Car Manufacturing in America

Saving Detroit

A new UAW contract, a legacy tax, & an anti-cartel policy

The UAW Contract

Chrysler, Ford, and GM (“Detroit”) have been denigrated for years as being poorly managed. Few people know what Detroit has been facing for the last 25 years. They have been forced to compete on a very UNLEVEL "playing field” and the fact that they are still in business at all is a tribute to their management and their good workers.

Our nation has anti-trust laws to prevent business collusion and monopoly, yet has always been a big supporter of union monopoly (UAW) in the auto industry. In Japan law prevents union monopoly so if there are 5 auto manufacturers there would have to be 5 labor unions (assuming that all 5 auto manufacturers were unionized). In other words the labor unions have to compete with each other the same way that the manufacturers have to compete.

This UAW monopoly has lead to labor contracts that are unusually advantageous to labor as compared to the benefits paid to the U.S. workers working at the foreign transplant factories such as Toyota and Honda etc. If Detroit is to have any chance to survive against the foreign auto manufacturers it is imperative that new UAW contracts be adopted very close to what is being paid to the U.S. workers at the transplant auto assembly plants.

To achieve this equality in pay between that transplant auto assembly plants and Detroit, it will be necessary for the UAW to either willingly agree to the needed new contracts or Detroit will have to file for Chapter 11 bankruptcy to get out of the current UAW contracts that are killing Detroit. Before everyone gets all worked up about Detroit going out of business, Chapter 11 Bankruptcy allows the company to continue operating as it gradually works out of its debt burden, and allows the company to get out of detrimental contracts like the UAW contracts.

Today’s UAW workers, I’m sure, are very unhappy with this suggestion, yet if they really think about it, wouldn’t they better off with the still-good pay rates being earned by the transplant workers as compared to Detroit going out of business? UAW workers would be earning a whole lot less if they had to find a job outside of the auto industry altogether. Also, if Detroit goes out of business, what about the pensions for all of today’s UAW retirees? These pensions need to be honored.

On a side note, our Democratic Congress is requiring Detroit to figure out how they can become profitable while at the same time honoring the current UAW contracts. Congress may as well be asking Detroit to figure out how they could walk to the moon. Any operational or process improvements or new more productive machinery Detroit were to implement could be matched by the foreign transplants, and we would be right back with Detroit having to deal with the non-competitiveness of today’s UAW contracts.

The “Legacy” Cost Problem

The problem with this is that for Detroit, for every employee working today there are around three retired people who are essentially still “on the payroll”. In contrast, the foreign transplant auto assembly plants probably have one retiree for every ten or twenty employees working today.

Even if the retiree’s pension benefit given by Detroit was the same amount as is offered by the transplants Detroit would still be in rough shape financially because of their large number of retirees. How can we solve this problem while still honoring the pension plans for today’s retired UAW workers?

One good solution would be to apply a “legacy” tax on all vehicles sold in the U.S. The Federal government would collect this money and then take care of paying the “legacy” costs for all of the auto assembly plants in the U.S., both Detroit and the foreign transplants.

The government would have all of the auto manufacturers in the U.S. report their total annual “legacy” cost and their total annual sales; then by dividing the total “legacy” costs for all of the auto assembly plants in the U.S. by the total U.S. sales we would have the “legacy” tax percentage.

This tax rate would be applied to every car sold in America, both domestically made and imported. The money collected from those cars assembled in the U.S. would be paid out by the Federal government to cover the pension expenses for all auto manufacturers in the U.S. This would place an equal “legacy” cost burden on all cars made in the U.S., and on all imported cars. Most importantly, it would relieve Detroit from their excessive and non-competitive “legacy” cost burden.

For the imported cars, the “legacy” tax collected would not be needed for paying any retired workers, so this money could be applied to our Social Security System which seems to be in some degree of future financial trouble. Some of this tax money from the imported cars could also be used to pay the administrative costs for the government management of the auto industry’s new pension system.

The Cartel Problem

This permits these foreign manufacturers to sell their cars in the U.S. market minus this significant cost. This cost advantage applies to both their imported cars and to the cars they assemble in their transplant factories in the U.S. For the U.S. auto manufacturers, this significant cost must be included in the selling price of their cars sold in the U.S. market. This causes an additional competitiveness problem for Detroit.

This problem could be solved if our trade policy, as it relates to cars, would require that foreign cars sold in the U.S., whether made in the U.S. or imported, would have to be sold at the same price as in their home market plus ocean freight. This would force them to include the write-off of their fixed costs in all the cars they sold. This would place the same burden on the foreign cars sold in the U.S. as is faced by Detroit.

These three changes would go a long way towards helping Detroit to be competitive. Without these basic competitiveness improvements Detroit would continue to be basically non-competitive. Detroit’s non-competitiveness problem has been apparent for quite a few years as we’ve watched the continual closing of more and more of Detroit’s assembly plants. The recent downturn of our economy has only served to push Detroit further towards the “edge” of bankruptcy.

Because of Detroit’s current financial difficulties, loaning them money at an attractive rate for use in developing new highly fuel-efficient cars would be a big help, however, this money won’t do any good long term if Detroit’s cost to manufacture these new cars is still too high compared to the competition’s cars. Down-sizing Detroit’s plant size will not solve Detroit’s basic problems either. Admittedly, the size of their payroll must be kept in-line with their production needs, but if their market share is declining, downsizing only helps to permit temporary survival while the company waits for further market share loss so they can down-size again. Haven’t we been watching this sequence for some years now ?

It’s time to get serious about what we’re going to do to help our very important U.S. auto industry survive. I believe that unless we “tackle” the three problems areas mentioned in this paper that we’ll just be wasting tax payer’s money and merely delaying the day that Detroit is forced to “close up shop”.

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