- The Washington Times - Monday, November 24, 2008

U.S. automakers have made major progress in recent years closing both the labor-cost gap and the quality gap with foreign companies manufacturing autos in the United States.

“Conditions are in place for the wages and benefits of workers at Detroit automakers to be lower in several years than the U.S. wages and benefits paid by international manufacturers,” such as Toyota and Honda, said David Cole, chairman of the Center for Automotive Research (CAR) based in Ann Arbor, Mich., which receives a portion of its funding from Detroit auto firms and Toyota.

“This is a huge change,” Mr. Cole emphasized.

The new labor contracts that the United Auto Workers (UAW) union signed with the Big Three last fall “really brought the UAW much closer to parity with Japanese transplants,” said Aaron Bragman, an auto analyst at IHS Global Insight.

Meanwhile, Detroit automakers have been making “leaps and bounds” of progress on quality in recent years, which “are now manifesting themselves in three-year dependability surveys,” said Neal Oddes, an auto analyst for J.D. Power and Associates.

Before contract negotiations between the UAW and General Motors commenced last year, UAW workers earned between $70 and $75 per hour in wages and benefits, Mr. Cole said. International firms paid their nonunion workers about $45 per hour in wages and benefits. The hourly cost differential was between $25 and $30.

Once the historic provisions of last year’s four-year labor contract are fully implemented, the Big Three eventually will be paying their unionized workers an average of $40 to $45 per hour in wages and benefits, Mr. Cole told The Washington Times in an interview. That range is as low or lower than the wage-and-benefit package earned by workers at Toyota and Honda plants, he said.

“The gap in labor costs that had previously existed between Detroit-based auto companies and the foreign transplant operations will be largely or completely eliminated by the end of the contract,” UAW President Ron Gettelfinger told the Senate Banking, Housing and Urban Affairs Committee on Tuesday.

Before the same committee, Peter Morici, business professor at the University of Maryland, argued that the concessions were still not enough to make Detroit competitive. “Today, the Detroit Three, though improved in productivity and with lower labor costs thanks to concessions from the United Auto Workers, are still not as competitive as the Japanese transplants,” he said.

The UAW had big incentives to make the concessions it did. “Over the years, the union had won many battles, but it realized last year it was on the verge of losing the war,” said Gary N. Chaison, a professor of industrial relations at Clark University in Worcester, Mass. That’s why the UAW agreed to so many concessions during 2007 contract negotiations, he explained.

To “substantially” close the labor-cost gap, “the UAW made incredible efforts to address legacy costs” in health care and pensions associated with its older and retired workers, said Hal Stack, the director of the Labor Studies Center at Wayne State University in Detroit.

The biggest changes in the UAW contract involve the creation of a company-funded and UAW-managed trust fund to pay for retiree health care; less-generous health care and pension plans for new workers hired by Detroit automakers; and a two-tiered wage structure.

New hires performing non-core, non-assembly work at the Big Three will be paid a wage that starts at $14 per hour, which is half the $28 that existing non-core employees earn. Transplants, which pay about $27 per hour, “deliberately set wages high enough to make it unattractive for workers to join a union,” Mr. Stack said.

GM has estimated that about 70 percent of its current workers will be eligible for retirement before the four-year contract expires. Many buyouts and retirements of UAW workers will lead to a new wave of people earning the lower wage and receiving considerably less-generous pension and health care benefits, Mr. Bragman of IHS Global Insight said.

Mr. Cole of CAR estimates that GM will eventually have a third of its work force earning the lower wage and receiving reduced benefits.

The new workers earning the lower-tier wage “will receive a totally different benefit plan that eliminates defined-benefit pensions as well as the companies’ liability for future retiree health care,” a recent CAR study reported. Non-core workers who transfer into “core” positions will still retain the second-tier benefits package.

Through a so-called Voluntary Employee Beneficiary Association (VEBA), the UAW will take over responsibility for paying health benefits to retirees in 2010. This will remove a $47 billion liability from the balance sheet of GM, which is required to contribute nearly $32 billion to the VEBA, including $16 billion from an existing health care trust and additional payments over the years.

One reason GM, Ford and Chrysler need a bridge loan from the federal government is to finance their 2009 and 2010 scheduled payments to VEBA, said Mr. Bragman, who noted that $25 billion may not be enough, considering the cash drain from operations.

“Once the automakers get those legacy health care costs off their balance sheets, they will be in much better shape,” Mr. Bragman added. “They have become much more innovative, and there is a night-and-day difference from five to 10 years ago.”

“American brands have been reducing the quality gap in recent years,” Mr. Oddes of J.D. Power said in an interview. “We see a lot more American brands in the top-three car segment” in the Initial Quality Survey, he said, “and we see no reason for this trend to be declining.” He said it was noteworthy that seven GM and Ford brands ranked above the industry average in 2008.

In J.D. Power’s 2008 Vehicle Dependability Study, which examines the deterioration of vehicle quality during the first three years of ownership, four American car brands (Mercury, Cadillac, Buick and Lincoln) ranked among the top eight, Mr. Oddes pointed out.

Mr. Cole of CAR said Ford and GM products were essentially equal in quality compared with foreign brands.

Auto sales have declined 15 percent through the first 10 months of 2008. By one estimate, the number of vehicles sold by the entire U.S. industry was the lowest in October for any other month since World War II, after adjusting for changes in population. Compared with October 2007, GM vehicle sales last month plunged 45 percent, Chrysler’s fell 35 percent, Ford’s decreased 29 percent, Honda’s declined 25 percent and Toyota’s were off 23 percent.

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