If you’ve been following the auto industry, you can’t help but notice it’s going through a major transformation.  And part of the transformation is a change of ownership.  But, it’s not the normal change of ownership that companies go through when being put through the financial wringer. When Chrysler and GM come out of the wash, they won’t be owned by their respective creditors — secured or unsecured — or even the current shareholders (which, in a perfect world, would be the case).

Instead, they’ll be owned in large part by the UAW, an organization that most industry observers believe deserve a large part of the blame for the demise of the industry giants.  Why, then, is the UAW getting any ownership position at all?  How can it be that bond holders and other deserving parties — who should own the assets — are left-out in the cold?

But, let’s put those “minor”, “inconsequential” questions aside, and examine this (apparent) new industry structure more closely:

We’ll now have two of the three (US-owned?) automakers actually owned in large part by the same organization that’s responsible for negotiating labor costs? TWO out of THREE?  Am I the only one that sees a major conflict of interest here?  Or, to put it another way, are you invested in Ford?

And, just for the record, I do have client and personal funds invested in Ford. But for the sake of equal consideration, let’s consider this issue from the perspective of UAW’s position.

Let’s say we control (or, at the very least, have some influence over) our labor costs AND our major competitors labor costs.  What’s would be the best way to maximize the value of “our” company?  Maybe labor costs at the new GM and Chrysler should be lower than labor costs at Ford? And, if so, is that good or bad for the membership that works for Ford?

Ford didn’t ask for a bailout.

Will the UAW finish the job at the bargaining table? At least it will be interesting to see the UAW’s position on the contracts that guarantee almost full-wage payments for laid-off workers.

Of course, the bankruptcy court will have nullified those contracts by then, saving the union any embarrassment of having to put forward a position that conflicts with their new ownership role.

As time passes, questions tend to be answered. As for me… well… I’m interested to see the answers time reveals to the questions I’m asking here.

REFERENCES:  http://en.wikipedia.org/wiki/United_Auto_Workers

**About the UAW**

The International Union, United Automobile, Aerospace and Agricultural Implement Workers of America, better known as the United Auto Workers (UAW), is a labor union which represents workers in the United States and Puerto Rico. Founded in order to represent workers in the automobile manufacturing industry, UAW members in the 21st century work in industries as diverse as health care, casino gaming and higher education. Headquartered in Detroit, Michigan, the union has approximately 800 local unions, which negotiated 3,100 contracts with some 2,000 employers.
**History**

The UAW was founded in May 1935 in Detroit, Michigan, under the auspices of the American Federation of Labor (AFL) after years of agitation within the labor federation. The AFL had focused on organizing craft unions since its founding in 1881 by Samuel Gompers. But at its 1935 convention, a caucus of industrial unions led by John L. Lewis formed the Committee for Industrial Organization, the original CIO, within the AFL. Within one year, the AFL suspended the unions in the CIO, and these, including the UAW, formed the Congress of Industrial Organizations (CIO).

The UAW was one of the first major unions that was willing to organize African-American workers. The UAW rapidly found success in organizing with the sit-down strike – first in a General Motors plant in Atlanta, Georgia in 1936, and more famously in the Flint sit-down strike that began on December 29, 1936. That strike ended in February 1937 after Michigan’s governor Frank Murphy played the role of mediator, negotiating recognition of the UAW by General Motors. The next month, auto workers at Chrysler won recognition of the UAW as their representative in a sit-down strike.

The UAW’s next target was the Ford Motor Company. Henry Ford had promised that “The UAW would organize Ford over my dead body.” Ford selected Harry Bennett to keep the union out of the company, and the Ford Service Department was set up as an internal security, intimidation, and espionage unit within the company, and quickly gained a reputation of using violence against union organizers and sympathizers (see The Battle of the Overpass). It took until 1941 for Ford to agree to a collective bargaining agreement with the UAW. By the end of the year, the Japanese attack on Pearl Harbor dramatically changed the nature of the UAW’s organizing.

The UAW’s Executive Board voted to make a “no strike” pledge to ensure that the war effort would not be hindered by strikes, and that pledge was later reaffirmed by the membership.

After the successful organization of the auto industry, the UAW moved towards unionization of other industries. For a time, the UAW even organized workers at bicycle fabrication and assembly plants in Cleveland and Chicago, including AMF, Murray, and later Schwinn Bicycle Co. The AMF and Murray plants later closed and were relocated to other states after increasing competition forced retooling, modernization, and a reduction in per-unit labor costs. In 1980, the Schwinn factory, hard hit by foreign competition and in need of complete modernization, also closed its doors.

At the UAW’s constitutional convention in 1946 Walter Reuther won the election for president and served until his death in a small airplane accident in May 1970 – leading the union during one of the most prosperous periods for workers in U.S. history. In the 1960s, the UAW used its strategy of negotiating a contract with one major auto maker and applying it to others to secure a number of new benefits for auto workers, including fully paid hospitalization and sick leave benefits at General Motors and profit sharing in American Motors. The UAW also grew to include workers in other major industries such as the aerospace and agricultural-implement industries. The UAW founded WDET 101.9fm in Detroit, MI in 1948. The station was later sold to Wayne State University for $1 in 1952.

During the 1950s and 1960s, UAW members became one of the best paid groups of industrial workers in the country – placing them solidly in the middle class of American society. By the end of this period, changes in the global economy, competition from European and Japanese automobile makers, and management decisions at the U.S. automakers had already started to significantly reduce the profits of the major auto makers and set the stage for the drastic changes in the 1970s.

The UAW disaffiliated from the AFL-CIO on July 1, 1968, after Reuther and AFL-CIO President George Meany could not come to agreement on a wide range of policy issues or reforms to AFL-CIO governance. On July 24, 1968, just days after the UAW disaffiliation, Teamsters General President Frank Fitzsimmons and Reuther formed the Alliance for Labor Action as a new national trade union center to organize unorganized workers and pursue leftist political and social projects. Meany denounced the ALA as a dual union, although Reuther argued it was not. The Alliance’s initial program was ambitious. But Reuther’s death in a plane crash on May 9, 1970, near Black Lake, Michigan, dealt a serious blow to the Alliance, and the group halted operations in July 1971 after the Auto Workers (almost bankrupt from a lengthy strike at General Motors) was unable to continue to fund its operations. The ALA formally disbanded in January 1972. The UAW re-affiliated with the AFL-CIO on July 1, 1981.

The situation for the automotive industry and UAW members worsened dramatically with the 1973 oil embargo. Rising fuel prices caused the U.S. auto makers to lose market share to foreign manufacturers who placed more emphasis on fuel efficiency. This started years of layoffs and wage reductions, and the UAW found itself in the position of giving up many of the benefits it had won for workers over the decades. By the early 1980s, the state of Michigan had been devastated economically by the losses in jobs and income within the state’s largest industry. This peaked with the near-bankruptcy of Chrysler in 1979. As a result of plant closings, cities such as Flint, Lansing, and to a lesser extent Detroit began to lose population and businesses. In 1985 the union’s Canadian division disaffiliated from the UAW over a dispute regarding negotiation tactics and formed the Canadian Auto Workers as an independent union. Specifically the Canadian division claimed they were being used to pressure the companies for extra benefits which went mostly to the American members.

The UAW has seen a dramatic decline in membership since the 1970s. Membership topped 1.5 million in 1979. But because of restructuring and decline of the American domestic auto industry due in part by the increased compensation and benefits advocated by the UAW, membership fell to approximately 540,000 at the end of 2006 and to just under 465,000 members by the end of 2007. The last time the UAW had fewer than 500,000 members was in 1941.

In late 2008, the union was lobbying Congress for a bailout to prevent the Big 3 Auto companies from filing for bankruptcy.

**Criticism**

Some blame the UAW for the automotive industry crisis of 2008-2009. They point to union workers’ high wages and overly generous benefits compared to their contemporaries working at non-union Japanese auto plants in the U.S. as one of the primary reasons for the poor competitiveness of the Big Three. In a November 18, 2008, New York Times editorial, Andrew Ross Sorkin claimed that, counting benefits, each UAW worker receives $74 per hour while Toyota workers receive about $44 per hour. The UAW asserts that most of this labor cost disparity comes from legacy pension and healthcare benefits to retired members, of which the Japanese automakers have none. According to the 2007 GM Annual Report, typical autoworkers earn a base wage of approximately $28 per hour. Following the 2007 National Agreement, the base starting wage was lowered to about $15 per hour. A second-tier wage of $14.50 an hour (which applies only to newly-hired workers)is even lower than the average wage in nonunion auto companies in the Deep South.

One of the benefits negotiated by the the United Auto Workers was the jobs bank program, under which laid-off members received 95 percent of their take-home pay and benefits. More than 12,000 UAW members were paid this benefit in 2005. In December 2008, the UAW agreed to suspend the program as a concession to help U.S. automakers during the auto industry crisis.

Others conclude that the costs imposed by labor had little to do with the problems in the auto industry. Management granted concessions to its unions in order to win labor peace, a benefit not calculated by the UAW’s critics. The primary cause of the automotive sector’s weakeness was substantially more expensive fuel costs linked to the 2003-2008 oil crisis which caused customers to turn away from large sport utility vehicles (SUVs) and pickup trucks, the main market of the American “Big Three” (General Motors, Ford, and Chrysler). In 2008, the situation became critical because the global financial crisis and the related credit crunch significantly impaired the ability of consumers to purchase automobiles. The Big Three also based their respective market strategies on fuel-inefficient SUVs, and suffered from consumer perception of relatively low quality (vis-a-vis automobiles manufactured by Japanese or European car makers). The Big Three neglected development of passenger cars and instead focused on light trucks (which had better profit margins) in order to offset the considerably higher labour costs, falling considerably behind in these market segments to Japanese and European automakers. Supporters of the U.S. auto industry and the UAW point out that the automotive crisis extends across national boundaries, affecting car companies in Asia, Europe. Japanese carmaker Toyota expects its first loss in 70 years, Korean manufacturer Hyundai is offering to allow customers to return their new cars if they lose their jobs. Sales for the first quarter of 2009 fell an average of 37 percent worldwide for Toyota, Nissan, and Honda, and Volvo, Scania, PSA Peugeot Citroën, Renault, Fiat, BMW, and Daimler are receiving bailouts from their respective home governments;[26] All are companies which are not organized by the UAW, and some are not unionized at all.

List of United Auto Workers local unions

2007 General Motors strike

Carl Milles

Final Offer – A documentary film that shows the 1984 contract negotiations, that would result in the union split of the Canadian arm of the UAW.

Leon E. Bates

Victor G. Reuther

2007 Freightliner wildcat strike

ADDDITIONAL REFERENCES

Who We Are from UAW website. Retrieved 21 November 2008.

University of Illinois Press, 1995. ISBN 025206626X

“Mr. Clean and the Outcast.” Time. June 6, 1969.

University Press, 2004. ISBN 0814329470  

Sorkin, Andrew Ross. “A Bridge Loan? U.S. Should Guide G.M. in a Chapter 11.” New York Times. November 18, 2008.

“General Motors Corporation 2007 Annual Report”, p. 62.

Brenner, Mark and Slaughter, Jane. “Cutting Wages Won’t Solve Detroit 3’s Crisis.” Detroit News. December 4, 2008.

Barkholz, David. “UAW Agrees to Suspend Jobs Bank, Gettelfinger Says.” Automotive News. December 3, 2008.

Ivison, John. “Automotive Bailout Must Not Be Free Ride.” National Post. March 2, 2009.

Tankersley, Jim. “No Easy Road for U.S. Auto Industry.” Los Angeles Times. April 9, 2009.

“Gas Prices Put Detroit Big Three in Crisis Mode.” Associated Press. June 1, 2008.

Vlasic, Bill and Bunkley, Nick. “Hazardous Conditions for the Auto Industry.” New York Times. October 1, 2008.

La Boz, Dan. “What’s to Be Done about the Auto Industry?” Monthly Review. November 2008.

Van Praet, Nicolas. “CAW Girds For War.” Financial Post. June 4, 2008.

Fackler, Martin. “Toyota Expects Its First Loss in 70 Years.” New York Times. December 23, 2008.

Datko, Karen. “Job worries? Hyundai Has A Deal for You.” MSN Money. January 5 2009.

Bunkley, Nick. “Auto Sales For March Offer Hope.” New York Times. April 2, 2009.

Saltmarsh, Matthew. “BMW Net Sinks; VW Warns on ‘09.” New York Times. March 13, 2009; Schmid, Joseph. “Europe Vows Quick Review of Auto Bailout Plans.” New York Times. February 26, 2009.

* All references courtesy of:   http://en.wikipedia.org/wiki/United_Auto_Workers

Ford (NYSE: F) has proven, at least so far, that staying away from government aid can be beneficial if you’re a U.S. automaker, especially when Chrysler is now bankrupt, and the consensus is that its “controlled” demise will be a model for what happens to General Motors (NYSE: GM).

President Obama bought Chrysler some time. But the automaker is clearly still in big trouble, and the implications of its failure, should it come to pass, extend way beyond the U.S. borders, and for more than the obvious reasons.

Chrysler filed for Chapter 11 bankruptcy and will attempt to reorganize its businesses after gaining concessions from labor unions and crafting out a deal with Italy’s Fiat. Yet, if you look at the situation closely enough, you see the potential for more trouble ahead for the company, as well as others with whom it does business.

Fiat’s initial stake in the deal is 20%, with the option to increase its ownership position to 35% by 2016, if it does certain things, such as make Chrysler successful at turning out small, fuel efficient cars that people in the U.S. will actually buy and drive. The U.S. government, the Canadian Federal Government, and the government on Ontario will take a 10% stake, with the U.S. taking 80% of the stake.

From a business standpoint, the fact that Fiat is the savior of Chrysler is at the very least somewhat questionable.

According to Stratfor.com: “the impact of the bankruptcy will be felt in other countries also. In fact, the U.S. plan for Chrysler hinges on a transfer of technology from Europe, meant to help the beleaguered company learn the ways of small and efficient automobile manufacturing. The irony is that Chrysler intends to keep Jeep and Dodge – neither of which are considered small or efficient – as the core assets of its new fleet.”

Strafor further noted: “Chrysler has turned to the Italian automaker Fiat, which has had financial difficulties of its own, for manufacturing and business acumen. In Europe, Fiat’s vehicles have suffered decades of image problems, depressing the price that the Turin-based company can ask for its cars. Furthermore, Fiat went through exceedingly difficult times in 2003 and 2004, when (again ironically) it was General Motors that was nearly forced to bail the company out. By 2005, Fiat was in such dire straits that it exercised an option to sell its car division to the American manufacturer, forcing GM to buy it at market price. But GM was so wary of Fiat’s enormous debt and unimpressed by the car division that it chose to pay a $2 billion penalty instead of taking ownership.”

Yet, aside from economic impact the Chrysler bankruptcy will have international implications, including some that could impact national security, in the U.S. and abroad.

Stratfor.com noted: “Further questions arise over the impact that the Chrysler bankruptcy will have on U.S. neighbors Canada and Mexico. For Canada, the key is Ontario’s manufacturing sector, which accounts for 42,000 assembly and 75,000 auto parts supplier jobs. Having suffered heavy job losses in both sectors in 2007 and 2008, the minority Conservative government cannot allow further economic hardship to strike in Ontario – the government already has faced multiple challenges from the Canadian Liberal Party during its tenure.”

In fact, Stratfor thinks that Mexico’s problems from these developments are “a matter of life and death,” as “The auto-manufacturing sector employs roughly 450,000 people – 100,000 in Ciudad Juarez alone.”

As readers of this space are well aware “Juarez is at the center of a drug war that has pitted the Mexican army and federal law enforcement against several cartels, which also are battling each other for control over key drug transshipment points into the United States,” which means that “Massive layoffs in the automotive sector would create a large pool of disaffected but able-bodied people, who would be great recruits for the cartels. The situation also could widen the rift between the notoriously rebellious and independent-minded residents of Chihuahua and the federal government in Mexico City, complicating efforts by federal law enforcement to conduct operations in Juarez.”

And the timing couldn’t be worse for Mexico, as it is reeling from the Swine flu’s effect on its international image and its tourism industry and “substantial decline in remittances from emigrants living abroad and low prices for its energy exports – which the government depends on for about 40 percent of tax revenue. Added to this would be the cost of a program that obligates the government to pick up one-third of autoworkers’ salaries when companies suspend factory operations.”

Beyond Chrysler, though, there is GM. Analysts are in agreement that Chrysler is the “canary in the coal mine” for this process. Any successes or failures with Chrysler are expected to be applied to GM, whose future is also in doubt.

Stratfor noted: “Given GM’s global reach, the potential collapse of that company, following the Chrysler bankruptcy filing, would cause shock waves for a number of countries and leave their governments to deal with the domestic effects. And that might sour the Obama administration’s relations with some key allies in the future.”

Conclusion

The hands of Chaos, more specifically “The Butterfly Effect” are all over this as unintended consequences are certain to develop.

To be sure, any intangibles that surface could have positive or negative effects. It’s too early to tell. What is certain, though, is that if the Chrysler deal fails, GM will likely be in an even more difficult position than it already is.

There are signs, though, that the U.S. economy’s troubles have begun to bottom out, at least in some sectors of the economy. In our neighborhood there are houses that are sporting “sale pending” signs. And soft indicators such as freeway traffic at rush hour and off times seems a bit heavier at times than it did just a few weeks ago.

The Federal Reserve and some private forecasters are seeing some small signs of improvement as well.

In other words, there is still danger for Chrysler and GM, but they may be helped if the U.S. economy actually starts to recover. The next two to three months will be critical.