work, MacDuffie continued. “We know this from behavioral theory that when two people doing the same work are paid something different, particularly when they work in proximity and know about that difference, it can be quite demotivating and it can lead to various kinds of tension.” As the negotiations continue, “the temp issue may be the trickiest one to resolve,” he added.

Purging Unhappiness and Distrust

Shaiken agreed that GM has made “impressive” gains in electric vehicles and autonomous technology in responding to the challenges the auto industry faces. “But the key to the industry — and this is easy to forget — is a highly motivated, highly skilled workforce,” he said. “GM has that, but there are costs to maintaining that. That’s something that Wall Street is often tone deaf to, being focused more narrowly on the bottom line, but losing that motivation, having an angry workforce has a cost, too.”

Masters pointed out that “it is important that [both] parties rebuild trust.” He added that GM made “a tactical error” in how it handled past layoffs and plant closures. “It left a bitter taste in not only the blue-collar workforce, but also the white-collar workforce.”

MacDuffie, too, felt that GM misplayed its hand with the plant closings. He noted that GM knew full well before union negotiations began that it was losing money on some of its plants with declining demand for the vehicles that were being built there. The company had committed in an earlier letter to the union that it would not close any plants, unless “drastic changes in business conditions” warranted those closures, he recalled.

However, when GM decided to close four U.S. plants, the UAW rightly demanded to know why GM did not move some of its higher-priced and faster-selling cars to those locations, he said. GM’s latest offer to allocate new vehicles and battery production to two of those plants has therefore been viewed with skepticism, MacDuffie pointed out. “It almost looks like they were positioning themselves to have a negotiating chip, when something as dramatic as plant closings and a lot of layoffs are not exactly going to win the hearts and minds of the workforce.”

Shadow of a Scandal

One distraction in the negotiations is a corruption scandal involving UAW officials that has been unfolding over the past two years. “That’s what everybody’s attention has been focused on, on what impact this scandal might have on the union,” said Masters.

Earlier this month, Michael Grimes, a retired official who was assigned to the UAW’s General Motors division, pleaded guilty to conspiracy charges, as part of a federal investigation into corruption within UAW leadership ranks that recently expanded to the union’s president and his predecessor, The Wall Street Journal reported. Grimes is the first senior official from the UAW’s GM department to be charged in the continuing criminal probe, which first became public in 2017 and has largely focused on financial misconduct involving executives at Fiat Chrysler Automobiles NV and their union counterparts, the report added.

“GM is not guaranteed a future to be here forever. I would not want to bet anything on who would be the major auto players 15 to 20 years from now.”–Marick Masters

Thus far, 10 people have been charged and nine have pleaded guilty in cases that have implicated senior UAW leaders and executives at Fiat Chrysler and General Motors, according to a Detroit Free Press report on Monday.

Broader Ground Realities

The loss GM incurs every day the strike continues must be viewed against other realities of the auto industry, Masters said. Even as auto companies are making money, “it’s still not a very sexy industry to be in,” he added. “Profit margins are relatively low. Capital investment requirements are huge. Their debt-to-equity ratio is pretty high.”

Against that backdrop, “GM is not guaranteed a future to be here forever,” Masters said. “The industry is in for some rapid disruptive changes. I would not want to bet anything on who would be the major auto players 15 to 20 years from now.”

Shaiken pointed out that although GM has made $35 billion in profits over the last three years, it has spent $25 billion over the last four years in stock buybacks and in paying dividends to its shareholders. “To do that then and to say now, ‘We really need to hammer down on labor costs’ doesn’t sit well with workers,” he said. GM may have been able to save the Lordstown plant by reconfiguring production plans, but it instead chose to invest in Mexico, Shaiken added. “The net result is GM last year manufactured 800,000 vehicles in Mexico, two-thirds or more of which were sold in the U.S. at the same time they’ve closed plants like Lordstown and possibly Hamtramck because of capacity utilization issues.”

Another sticking point has been that GM’s plan to invest in Mexico contrasts with Ford’s decision to grow in Detroit, said MacDuffie. He noted that outsourcing manufacturing to lower-cost locations is a global trend, “but in this current political climate, there’s a contrast effect that GM is suffering.” He pointed out that Ford backed away from a plan to move some manufacturing to Mexico, and said it would expand in the U.S. instead. Fiat Chrysler also plans to invest in a new plant in Detroit — an emotionally-charged location since it has seen substantial disinvestment over the years.

“So, fair or not, Ford and Chrysler look a little better from the UAW point of view,” said MacDuffie. “And, it is easier to cast GM as the villain in this particular plotline.”

Recession Fears

The strike could trigger “a single-state recession” in Michigan, “but that would only occur if the strike continued for a prolonged period,” said Masters. For every hourly GM worker, the company’s suppliers have three or four workers, the CNN report added, citing estimates by the Center for Automotive Research, a think tank in Michigan. If one includes the impact on restaurants and other local businesses, every GM worker on strike threatens seven other jobs, Shaiken told USA Today.

Shaiken pointed to the wider implications of companies moving their operations to lower-cost locations. “The flip side of laying off Lordstown workers at $30 an hour is you lose $30 an hour in purchasing power,” he said. “That’s what fuels the economy. That’s what built a middle class in the U.S. in the post-World War II era. When it’s outsourced not simply to low-wage areas, but to areas where wages are suppressed because workers do not have the right to form independent unions, then you are not simply undermining autoworker wages. You’re undermining the middle class. You’re undermining the purchasing power that is fueled economic growth in this country historically.”

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