By: Joe Oglesby
The bubble has burst and now the giant ball of yarn is unraveling. The latest victim is the auto industry. Not the auto industry as a whole, however. The companies that are at capitol hill begging for a bailout of their own are what will be referred to for the remainder of this blog as the big three; Chrysler, Ford, and GM.
This past week the big three have been asking for a twenty five billion dollar lifeline that would be appropriated from the seven hundred billion dollar bailout afforded to Wall Street to aid in the credit crisis. But why is it only these three companies who are out being vocal, where are Toyota, Hyundai, and Nissan? The latter three companies do not have the financial burden that the big three do. The financial burden is coming from within a single source, the United Auto Workers union (UAW).
The UAW and the big three have a contract over a half century old that is suffocating and stunting the growth of these companies in the states. The blame is not a blanket on the whole union, but rather on one aspect; legacy costs. Legacy costs are the retirement plans and benefits defined under the current contract. Mike Rosen of 850 KOA spoke about this in the first hour on his morning radio program on Thursday the 13th of November. He cited two people Greg Lewis and Mark Perry during the segment.
Greg Lewis of the Washington Times wrote “The financial burden thus incurred weighs down their balance sheets to such a degree that, even if the industry in which they compete were thriving, it would be extremely difficult to maintain long-term profitability.” Greg continues on the article about compensation. GM currently has around 450,000 retirees; this is three times the amount of current employees. GM must provide pension plans and medical care for all of these retirees. It is estimated that the total cost comes out to around eighty billion dollars per year. Toyota, on the other hand, currently has approximately one thousand retirees and as the number of retirees grows the cost of pension plans from Toyota will be zero. The reason for this is that the employee is responsible for their retirement account and not the employer.
Mark Perry is professor of economics and finance at the School of Management at the University of Michigan. He brings up that the average labor cost of the big three is around $145,000 per year while the average labor cost at Nissan per year is only $96,000. Mark also discusses the average pay relative to other careers. The average UAW employee with a high school diploma makes 57.6 percent more compensation than the average university professor with a PhD and 52.6 percent more than average worker at Toyota, Honda, or Nissan.
Mike Rosen also briefly cites Steve Miller. Steve Miller is a turnaround specialist and was in charge of the restructuring of Del Phi after it severed from GM. Steve said “we can not continue to pay sixty five dollars an hour for someone to cut the grass and have the company remain competitive.” What Steve is referring to is that under the current contract the UAW employees that mow the grass and clean the toilets receive the same compensation, both in pay and pension, as a worker on the assembly line.
Throwing more money at the auto companies only puts the companies on life support as long as they have to throw away eighty billion dollars a year on retirees; a number that will continually grow exponentially if left unchecked. By having the companies file bankruptcy the company can be restructured to emulate the new state of the art factories that are not currently possible because of the unions. The underlying problem must be addressed in order for the companies to not only survive but prosper. The poison that is the United Auto Workers union must be flushed out of the system.