The Decline and Resurgence of the U.S. Auto Industry
Introduction and executive summary
Over the past thirty years the U.S. auto industry has faced numerous existential crises, illustrating both the cost of lost opportunities and the power of innovation as the archetypical industrial enterprise adapts to a post-industrial skill economy.
Most policymakers and outside observers still make simplistic assumptions about labor and management in the auto industry, assuming, for example, that the industry’s problems can be alleviated just by reducing labor costs and relieving union work rules. In contrast, the overarching aim of this report is to present a series of windows into the industry that convey its complexity, and that make clear the limitations of simplistic assumptions about labor and management. In particular, this paper aims to develop a deeper appreciation of the industry’s problems and of the sources of resilience in the industry, which include management leadership, union partnership, and front-line workforce teamwork.
A more holistic understanding of the industry is significant since its footprint accounts for an estimated one in every twenty two U.S. jobs—and because the lessons are relevant to other industries facing transformational challenges. To increase understanding and appreciation of the strategic dynamics facing the industry, we suggest a comparison of the industry’s responses to two major recessions (the early 1980s recession and the Fine Recession); a look at the relationship inbetween productivity and compensation; a specific concentrate on labor costs and work rules; an examination of the geography of the industry, including the role of what are termed “transplants” (foreign-owned assembly and supplier facilities); and a consideration of how fresh technologies and systems to achieve quality and efficiency improvements are challenging core operating assumptions.
A number of themes emerge:
- The U.S. auto industry has been revitalized in latest years through a commitment to quality, innovative production and management technologies, a constructive relationship inbetween management and labor, and improved relations with suppliers.
- As an example of the industry’s latest success, Ford liked profits of $6.Two billion in 2011, $7.Two billion in 2012, $8.Trio billion in 2013, and $6.9 billion in 2014. As a result, the company’s workers received profit sharing checks of $6,200 for 2011, $8,300 for 2012, $8,800 for 2013, and $6,900 for 2014.
Prologue
The two thousand three national negotiations inbetween UAW and Ford were not, in most respects, pivotal. Embedded in the negotiations, however, were two signals of the transformational switch that is a concentrate of this report.
Most of the two thousand three negotiations involved traditional bargaining, continuing a longstanding practice of trading incremental gains in wages and benefits for labor peace and union/worker participation in joint programs on safety, quality, work-life balance, and other matters. The two transformational signals were largely invisible to policymakers and the general public.
Very first, the quality subcommittee (one of over twenty subcommittees in the negotiations) utilized an interest-based, problem-solving treatment to bargaining and generated an innovative agreement to have hourly workers designated as Quality Operating System Coordinators (QOSCs) in key areas of all the plants, taking responsibility for driving standardized work processes and joining with team leaders to generate continuous improvement suggestions from work teams. This harnessing of front-line skill in the early 2000s was pivotal to Ford’s progress from near last in quality to best-in-class by 2010.
2nd, the union proposed that hourly workers also be permitted to earn what is termed a “black belt” in lean/Six Sigma principles. Earning a black belt involves completing required coursework in statistical process control and related matters, as well as leading a major process improvement project through the stages of Define, Measure, Analyze, Improve, and Control (DMAIC), typically generating savings of hundreds of thousands of dollars up to a million dollars. Ford’s vice president of quality at the time could not conceive how an hourly worker could lead a switch initiative on this scale, which would have entailed directing the work of the associated engineers and managers. The proposal was rejected.
Rapid forward to 2008, when the results of front-line engagement were increasingly evident. Even with 50,000 workers taking severance packages to depart from the company during the downturn, quality made year-over-year improvements. The UAW again raised the idea of hourly black belts, and this time Ford leadership agreed to support an initial cohort of thirty five hourly workers injecting training to earn a lean/Six Sigma black belt.
Armentha Youthful is a UAW member in the Dearborn Truck Plant and a QOSC who was part of the very first graduating class of black belts in 2010. Reflecting on the two years of training for this very first cohort of trainees, she said:
No longer were we management and employee, we were team members pursuing the same aim. This practice doesn’t eliminate the notion of salaried versus hourly, but for me personally it demonstrated how much more we as an organization can achieve when titles, classifications, and separation aren’t the central concentrate. (Cutcher-Gershenfeld, Brooks, and Mulloy 2015, 147)
Back on the job, she describes the influence of the training:
I am able to problem solve [and] coach team leaders. It is not just the statistical part; it is the basic DMAIC process for scoping problems and getting to root causes.
Youthfull further comments on the role of front-line skill:
Company successes are not just due to the minds of the people at the top who are being paid all the money, but the minds of people at the bottom. This is not a false empowerment but truly and genuinely acknowledging that we have each chosen our part of the job and both are part of success. . . . People are loyal to the company—there has to be respect and loyalty because we are all providing our best and it doesn’t matter where you are in the structure.
In reflecting on the practice, she adds that there are still cultural barriers in the minds of some:
Black belt training has empowered me. People in management do respect you more. Some didn’t believe a person without a statistics background could pass. When I did pass, some begrudgingly shook my forearm. You could see it in their faces: they were amazed. I thought, “You’ve got to be kidding me.” They were, like, “Oh my god, she passed and did it on the very first time.”
The comment is a little insulting—there are slew of people who could do this. People have abilities that managers don’t know anything about. One should never be comfy making an assumption about another person’s skill set or talents simply by their classification, association with a group, or a particular organization and/or appearance. (Cutcher-Gershenfeld, Brooks, and Mulloy 2015, 53)
As is evident from this last quote, despite considerable progress in valuing the distributed skill of the total workforce, there were still deeply embedded assumptions that had not fully switched. At the same time, the very existence of hourly employees with black belts speaks of many deeply embedded assumptions that have switched.
We share this story for three reasons. Very first, it is illustrative of a long-term transformation that has delivered results and switched lives. The QOSCs and black belts are just two of many pivotal examples that break from common stereotypes about the auto industry.
2nd, it highlights the auto industry’s capacity for resurgence. When Congress and the Obama administration were debating a bailout of the auto industry, it was seen as troubled in ways comparable to the financial sector. Industry leaders were berated for flying corporate jets to testify before Congress (Wutkoski 2008). The congressional representatives’ questions exposed just how little they knew about this industry and the roles of labor and management in working to convert quality, safety, and other operational aspects. Unlike the financial sector, the auto industry in 2007–2008 (when the congressional hearings were taking place) was already well along on a transformational journey. By 2008, for example, the quality gains at Ford had translated into a reported savings of $1.Two billion in warranty costs (Kavanagh 2008). An improvement of this magnitude does not happen lightly or quickly; it is the product of constancy of purpose over many years in product design and manufacturing.
During the brief time that Cerberus, a venture capital rock-hard, wielded Chrysler it became very clear that running an auto company required deep expertise that was not lightly acquired. Consider that a typical car will have as many as Ten,000 components with an assembly process involving the coordinated efforts of over Four,000 workers. Tolerances of thousandths of an inch are required for quality standards, and if the assembly line doesn’t run due to a threat to quality or something not going as planned, it can cost a company as much as $15,000 a minute. The heartbeat of an auto assembly plant is measured in the plant producing approximately one fresh car a minute.
The challenge for the auto industry when the congressional hearings were taking place was not figuring out how to improve—that was clear, and improvements were underway. It was the cash-flow implications of the short-term unprecedented collapse in the consumer market. Ford lost over $12 billion in two thousand six as it adjusted to declining sales and lost market share, for example. Working with the UAW, Ford met that challenge and is now a national leader in job creation, generating an estimated Eighteen,000 fresh jobs in the United States since the recession, including jobs that had been slated for Mexico. Overall, Goolsbee and Krueger (2015) document that motor vehicles and parts manufacturing accounted for an estimated increase of 256,000 jobs inbetween June two thousand nine and July 2014. This represents six percent of the nation’s growth in jobs, even however this industry only accounts for two percent of total employment. Ford loved profits of $6.Two billion in 2011, $7.Two billion in 2012, $8.Three billion in 2013, and $6.9 billion in two thousand fourteen (even with substantial investments in fresh products, such as the fresh fuel efficient, aluminum bod F150 truck). Moreover, workers received profit sharing checks of $6,200 for 2011, $8,300 for 2012, $8,800 for 2013, and $6,900 for two thousand fourteen (each paid in the very first quarter of the next year). General Motors workers received profit sharing payouts of $Four,300 for 2011, $6,750 for 2012, $7,500 for 2013, and $9,000 for two thousand fourteen (again, each paid in the very first quarter of the next year) based on profits of $7.6 billion for 2011, $Four.9 billion for 2012, $Three.8 billion for 2013, and $200 million for 2014. Albeit there is variability in profit sharing payouts, in the last four years autoworkers have received far larger payouts than have most U.S. workers.
As former chairs of the Council of Economic Advisers during the industry crisis, Goolsbee and Krueger (2015) report being astonished by the industry’s resurgence, commenting, “We are both pleased and a bit astonished by how well the past five years have played out for the domestic auto industry.” These authors go on to conclude, “We are both thrilled and relaxed with the result: the automakers got back on their feet, which helped the recovery of the U.S. economy. Indeed, the automakers outsize contribution to the economic recovery has been one of the unexpected consequences of government intervention.” These authors capture well the uncertainty felt in government during the tumult of the recession, but as we indicate in this report, a deep skill of the inward workings of the industry suggests that the capacity for resurgence was much stronger than many assumed. Also, while government intervention was essential for the industry’s recovery, also key were continuous improvement processes, organizational restructuring, and collective bargaining agreements that preceded the crisis.
A third motivation for sharing the QOSC and lean/Six Sigma black belt story is that it illustrates the constructive role of the union. Many viewed the UAW as part of the problem, citing what they eyed as inflexible wages and limitary work rules. For example, U.S. Senator Bob Corker (R-Tenn.) criticized the UAW, stating that “it’s about confrontation, it’s about fighting,” adding, “[t]here’s no question that the UAW has had a negative influence on the big three automakers” (DePillis 2014). In fact, the union was a key driving force behind innovations such as the Quality Operating System Coordinators and the lean/Six Sigma black belts. The union also agreed to far-ranging work rule switches at various times before two thousand seven (including the negotiation of over thirty competitive operating agreements at Ford plants in 2006, generating estimated efficiency improvements of over $500 million). Additionally, the union agreed to a lower entry wage in two thousand seven for up to twenty percent of the workforce, after which workers would receive the higher regular wage. As is discussed more fully below, the two thousand seven establishment of a Voluntary Employee Benefit Association (VEBA), funded to take on responsibility for retiree health care, helped reduce the gap in compensation (wages and benefits) inbetween the Big Three automakers and transplants from approximately $35 per hour to $6 per hour.1 By the time the industry was asked to testify before Congress in November 2008, the president of the UAW had clear evidence to indicate that labor was very responsive to the economic challenges facing the industry and engaged in utter partnership to enable industry success.
This report features material from a forthcoming book titled Inwards the Ford-UAW Transformation: Pivotal Events in Valuing Work and Delivering Results (Cutcher-Gershenfeld, Brooks, and Mulloy 2015), which presents a total of fifty six pivotal events over thirty years that add up to a transformation in the Ford–UAW relationship.Two This does represent an orientation in the report toward the one company that didn’t take a government bailout, but many of the Ford–UAW pivots have counterparts at GM and Chrysler that are significant to understanding their part in the industry’s resurgence. In addition to drawing on material from the Ford–UAW book, this report also incorporates material from other sources with the overarching aim of presenting a series of windows into the industry that conveys its complexity. A combination of qualitative and quantitative data is featured to provide a visceral and comprehensive sense of the industry and its challenges. Not all the pivots described in the Ford–UAW book or in the industry more broadly were successful. There were certainly strategic choices in the 1980s and 1990s that, in retrospect, were ill-advised, and there are still pivotal challenges ahead.
It has been argued that a transformation in employment relations requires aligned switches at the strategic level, the collective bargaining or institutional level, and the front-line workplace level (Kochan, Katz, and McKersie 1986). In the domestic auto industry and particularly in the Ford–UAW case, we find evidence of transformational switch at all three levels, tho’ it is still incomplete, and there are many threats to progress. Thus, the aim of this paper is to make clear the limitations of simplistic assumptions about labor and management, pointing instead to a deep appreciation for the sources of resilience in an industry whose extended footprint accounts for an estimated Four.Five percent of U.S. employment, or one of every twenty two U.S. jobs.Three
The balance of the paper proceeds as goes after. It starts with a comparison of the auto industry’s response to the 1979–1982 and 2006–2009 crises to illuminate how the industry copes with adversity, and to demonstrate how it has remade itself in response to the most latest crisis. The paper then takes a detailed look at labor costs and work rules to dispel some of the most persistent myths surrounding the auto industry. Next, it examines a number of factors shaping U.S. automakers, including the arrival of transplants, the shifting geography of the industry, and evolving supplier relations. Ultimately, the paper details how the industry has been transformed by the shift to knowledge-driven work, the spread of lean/Six Sigma systems, and the development of fresh technologies.
A historical comparison: The 1979–1982 and 2006–2009 crises
For the auto industry, the 1979–1982 period was as cataclysmic as the recession that, for automakers, began in 2006. Putting the two crisis periods side-by-side helps illustrate how the industry copes with adversity, and is instructive about how both labor and management take into account the public interest to a much greater degree than almost any other industry.
The logic of placing the two recessions side-by-side is evident in Figure A, which indicates that both represent the most precipitous declines in auto sales in the past half century.Four
Seasonally adjusted lightweight U.S. vehicle sales (millions of units)
Source: Reproduced from Goolsbee and Krueger (2015)
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While a combination of monetary policy and global energy issues drove the recession of the early 1980s, the auto industry felt the influence in early 1979, as Automotive News recalls:
Auto sales were off to a rousing embark in 1979. Sales of domestic vehicles in the very first ten days of the year were up twenty three percent. Then all hell broke liberate. On Jan. 16, 1979, the Shah of Iran was overthrown, and the Ayatollah Khomeini came to power. He cut Iran’s oil production, which diminished shipments of crude oil to the United States. Gasoline prices soared, and the American economy plunged into a recession. (Sawyers 2013)
Subsequently, sales of the more fuel-efficient Japanese cars took off. Sales for Toyota, Datsun (now Nissan), and Honda—the three top-selling Japanese brands—rose from 1.1 million in one thousand nine hundred seventy eight to 1.Four million in 1982, a twenty nine percent increase. Indeed, in 1982, Japan surpassed the United States, even if only shortly, as the world’s largest producer of cars and trucks. At Ford, the situation was eerily similar to the late 2000s recession. Ford’s car sales dropped forty seven percent, from Two.Five million in one thousand nine hundred seventy eight to 1.Four million in 1982. The company had already lost $1.Five billion in one thousand nine hundred eighty and $1.0 billion in one thousand nine hundred eighty one (equivalent to $Four.6 billion and $Two.7 billion, respectively, in two thousand fourteen dollars), with hourly employment pulling down by forty six percent (approximately 100,000 jobs) during the same period (Cutcher-Gershenfeld, Brooks, and Mulloy 2015, 27).
In an unprecedented budge, contract negotiations inbetween the UAW and the U.S. companies were opened six months early, and the automakers demanded and achieved an end to what was termed the Annual Improvement Factor (AIF). For over three decades prior, autoworkers received an annual wage increase of three percent (separate from extra inflation-based cost-of-living increases). The three percent year-over-year increase in base wages corresponded to a three percent year-over-year increase in productivity during that same period. This formula was adopted to varying degrees by other major U.S. industries and played a central role in building the U.S. middle class.
The next section of the paper will concentrate more fully on the implications of violating from this pattern. Very first, however, it is instructive to highlight another joint UAW–automaker response to the recession: effective efforts to retrain displaced workers. All three major auto manufacturers established joint training funds, primarily supported at the rate of five cents for each hour worked by union members and later expanded to ten cents and higher amounts, with extra premiums for overtime hours. The joint funds required both union and management signatures before money could be spent and were targeted at establishing retraining programs with community colleges and other service providers. Remarkably, within approximately two years over ninety percent of the laid-off autoworkers had been placed in fresh jobs (Ferman et al. 1991). This commitment to invest in workers who would most likely never work in the auto industry again cushioned the influence of the recession on individuals, families, and communities.
In addition to violating from the Annual Improvement Factor and establishing joint training funds, the UAW–Ford contract in particular was notable for the launch of what were termed Mutual Growth Forums. The principle of “mutual growth” preserved the spirit of the AIF, linking worker prosperity with business development, and recognized the need for a regular forum for dialogue inbetween labor and management on these matters. We will comeback to all three developments in the context of the 2007–2009 recession.
The late 2000s recession followed more than four decades of declining market share, as is indicated in Figure B.
Percent of total U.S. auto industry market share, by automaker, 1961–2014
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The data underlying the figure.
Source: WardsAuto (various years)
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By the end of the 1990s it was clear that the U.S. domestic manufacturers lagged competitors on quality, and Toyota in particular benefited with the fastest growth in market share. In the 2000s, however, the story is one of enlargening recognition of the need for transformation in the domestic auto industry—and, in the case of Ford, clear progress in halting the decline.
Before the total influence of a transformation was realized, the entire auto market collapsed in the most latest recession. The seasonally adjusted annual sales (SAAR) of cars and trucks dropped from a projection of more than seventeen million vehicles at the beginning of two thousand six to under eleven million in 2008. During 2006–2007, the hourly workforce at Ford was diminished from over 90,000 to approximately 40,000. These developments made the headlines. What was not as visible was the adjustment process, which paralleled and even went beyond what had happened in the early 1980s.
There was again concession bargaining, resulting in two thousand seven in the establishment of a fresh $14.20 entry wage that was approximately sixty percent of the regular production kicking off hourly wage. Importantly—unlike two-tier wage systems in other settings—once twenty percent of the workforce was entry wage, the very first employees hired would stir up to the total wage. Instead of unilaterally cutting retiree health care, which happened in many non-union firms, each of the domestic original equipment manufacturers (OEMs) negotiated with the UAW their own separate Voluntary Employee Benefit Associations (VEBAs). (The term “OEM” refers to the companies designing and building the vehicles, in contrast to what are termed first-, second-, and third-tier suppliers.) The collective Overall Post-Employment Benefit (OPEB) liability of the three companies totaled $115 billion. In total the companies contributed approximately $70 billion in cash and stock to fund the retiree health care benefits. With the stroke of a pen, the VEBA, an independent entity managed by a board with a majority of non-UAW directors, became one of the nation’s largest providers of health care benefits, and the members had much greater assurances of continuity of benefits than if they had relied on companies that might go into bankruptcy.
As was the case in the early 1980s, all three auto companies went far beyond almost all other U.S. firms in their efforts to cushion the downsizing’s influence on employees. Ford went the furthest—there was not one single involuntary layoff. Instead, all 50,000 workers who lost their jobs did so through voluntary separation packages. There were at least fourteen distinct packages, ranging from a special early retirement program suggesting $100,000 and six months of health care coverage to a non-retirement-eligible educational chance program providing four years of college tuition (up to $15,000 a year), half salary, and total benefits for four years. Unnecessary to say, these and other comparable programs far exceeded what most displaced workers experienced during the latest recession. The influence on individuals, families, and communities was far less severe than it would have been otherwise. Reflecting on the practice, current Ford CEO Mark Fields (and then president of the Americas, covering North and South American operations) observed:
We went through a fat transformation. . . . We had to say goodbye to almost fifty percent of the hourly workforce and almost forty percent of the salaried workforce. The key thing about the transformation is that we did not miss a unit of production during this time and quality went up. (Cutcher-Gershenfeld, Brooks, and Mulloy 2015, 74)
From this comparison of the responses of labor and management in the early 1980s recession and the most latest recession, it is clear that the values of the union and of the employers combined to generate outcomes that mitigated the harm to workers, their families, and their communities. The original concept of a corporate charter was a social contract in which organizational leaders were indemnified from lawsuits in exchange for contributing to what was termed the commonweal (by providing employment, supplier purchases, and tax revenue that would contribute to the effective functioning of the economy and society). The mitigation of the influence of the recession on workers, families, and communities reflects attention to the public interest in keeping with the spirit of this fundamental social contract. We also see that the union was not intransigent—there was a capacity to adjust wages and benefits to the fresh competitive realities, but it was a negotiated process of adjustment rather than a unilateral cut. Ultimately, we see that there were tangible benefits in cost and quality that are still evident today. These benefits are part of a business case for the industry’s constructive response to the downturn. It would be interesting to know the degree to which leaders in other industries fully explored such options, as compared with just replicating common practices such as involuntary layoffs with limited assistance or severance payments.Five
The rate of switch in productivity and wages
In one thousand nine hundred fifty UAW President Walter Reuther led the negotiation of what has come to be called the “Treaty of Detroit” with General Motors, which was followed by similar agreements with Ford and Chrysler. This five-year agreement introduced cost-of-living adjustments to wages, the concept of an actuarially sound pension plan, a no-strike provision during the term of the agreement, reserved management rights to run the business, and a link inbetween wages and productivity (termed the Annual Improvement Factor). In many respects, the legacy of this agreement still shapes labor–management relations in the auto industry.
The influence of the “Treaty of Detroit” is evident in Figure C, which depicts the rate of switch in nationwide productivity, overall hourly wages, overall hourly wages and benefits, and hourly wages among Ford assembly workers (which are similar to those of their GM and Chrysler counterparts).
Cumulative percent switch in U.S. productivity, U.S. hourly wages and compensation, and Ford assembly line worker hourly wages, 1947–2013
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The data underlying the figure.
Source: Adapted from Cutcher-Gershenfeld, Brooks, and Mulloy (2015)
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In the U.S. economy, for the three decades following World War II, wage growth matched the rate of switch in productivity. The combined increase in productivity and purchasing power fueled a remarkable period of economic growth in the United States. However, by the early 1970s, the rate of switch in wages had begun to go plane. To some extent this was mitigated by continued growth in benefits (health care and pensions are indicated in the figure), however combined compensation (wages and benefits) was also flattening out by the early 1980s. However it is not represented on this chart, household income continued to grow as 2nd wage earners (women) entered the workforce, tho’ the rate of switch in household income went vapid by the 1990s. At this point most households did not have a third wage earner able to come in the workforce, and this marked the beginning of the stagnation in purchasing power that contributed to the latest recession.
Compensation for Ford assembly workers displays much greater variability since adjustments are generally made through three-year cycles of collective bargaining (with some longer-term agreements). The more latest addition of profit sharing has smoothed out some of the variability, but the main story is that the rate of switch in auto industry wages continued to track the rate of switch in productivity for two extra decades after the break from the AIF formula. It was not until the 2000s that the rate of switch went vapid in this industry.
There are already indications that stagnant hourly wages will be an issue in the auto industry’s two thousand fifteen negotiations. There are also indications that efforts will be made to connect this issue with executive compensation. These are sophisticated issues, and some aspects of them are beyond the scope of labor negotiations. Even issues that are within the scope will be challenging to resolve. For example, the entry wage has directly led to job growth among U.S. automakers that was either slated for suppliers or for other countries, such as Mexico. As noted previously, an estimated Legal,000 fresh jobs have been created within Ford through fresh work and extra shifts in a number of domestic plants. As such, the issues surrounding pay become intertwined with issues pertaining to job creation.
Ultimately, the challenge facing the auto industry, the U.S. economy, and the global economy more broadly is finding a way to ensure a continued linkage inbetween pay and productivity—so that purchasing power proceeds to keep rhythm with the generation of products and services.
Myths and realities regarding labor costs and work rules
Two often-misunderstood facets of the U.S. auto industry are labor costs and work rules. While these issues are often at the core of criticisms of the U.S. auto industry, they are not the stagnant haul on the industry that they are typically seen to be. Moreover, there are other competitive factors—such as product mix, product quality, supply chain spectacle, and enterprise business strategy—that are far more significant to the fortunes of the industry.
The role of labor costs and work rules
Direct labor costs (for hourly and salaried workers) represent approximately 18–20 percent of the total costs of an automotive enterprise (with hourly workers accounting for approximately half that amount). Most of the total costs are associated with purchased parts, energy, research and design, warranty, overhead, and other factors. Indeed, Helper and MacDuffie (2008) place the cost of purchased parts at seventy percent of total costs. Additionally, work rule plasticity has been enhancing through pilot experiments since the introduction of the mutual growth forums in 1982, with major gains over the last decade-and-a-half as the industry has moved more systematically to team-based work systems.
Far more consequential than labor costs or work rules are strategic choices, such as Ford’s decision to purchase fresh brands in the 1990s and early 2000s (Volvo, Land Rover, Jaguar, Aston Martin) and to undertake share buybacks, rather than reinvesting in domestic operations. In 2006, as the market was collapsing, Ford permitted the UAW to select a financial experienced to conduct a detailed review of the business so that there would be total transparency on the extent of the crisis the company faced. This individual, Eric Perkins, who would later be named research director for the UAW, recalls the briefings to the union membership he provided based on his findings:
I told the membership that the company was in terrible form. They should prepare for the worst. There were nimble assets shops only running one product. Money had been wasted on share buybacks and special dividends, rather than investment in fresh products. Purchased component costs (two-thirds of vehicle costs) were harshly $Two,000 higher for Ford than for Toyota and maybe a thousand higher than they were at GM on equivalent vehicles, primarily because of lousy volume predictions at the time of product approval.
There was too much complexity in the design. Their time to market was two to three years longer than the Japanese and one year longer than GM. Ford had generated many innovative products such as the Explorer and the Expedition, but the success covered up underlying problems. Further, most of the Big three market share loss since two thousand one had been at Ford, and this included the very profitable products such as Explorers, Expeditions, and even pickups—product segments Ford had once predominated. I said this company is on the edge of bankruptcy and they needed to make a radical transformation. Purchasing and design accounted for more of the problem than labor. I said that however we were only twenty percent of the problem, every penny counted. Many UAW members possessed stock and identified with Ford. People thought of themselves as working for a excellent company—so it was a difficult message to produce. (Cutcher-Gershenfeld, Brooks, and Mulloy 2015, 43)
As the quote indicates, business strategy is much more salient to the fortunes of the industry than labor costs or work rules. Yet in 2008, the Wall Street Journal still laid all the problems of the industry on the doorstep of employee benefits and UAW work rules, writing in a December one editorial:
Consider labor costs. Take-home wages at the U.S. car makers average $28.42 an hour, according to the Center for Automotive Research. That’s on par with $26 at Toyota, $24 at Honda and $21 at Hyundai. But include benefits, and the picture switches. Hourly labor costs are $44.20 on average for the non-Detroit producers, in line with most manufacturing jobs, but are $73.21 for Detroit.
This $29 cost gap reflects the way Big Three management and unions have conspired to make themselves uncompetitive – increasingly so as their market share has collapsed. . . .
The absence of the UAW also gives [transplant] car producers the plasticity to deploy employees as needed. Work rules vary across company and plant, but foreign rules are generally less limitary. At Detroit’s plants, electricians or mechanics tend to perform certain narrow tasks and often sit idle. That infrequently happens outside Michigan. In the nonunionized plants, makeshift workers can also be hired, and let go, as market conditions dictate.
The editorial did point to some UAW locations—such as the GM–Toyota Fresh United Motors, Inc., joint venture in Fremont, California (NUMMI)—as exceptions, but it failed to take into account the VEBA negotiated in two thousand seven and the progress with team-based work systems that preceded the collapse of the market and that continued even in the face of the departure of approximately half of the workforce. Moreover, the legacy pension and health care costs were not the product of what the Wall Street Journal editorial termed “a conspiracy to be uncompetitive.” Instead, they were the product of business success and a determination to share the gains across numerous generations of the workforce.
The evolution of fringe benefits
The health care and pension benefits provided by U.S. automakers are an significant mechanism for broadly sharing companies’ prosperity, and for ensuring that the automakers uphold their end of the social contract. The provision of what became termed “fringe benefits” emerged during World War II under the National War Labor Board as an alternative to wage increases, which were constrained by national wage and price controls.6 Following the war, in the 1950s, the UAW pressed unsuccessfully for national health care legislation. The company-provided health benefits represented what the union eyed as an acceptable but less-preferred alternative, which began with active worker coverage and was later extended to retirees.
At various times when national health care arrangements have been debated in the United States, the domestic auto companies have been largely silent, but privately supportive of policies that would level the playing field vis-à-vis foreign competitors by lowering the companies’ benefit costs. Indeed, a two thousand three Fresh York Times articled indicated that Ford Chairman and CEO William Clay Ford Jr. “said that a national health care system, in some form, could help level the playing field with Japanese and European competitors based in countries with national health systems” (Hakim 2003). His comments were partly in response to a criticism of the domestic auto companies as “H.M.O.s on wheels.” Because the domestic firms didn’t have to cover health care costs in Canada, for example, this provided a cost advantage for some production to be shifted to Canada at various times during the past four decades.
When transplant facilities arrived in the United States they also suggested company-provided health benefits for active workers, but did not primarily have retirement-eligible workers for whom pension or health care benefits would be needed. In addition, some have shifted from defined benefit to defined contribution 401(k) pension plans, and some have eliminated retiree healthcare benefits. Note, however, that BMW in South Carolina does still have a defined benefit pension plan, and others do contribute cash into the defined contribution plans. Perhaps a more significant factor is the use of improvised workers, with lower wages and lower benefit costs. For example, as much as twenty percent of the Toyota workforce is made up of makeshift workers.
The evolution of work rules
Cost issues loom large in the daily operations of all auto plants. Most plants operate with what are termed “labor and overhead” budgets in which hourly and salaried labor accounts for around eighty percent of the operating budget (since purchased parts, warranty, research and development, and other costs are not considered “within the four walls” of a plant budget). Thus, for a plant manager, labor costs are a major portion of the budget they manage—particularly since each year these managers are faced with a cost-cutting “task” to be accomplished through efficiencies and diminished head count. The primary method of meeting the task is through efficiency improvements. Thus, work rules have historically been contested terrain—where management has an incentive to speed up operations and workers have an incentive to avoid work intensification. The rise of team-based work systems and continuous improvement implements and methods (discussed more fully below) has helped to shift a historically contentious issue into an area of mutual growth.
In the face of enlargened market volatility, there has been mutual interest in developing work rules that permit for more modular and more limber forms of production.7 Two decades ago, it would have been considered an significant accomplishment to have two or three products built on the same platform and the same assembly line. Today, there are a number of plants that can produce as many as six distinct products on the same assembly line—allowing for much more pliable responses to variation in product request (without as many complications due to established physical infrastructure). This has, of course, required enlargened plasticity within teams for training and work assignments, which the UAW has supported. In latest years, there have also been experiments with different forms of skilled trades teams, including what is termed “line-side deployment” (having various trades stationed on the side of the production line rather than in a separate contraption room). Ford’s Powertrain Plant of the Future initiative is an example of the substantial increases in uptime that can result from these models (Cutcher-Gershenfeld, Brooks, and Mulloy 2015, 151).
Further, the volatility of the markets means that labor costs can be very consequential during a downturn. This goes beyond work rules. Given the large motionless capital investment, a major drop in volume quickly erodes any profit margins and requires attention to the two primary variable costs—labor (hourly and salaried) and purchased parts. There are penalties in both cases to a reduction in spending, so the adjustments are costly. With suppliers, the purchase agreements are premised on predicted volumes, with extra costs imposed when those volumes are not achieved (and often with collective savings when gains exceed what was anticipated in the contract). With the workforce, the original assurances of job security in exchange for contributions to continuous improvement (discussed further in a later section) have been relaxed, but the mutual commitment to cushioning the gargle for displaced workers is a cost, albeit one that benefits the rest of society.
The role of collective bargaining
What is perhaps most significant in understanding labor costs and union work rules is that both are a product of collective bargaining. Agreements are reached through the give and take of negotiations. Historically, auto negotiations are very structured events, involving hundreds of union and management representatives serving on twenty or more subcommittees addressing issues such as quality, safety, sourcing, and other matters. Overall agreements on wages and benefits are made at the “main table,” which is also where the work in the subcommittees is reviewed and final agreements are reached. Importantly, the auto industry provides a vivid example of how this very structured process can adjust in a crisis.
In the two thousand seven UAW–Ford negotiations, the parties engaged in a “bargaining over how to bargain” process in which they redesigned the way they negotiated to emphasize problem solving (Cutcher-Gershenfeld 2011). For each subcommittee a multistep process was developed that included the following steps:
- Developing a collective vision for success
- Jointly collecting data
- Analyzing underlying interests
- Brainstorming options
- Identifying potential language/elements of agreements (as suitable)
- Anticipating implementation, including recommended communication and training
With periodic calibration at the main table, this process guided negotiators in developing a collective vision for success on their subcommittee topic. It also provided them with data, an analysis of underlying interests, and a brainstorming of options before the actual negotiations began. While the bargaining at General Motors and Chrysler was not restructured to the same degree, the two thousand seven negotiations with these companies were also characterized by a high degree of problem solving. As noted earlier, the two thousand seven negotiations generated the establishment of a VEBA that was funded to take over responsibility for retiree health care. The VEBA took an enormous liability off the U.S. auto companies’ books. Along with improvements in vehicle margins, diminished warranty costs, and other developments, the influence on Ford is evident in Figure D, which shows that the company’s credit rating began improving at the actual launch of the VEBA in two thousand ten and, by 2013, had moved back into the investment-grade range.
Standard and Poor’s issuer rating for the Ford Motor Company, 2000–2013
Source: Reproduced from Cutcher-Gershenfeld, Brooks, and Mulloy (2015)
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This is just one example of labor and management using collective bargaining to reach agreements with transformative influence, not just to make incremental adjustments in wages, benefits, and working conditions.
Factors shaping the industry in latest decades: Transplants, shifting geography, and supplier relations
In the last two decades, the U.S. auto industry has been shaped by globalization and the associated arrival of transplants. These coerces have caused the geography of the U.S. auto industry to go through a dramatic transformation. They have also had significant effects on the wages and benefits of the domestic auto manufacturers and on their supply chains.
The arrival of transplants and shifting industry geography
The one thousand nine hundred ninety four North American Free Trade Agreement (NAFTA) accelerated the growth of auto component production and auto assembly plants in Mexico (and to some degree, Canada). Political and market pressure on Japanese and European (and later, Korean) manufacturers to reduce imports to the United States has led to a rising number of “transplants” supplying auto components and assembling autos.
Originally, the transplants operated in the Midwest, including assembly plants in Illinois (Mitsubishi), Michigan (Mazda), Ohio (Honda), and Pennsylvania (Volkswagen), along with California (Toyota’s joint venture with General Motors, now a Tesla facility). More recently, however, the growth has been in Southern states, including assembly plants in Alabama (Honda, Hyundai, and Mercedes-Benz), Georgia (Kia), Kentucky (Toyota), Mississippi (Nissan and Toyota), South Carolina (BMW and Mercedes-Benz), Tennessee (Nissan and Volkswagen), and Texas (Toyota). In Mexico there are current and planned assembly operations for Audi, BMW, Chrysler/Fiat, Ford, General Motors, Honda, Kia, Mercedes-Benz, Nissan, Porsche, Peugeot, Renault, and Volkswagen. In Canada, there are assembly plants for Chrysler/Fiat, Ford, General Motors, Honda, Suzuki (a joint venture with General Motors), and Toyota—a much smaller mix of manufacturers compared with Mexico.
In addition to the transplant assembly plants, there are a large number of transplant suppliers. Even tho’ Ford did not seek the same bailout as did General Motors and Chrysler, it fully supported government intervention since a failure of either of its major competitors would have had devastating impacts on the supply chain, which would have affected all firms (even the transplants). (Indeed, scholars have seen the government intervention as a de facto regional industrial policy on the part of the U.S. government [Klier and Rubenstein 2011]).
As a result of these trends, the geography of the auto industry is no longer almost as concentrated in the Midwest as it once was. The trend for overall motor vehicle manufacturing employment (original equipment manufacturers and parts suppliers) is introduced in Figure E (which was developed with a concentrate on Tennessee, a state that has been in the public spotlight due to intense political opposition to a UAW organizing drive at the Volkswagen plant in Chattanooga). As Figure E illustrates, the greatest growth has been in Mexico, with the greatest loss of employment in the Midwest, the United States outside of the South and the Midwest, and Canada.
North American motor vehicle manufacturing employment, by country and U.S. region, 1994–2012
Source: Reproduced from Brookings Institution (2013)
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Against these larger geographic trends it is noteworthy that the 2007, 2009, and two thousand eleven negotiations all involved dialogue and agreements about jobs to be maintained in the United States. In some cases, jobs targeted for Mexico were instead located in domestic plants. Thus, albeit the direction of the trends is clear, the trends are not immutable.
Transplants’ effects on the Big Three’s wages and benefits
The arrival of the transplants has resulted in a gap inbetween the compensation of the domestic manufacturers and that of transplants, as almost all transplants are non-union and located in lower-wage locations—undermining the original aim of the UAW to take wages out of competition. The gap is not just a product of lower base wages, but is also due to the absence of retiree pension and retiree healthcare costs for the newer organizations. In 2005, there was a gap of $Three.62 inbetween the average hourly wage of $27.41 at Ford and $23.79 for the transplants. When fringe benefits, legally required payments, pension benefits, retiree health care, and other post-employment labor costs are added in, the gap grew to $20.55 ($64.88 versus $44.33).
During the government bailout negotiations in 2009, the U.S. government pressured the UAW to agree to what it termed competitive wages, competitive benefits, and competitive work rules, and to convert fifty percent of the VEBA to equity. Albeit the union did agree to a improvised shift in compensation from an annual wage increase to annual lump sums (among other adjustments), it was able to forestall deeper cuts. In 2010, following the two thousand seven introduction of the entry wage and concessions made during the two thousand nine government bailout, the wage gap stood at $Four ($28 for Ford versus $24 for the transplants), and the gap when including fringe benefits and post-employment costs stood at $6 ($58 for Ford versus $52 for the transplants). In retrospect, given the current profitability of the industry, it is clear that deeper wage cuts were not needed to enable the industry’s recovery. In this case, the collective bargaining process generated sufficient concessions to get through the crisis, but preserved what are considered good middle-class jobs to a much greater degree than would have occurred through unilateral act by management or government.
The gap in post-retirement costs inbetween the domestic manufacturers and the transplants is closing due to the VEBA, joint healthcare initiatives inbetween the UAW and the domestic manufacturers, and rising costs for the transplants. Among the transplants, four (BMW, Honda, Subaru, and Toyota) provide PPO health care through age sixty five with varying degrees of premium sharing (Honda is at one hundred percent versus Toyota at fifty percent, for example). These companies also make contributions to healthcare retirement accounts (HRAs) based on service. Nissan offers an account-based health plan with premium sharing up to age 65, but has cut off the HRA for those hired after two thousand six (presumably due to concerns with rising costs). Others (Hyundai, Kia, Mercedes, and Volkswagen) do not suggest any post-retirement healthcare coverage. In this context, the VEBA is a competitive advantage in that it permits the UAW-represented workforce to have high quality healthcare coverage in retirement without imposing extra costs on the balance sheets of the domestic manufacturers.
Shifts in supply chains
The larger trends related to transplants and shifting industry geography obscure a number of extra shifts in the supply chains. Very first, in the late 1990s and early 2000s, there was a stir by all three of the major U.S. original equipment manufacturers to outsource many aspects of component design to suppliers. This was seen as a cost-saving stir, with the companies focusing on what they termed their “core” business. This strategy proved problematic, however, as key skill within the OEMs on the component designs dissipated, reducing the capability to oversee the work. As costs and warranty issues with component parts began to climb on, the OEMs have begun to bring more engineering and design work in-house.
Moreover, there has been a major shift in the way the domestic auto industry interacts with suppliers. Historically, the Big Three would pit suppliers against one another in competitive bidding processes and treatment ongoing relations from a low-trust, high-control perspective. Annual surveys by Planning Perspectives, Inc. calculate a Working Relations Index, based on a supplier’s rankings of its automaker customers. As shown in Figure F, from two thousand two to 2008, on a scale from zero to five hundred (where 0–250 indicates poor supplier relations and 350–500 indicates very good supplier relations), the range of scores for Toyota was three hundred fourteen to 415, and the range for Honda was two hundred ninety seven to 384. In contrast, the range for GM was one hundred fourteen to 174, Ford’s range was one hundred fifty seven to 191, and Chrysler’s range was one hundred sixty one to 218. As Figure F indicates, however, the story since two thousand eight has been one of overall improvement by all three domestic manufacturers, as well as some decline among the major transplant manufacturers.
Original equipment manufacturer–supplier working relations index, by automaker, 2002–2014
Source: Reproduced from Planning Perspectives (2014)
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Switching the underlying treatment to supplier relations is just one aspect of a broader set of cultural shifts happening in the auto industry. As is discussed more fully in the following section, these are rooted in the rise of knowledge-driven work systems that employ lean/Six Sigma principles, and in the influence of fresh technologies. Front-line hourly workers responsible for quality, for example, are increasingly expanding the scope of their work to include supplier visits and even technical assistance with suppliers on the use of quality-focused operating procedures. In the more dynamic marketplace, the interdependencies among manufacturers and suppliers are growing.
With the enlargened importance of digital technology in cars there are fresh challenges in the supply chain. Key technology suppliers, such as Microsoft and Google, are not well-attuned to a business context where the reboot of a computer or a need for a software upgrade counts as one “thing gone wrong” in the J.D. Power quality standards. Thus, bringing fresh technology features to the customer, such as GM’s OnStar and Ford’s Sync, has contributed to a reversal in quality spectacle since 2010. Of course, maintaining constancy of purpose with regard to quality—both at the OEMs and among all the suppliers (not just the technology suppliers)—is a never-ending challenge for the industry.
Knowledge-driven work, lean/Six Sigma systems, and fresh technology
To understand the auto industry in the 21st century, it is crucial to consider how fresh technologies and systems to achieve quality and efficiency improvements are challenging the industry’s core operating assumptions.
The auto industry is the archetypical industry of the industrial revolution. In some of the social sciences, the mass production model is still referred to as “Fordism.” Interestingly, the rise of lean principles (such as just-in-time delivery of parts, value stream mapping, continuous improvement suggestion systems, preventative and predictive maintenance, and error proofing) also has roots in the auto industry, building on the Toyota production system. What is not widely appreciated, however, is the degree to which lean principles have a deeply embedded operating assumption centered on the value of distributed skill across the workforce (Murman et al. 2002; Cutcher-Gershenfeld et al. 1998). Organizations that just attempt to apply lean production implements, but that don’t wrestle with this core assumption, will have limited success. While the Six Sigma principles (such as reducing variance before improving a system, identifying spectacle relative to “opportunities” for errors, and process-improvement projects) emerged very first at Motorola and then were popularized at GE (both outside of the auto industry), they have come to be integrated with lean principles and depend identically on valuing distributed skill.
The quotes in the prologue illustrate just how difficult it is to shift operating assumptions about front-line skill. The very first pivotal event in shifting these assumptions involved the combination of an embrace of what was termed “employee involvement” and the mutual growth forums, both of which emerged in the late 1970s and early 1980s. At the time, there was an understanding that an enlargened degree of job security was needed in exchange for a commitment from the workforce to share ideas about improving efficiency.
The initial concentrate on employee involvement was aimed not at improving companies’ bottom lines, but at addressing what were termed “blue dog collar blues”—worker alienation on the job. The publication of the book The Machine That Switched the World in one thousand nine hundred ninety one brought the features of the Toyota Production System and what the authors and associated researchers termed “lean production” to a broad audience (Roos, Womack, and Jones 1991; Krafcik 1986). Within the U.S. auto industry the very first exposure to these principles, such as at the GM–Toyota Fresh United Motor Manufacturing, Inc. (NUMMI) joint venture, resulted in more piecemeal rather than systematic learning on the part of the U.S. manufacturers. This was ironic since the lean production systems involve deeply integrated organizational learning principles. Still, the results from the NUMMI case could not simply be dismissed. As Paul Adler (1992) notes from his analysis of the case:
The NUMMI case presents a number of particularly interesting features. Very first, the plant’s design and operating philosophy were a very close copy of Toyota’s Takaoka plant in Japan. Kamata (1983) had given a harrowing account of his practice of exploitation and alienation as a makeshift worker at Toyota City. Observers have thus been antsy to learn how U.S. workers would react to the intense discipline for which Toyota is renowned. 2nd, 85% of the workers hired by the fresh company were former employees of the GM-Fremont facility that NUMMI took over, and the United Auto Workers (UAW) continued to represent them. The GM-Fremont plant had an abysmal record of productivity, quality and labor strife. When it closed in 1982, there were over seven hundred outstanding grievances, and absenteeism was running at approximately 25%. Its productivity and quality were among the worst in the entire GM system. . .
Within two years of start-up, the fresh plant had become the most productive auto assembly plant in the U.S. and the quality of the plant’s principal product, the Nova, was ranked by consumers and internal GM audits in the highest category among domestic and foreign cars. Moreover, worker morale seemed high: in the very first four years of operation, only some thirty grievances had been filed, of which only three had gone to arbitration; absenteeism averaged Two.5%; personnel turnover averaged inbetween 6% and 8%; and over 70% of the workers annually participated in the suggestion program, contributing on average approximately six suggestions per employee. Over the more latest years, the plant has sustained these exceptional levels of business and personnel management spectacle.
The domestic auto firms have varied in the speed with which they have learned the lessons from the Toyota production system, particularly from the adapted version in the U.S. context at NUMMI. We document a number of false starts in the Ford–UAW case, and others have documented the same dynamics in the GM–UAW case (Rubinstein and Kochan 2001). Even however the learning could have been quicker, particularly during the 1990s when the lessons were increasingly clear, significant progress has been made via the 2000s. Today, lean and closely related Six Sigma principles are pervasive in the industry. A key lesson from our analysis of the Ford–UAW transformation is that these principles challenged deeply embedded operating assumptions.8 Surfacing operating assumptions is hard to do; switching them is even tighter.
Certain operating assumptions pertaining to management evolved to incorporate lean and Six Sigma principles. For example, the assumption that quality and safety should be driven by inspection shifted to the assumption that they should be driven by prevention. Shifting that assumption required enlargened communication and coordination inbetween fresh product development and manufacturing (based on “design for assembly” and related principles), training of leaders and workers in a non-blaming treatment to tracking and learning from “near misses,” and innumerable other switches in quality and safety operating procedures. A similar set of switches in operating assumptions involved setting aside the treatment dating back to Frederick Taylor (1914) that put the design of work and the larger enterprise in the mitts of experienced engineers and managers, substituting instead the assumption of quality experienced W. Edwards Deming (1986) that it was significant to “[p]ut everybody in the company to work to accomplish the transformation. The transformation is everybody’s job.” At its root, this is a shift from what Douglas McGregor (1960) termed a “Theory X” assumption that people need to be monitored and managed on the job, to a “Theory Y” assumption that people want to do a good job, and the concentrate should be on providing them with the implements and resources to do the best job they can.
For the UAW, the shift in operating assumptions is still ongoing and no less central to its operations. Historically, unions have derived power from the threat of withholding labor. However, there is a shift underway whereby the UAW is learning to derive power by enabling work (Cutcher-Gershenfeld, Brooks, and Mulloy 2015, 335). This is evident in the expertise the union now brings to discussions of quality, safety, predictive and preventative maintenance, workforce development, team-based operations, and other such topics. This is challenging internally for the union—it is a very centralized organization and, like management, it has had to increase its appreciation for distributed front-line expertise, and demonstrate plasticity in response to this diffusion of expertise. This is most evident with the individuals who are in what are termed “appointed roles” (rather than elected roles) in local unions. Appointees are designated to oversee quality, safety, training, and other such domains, as well as to pack roles such as Six Sigma black belts. As these individuals become subject matter experts, they must still honor and respect the primacy of the elected leaders—that is the heart of the union’s identity—but their skill must also be given weight in ways that switch how a local or international union operates. At the root of this shift is an expansion of the domains in which the union is able to react in a “pull” style, using distributed skill to advance the interests of its members. Other service organizations are facing similar challenges to their operating assumptions, whether in health care, human services, or other related domains.
Some switches in operating assumptions were not as widely documented in the management literature, but were also pivotal. In the Ford–UAW case, these included a shift in the safety operating system from focusing identically on all safety incidents, to a special concentrate on what were termed “low frequency, high consequence events.” These include lacerations, amputations, and, in a few instances, deaths. Labor and management learned that the practices required for preventing the low frequency, high consequence events were not the same as for other aspects of safety prevention. Similarly, a number of switches in operating assumptions about training and development were needed. Instead of assuming that training should be provided by trainers through formal training events with a comprehensive curriculum, the assumption shifted to organizing training around single-point lessons delivered when needed by supervisors with access to instructor guides—an assumption of leaders as teachers and learning being delivered on a “pull” basis rather than a “push” basis (Cutcher-Gershenfeld, Brooks, and Mulloy 2015, 298).
Even less visible within management was a shift in operating assumptions about the treating of bad news. Traditionally, leaders in the Ford culture assumed that problems within their domain were their responsibility to solve. As such, problems with a fresh product launch, for example, would only be collective with other leaders if it was evident that they could not be contained and resolved. When Alan Mulally joined Ford as CEO, he sought to switch this assumption through weekly Business Plan Review (BPR) meetings for all managers, with Special Attention Review (SAR) sessions to go after up on problems that were identified. For the very first few months of these meetings, the managers were careful to only present status reports that were color-coded as “green” or “yellow,” with no one daring to break the norm of treating problems internally by putting up a status of “red.” The pivot happened when the company’s then–president of the Americas, Mark Fields (now CEO), indicated that a product launch for which he was responsible was “red,” that is, in trouble on quality and cost. Mulally’s response was to embrace the problem and enlist everyone’s help in resolving it, rather than to react with blame, as was typical in the company’s culture. As the vice presidents and directors of manufacturing each set up BPR and SAR processes within their domains, the shift in this embedded operating assumption began to permeate the organization (Cutcher-Gershenfeld, Brooks, and Mulloy 2015, 103).
Looking to the future, there are even more deeply embedded operating assumptions associated with the accelerating rhythm of switch in technology. This is visible in manufacturing operations—where many of the most challenging jobs on the assembly line (such as the installation of windshields or the painting of vehicles) are now entirely treated by robots—and in engineering design, where the entire process utilizes computer-aided design (CAD) processes that directly translate into simulation models and manufacturing specifications. But the role of technology goes much further. A car may have approximately Ten,000 component parts, but software’s role in the functioning of all of these parts is now pervasive in every aspect of the vehicle’s operation. Recently, for example, General Motors enhanced its staff of software engineers from 1,400 to 8,000 (Bennett 2015). This expansion wasn’t undertaken with a concentrate only on vehicle design; the expanded internal capability enabled the development of an improved customer direct ordering system for GM. Similarly, Tesla’s decision to build a large-scale battery facility, what it calls a “gigafactory,” in Nevada represents a strategic choice to not only be more of a vertically integrated enterprise, but to also set technology standards for batteries more broadly in the industry by supplying batteries to other companies (Ramsey 2014). Moreover, as Ford Chairman Bill Ford comments:
The chance and challenge looking ahead is that switches are coming like we have never seen. Self-driving vehicles are coming. Vehicles will be connected to the cloud. We will be transitioning into being a technology company as a result. (Cutcher-Gershenfeld, Brooks, and Mulloy 2015, 243)
Thus, an appreciation of the auto industry today and in the future is inextricably entwined with the advances of technology.
Conclusion
The auto industry is converting from the archetypical mass production industry to a knowledge-driven, technology-infused industry with enterprises committed to providing transportation solutions for the 21st century. Nevertheless, most policymakers and outside observers still make simplistic assumptions about the U.S. auto industry, viewing it as uncompetitive and badly lagging foreign rivals. The aim of this report has been to provide a few very accessible windows into the industry and its operations to motivate a rethinking by outside observers and to prompt fresh ideas for policy and practice.
Simple-minded characterizations of the industry’s challenges as being a product of high wages or union work rules miss the mark in numerous ways. The gap inbetween union and non-union competitors in the domestic industry has been largest around post-employment legacy benefit costs. This was originally an artifact of the non-union transplants being newer organizations with few retirees, and is now also a reflection of the establishment of the VEBAs, as well as transplants’ higher usage of makeshift workers. Not only is the competitive situation switching over time, but the UAW has worked with management at the Big Three in establishing a VEBA, which has addressed a major portion (and the most rapidly growing part) of this cost differential. And far from union work rules being a barrier, the union has been a utter fucking partner for more than a decade in experimenting with innovations in work organization.
More consequential for the industry, in the brief run, are the challenges of coping with swings in the marketplace. This is already driving enlargened team plasticity in operations, innovation in managing voluntary departures, enlargened attention to supplier relations, and a budge to modular product platforms. In the long run the challenges are even greater as fresh technologies permeate vehicles and the broader enterprise.
As labor and management in the domestic industry prepare for two thousand fifteen collective bargaining, a key question will be the degree to which the parties are able to address short-term issues around wages, hours, and working conditions—as well as the degree to which they use collective bargaining as a forum to lay the groundwork for jointly facing the challenges that lie ahead.
About the authors
Joel Cutcher-Gershenfeld is professor (and former dean) in the School of Labor and Employment Relations at the University of Illinois, Urbana–Champaign, and freshly appointed as professor at Brandeis’ Heller School of Social Policy and Management (beginning January 2016). He is an experienced on workplace innovation and served as a consultant to the UAW and Ford for over two decades.
Dan Brooks served as a union leader with the UAW for thirty five years, rising from local elected positions to co-lead many of the national UAW–Ford joint programs.
Martin Mulloy rose in management over thirty four years to serve as Ford’s Vice President for Global Labor Affairs. He is the two thousand fifteen president of the Labor and Employment Relations Association.
Endnotes
1. The VEBA was the largest contributor to closing the gap ($17), but other factors contributed, including the later elimination of cost-of-living adjustments, lump-sum wage payments, the elimination of what were termed job banks, and the rising costs of the transplants’ utter fringed costs from $47 to $55. By two thousand fourteen it was just a $6 gap. At the time the CEOs testified before Congress, the gap was around $10–12.
Two. The pivotal events in the book are introduced in the present progressive tense, as however you were there at the time (however with quotes from people we interviewed looking back on the event). Here we draw on some of the same material, but we present them in the past tense.
Trio. The Center for Automotive Research reports that “over 1.7 million people are employed by the auto industry. In addition, the industry is a enormous consumer of goods and services from many other sectors and contributes to a net employment influence in the U.S. economy of almost eight million jobs. Approximately Four.Five percent of all U.S. jobs are supported by the strong presence of the auto industry in the U.S. economy. People in these jobs collectively earn over $500 billion annually in compensation and generate more than $70 billion in tax revenues” (Hill, Menk, and Cooper 2010).
Four. The decade preceding the period covered in Figure A includes the very first oil shock of 1973–1974, which was also very consequential.
Five. There is a well-established literature around what was very first termed “institutional isomorphism,” which refers to the way institutional practices tend to look alike, without necessarily reflecting functional differences that would be expected to generate a greater degree of variation. See DiMaggio and Powell 1983. Cracking from such traditions does stand out—consider the attention that Netflix has received for its treatment to severance payments not just in a crisis, but as part of its regular operations. See McCord 2014.
6. The actual term for these benefits is reportedly a product of a meeting of the War Labor Board where they were discussing what to call these extra benefits that were being negotiated. The Broadway play Oklahoma! was popular at the time, and someone in the meeting was evidently humming the tune “Surrey with a Fringe on Top” when someone suggested that they be called “fringe benefits.”
7. See, for example, Muffatto and Roveda 2002; and Simpson, Siddique, and Jiao 2006.
8. This draws on Edgar Schein’s notion of the deeply embedded assumptions in an organization’s culture. See Schein 1990.
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The Decline and Resurgence of the U
The Decline and Resurgence of the U.S. Auto Industry
Introduction and executive summary
Over the past thirty years the U.S. auto industry has faced numerous existential crises, illustrating both the cost of lost opportunities and the power of innovation as the archetypical industrial enterprise adapts to a post-industrial skill economy.
Most policymakers and outside observers still make simplistic assumptions about labor and management in the auto industry, assuming, for example, that the industry’s problems can be alleviated just by reducing labor costs and calming union work rules. In contrast, the overarching purpose of this report is to present a series of windows into the industry that convey its complexity, and that make clear the limitations of simplistic assumptions about labor and management. In particular, this paper aims to develop a deeper appreciation of the industry’s problems and of the sources of resilience in the industry, which include management leadership, union partnership, and front-line workforce teamwork.
A more holistic understanding of the industry is significant since its footprint accounts for an estimated one in every twenty two U.S. jobs—and because the lessons are relevant to other industries facing transformational challenges. To increase understanding and appreciation of the strategic dynamics facing the industry, we suggest a comparison of the industry’s responses to two major recessions (the early 1980s recession and the Superb Recession); a look at the relationship inbetween productivity and compensation; a specific concentrate on labor costs and work rules; an examination of the geography of the industry, including the role of what are termed “transplants” (foreign-owned assembly and supplier facilities); and a consideration of how fresh technologies and systems to achieve quality and efficiency improvements are challenging core operating assumptions.
A number of themes emerge:
- The U.S. auto industry has been revitalized in latest years through a commitment to quality, innovative production and management technologies, a constructive relationship inbetween management and labor, and improved relations with suppliers.
- As an example of the industry’s latest success, Ford liked profits of $6.Two billion in 2011, $7.Two billion in 2012, $8.Trio billion in 2013, and $6.9 billion in 2014. As a result, the company’s workers received profit sharing checks of $6,200 for 2011, $8,300 for 2012, $8,800 for 2013, and $6,900 for 2014.
Prologue
The two thousand three national negotiations inbetween UAW and Ford were not, in most respects, pivotal. Embedded in the negotiations, however, were two signals of the transformational switch that is a concentrate of this report.
Most of the two thousand three negotiations involved traditional bargaining, continuing a longstanding practice of trading incremental gains in wages and benefits for labor peace and union/worker participation in joint programs on safety, quality, work-life balance, and other matters. The two transformational signals were largely invisible to policymakers and the general public.
Very first, the quality subcommittee (one of over twenty subcommittees in the negotiations) utilized an interest-based, problem-solving treatment to bargaining and generated an innovative agreement to have hourly workers designated as Quality Operating System Coordinators (QOSCs) in key areas of all the plants, taking responsibility for driving standardized work processes and joining with team leaders to generate continuous improvement suggestions from work teams. This harnessing of front-line skill in the early 2000s was pivotal to Ford’s progress from near last in quality to best-in-class by 2010.
2nd, the union proposed that hourly workers also be permitted to earn what is termed a “black belt” in lean/Six Sigma principles. Earning a black belt involves completing required coursework in statistical process control and related matters, as well as leading a major process improvement project through the stages of Define, Measure, Analyze, Improve, and Control (DMAIC), typically generating savings of hundreds of thousands of dollars up to a million dollars. Ford’s vice president of quality at the time could not conceive how an hourly worker could lead a switch initiative on this scale, which would have entailed directing the work of the associated engineers and managers. The proposal was rejected.
Rapid forward to 2008, when the results of front-line engagement were increasingly evident. Even with 50,000 workers taking severance packages to depart from the company during the downturn, quality made year-over-year improvements. The UAW again raised the idea of hourly black belts, and this time Ford leadership agreed to support an initial cohort of thirty five hourly workers coming in training to earn a lean/Six Sigma black belt.
Armentha Youthfull is a UAW member in the Dearborn Truck Plant and a QOSC who was part of the very first graduating class of black belts in 2010. Reflecting on the two years of training for this very first cohort of trainees, she said:
No longer were we management and employee, we were team members pursuing the same objective. This practice doesn’t eliminate the notion of salaried versus hourly, but for me personally it demonstrated how much more we as an organization can achieve when titles, classifications, and separation aren’t the central concentrate. (Cutcher-Gershenfeld, Brooks, and Mulloy 2015, 147)
Back on the job, she describes the influence of the training:
I am able to problem solve [and] coach team leaders. It is not just the statistical part; it is the basic DMAIC process for scoping problems and getting to root causes.
Youthfull further comments on the role of front-line skill:
Company successes are not just due to the minds of the people at the top who are being paid all the money, but the minds of people at the bottom. This is not a false empowerment but truly and genuinely acknowledging that we have each chosen our part of the job and both are part of success. . . . People are loyal to the company—there has to be respect and loyalty because we are all providing our best and it doesn’t matter where you are in the structure.
In reflecting on the practice, she adds that there are still cultural barriers in the minds of some:
Black belt training has empowered me. People in management do respect you more. Some didn’t believe a person without a statistics background could pass. When I did pass, some begrudgingly shook my forearm. You could see it in their faces: they were amazed. I thought, “You’ve got to be kidding me.” They were, like, “Oh my god, she passed and did it on the very first time.”
The comment is a little insulting—there are slew of people who could do this. People have abilities that managers don’t know anything about. One should never be convenient making an assumption about another person’s skill set or talents simply by their classification, association with a group, or a particular organization and/or appearance. (Cutcher-Gershenfeld, Brooks, and Mulloy 2015, 53)
As is evident from this last quote, despite considerable progress in valuing the distributed skill of the utter workforce, there were still deeply embedded assumptions that had not fully switched. At the same time, the very existence of hourly employees with black belts speaks of many deeply embedded assumptions that have switched.
We share this story for three reasons. Very first, it is illustrative of a long-term transformation that has delivered results and switched lives. The QOSCs and black belts are just two of many pivotal examples that break from common stereotypes about the auto industry.
2nd, it highlights the auto industry’s capacity for resurgence. When Congress and the Obama administration were debating a bailout of the auto industry, it was seen as troubled in ways comparable to the financial sector. Industry leaders were berated for flying corporate jets to testify before Congress (Wutkoski 2008). The congressional representatives’ questions exposed just how little they knew about this industry and the roles of labor and management in working to convert quality, safety, and other operational aspects. Unlike the financial sector, the auto industry in 2007–2008 (when the congressional hearings were taking place) was already well along on a transformational journey. By 2008, for example, the quality gains at Ford had translated into a reported savings of $1.Two billion in warranty costs (Kavanagh 2008). An improvement of this magnitude does not happen lightly or quickly; it is the product of constancy of purpose over many years in product design and manufacturing.
During the brief time that Cerberus, a venture capital hard, possessed Chrysler it became very clear that running an auto company required deep expertise that was not lightly acquired. Consider that a typical car will have as many as Ten,000 components with an assembly process involving the coordinated efforts of over Four,000 workers. Tolerances of thousandths of an inch are required for quality standards, and if the assembly line doesn’t run due to a threat to quality or something not going as planned, it can cost a company as much as $15,000 a minute. The heartbeat of an auto assembly plant is measured in the plant producing approximately one fresh car a minute.
The challenge for the auto industry when the congressional hearings were taking place was not figuring out how to improve—that was clear, and improvements were underway. It was the cash-flow implications of the short-term unprecedented collapse in the consumer market. Ford lost over $12 billion in two thousand six as it adjusted to declining sales and lost market share, for example. Working with the UAW, Ford met that challenge and is now a national leader in job creation, generating an estimated Legal,000 fresh jobs in the United States since the recession, including jobs that had been slated for Mexico. Overall, Goolsbee and Krueger (2015) document that motor vehicles and parts manufacturing accounted for an estimated increase of 256,000 jobs inbetween June two thousand nine and July 2014. This represents six percent of the nation’s growth in jobs, even however this industry only accounts for two percent of total employment. Ford liked profits of $6.Two billion in 2011, $7.Two billion in 2012, $8.Three billion in 2013, and $6.9 billion in two thousand fourteen (even with substantial investments in fresh products, such as the fresh fuel efficient, aluminum assets F150 truck). Moreover, workers received profit sharing checks of $6,200 for 2011, $8,300 for 2012, $8,800 for 2013, and $6,900 for two thousand fourteen (each paid in the very first quarter of the next year). General Motors workers received profit sharing payouts of $Four,300 for 2011, $6,750 for 2012, $7,500 for 2013, and $9,000 for two thousand fourteen (again, each paid in the very first quarter of the next year) based on profits of $7.6 billion for 2011, $Four.9 billion for 2012, $Three.8 billion for 2013, and $200 million for 2014. Albeit there is variability in profit sharing payouts, in the last four years autoworkers have received far larger payouts than have most U.S. workers.
As former chairs of the Council of Economic Advisers during the industry crisis, Goolsbee and Krueger (2015) report being astonished by the industry’s resurgence, commenting, “We are both pleased and a bit astonished by how well the past five years have played out for the domestic auto industry.” These authors go on to conclude, “We are both thrilled and loosened with the result: the automakers got back on their feet, which helped the recovery of the U.S. economy. Indeed, the automakers outsize contribution to the economic recovery has been one of the unexpected consequences of government intervention.” These authors capture well the uncertainty felt in government during the tumult of the recession, but as we indicate in this report, a deep skill of the internal workings of the industry suggests that the capacity for resurgence was much stronger than many assumed. Also, while government intervention was essential for the industry’s recovery, also key were continuous improvement processes, organizational restructuring, and collective bargaining agreements that preceded the crisis.
A third motivation for sharing the QOSC and lean/Six Sigma black belt story is that it illustrates the constructive role of the union. Many viewed the UAW as part of the problem, citing what they witnessed as inflexible wages and limitary work rules. For example, U.S. Senator Bob Corker (R-Tenn.) criticized the UAW, stating that “it’s about confrontation, it’s about fighting,” adding, “[t]here’s no question that the UAW has had a negative influence on the big three automakers” (DePillis 2014). In fact, the union was a key driving force behind innovations such as the Quality Operating System Coordinators and the lean/Six Sigma black belts. The union also agreed to far-ranging work rule switches at various times before two thousand seven (including the negotiation of over thirty competitive operating agreements at Ford plants in 2006, generating estimated efficiency improvements of over $500 million). Additionally, the union agreed to a lower entry wage in two thousand seven for up to twenty percent of the workforce, after which workers would receive the higher regular wage. As is discussed more fully below, the two thousand seven establishment of a Voluntary Employee Benefit Association (VEBA), funded to take on responsibility for retiree health care, helped reduce the gap in compensation (wages and benefits) inbetween the Big Three automakers and transplants from approximately $35 per hour to $6 per hour.1 By the time the industry was asked to testify before Congress in November 2008, the president of the UAW had clear evidence to indicate that labor was very responsive to the economic challenges facing the industry and engaged in total partnership to enable industry success.
This report features material from a forthcoming book titled Inwards the Ford-UAW Transformation: Pivotal Events in Valuing Work and Delivering Results (Cutcher-Gershenfeld, Brooks, and Mulloy 2015), which presents a total of fifty six pivotal events over thirty years that add up to a transformation in the Ford–UAW relationship.Two This does represent an orientation in the report toward the one company that didn’t take a government bailout, but many of the Ford–UAW pivots have counterparts at GM and Chrysler that are significant to understanding their part in the industry’s resurgence. In addition to drawing on material from the Ford–UAW book, this report also incorporates material from other sources with the overarching aim of presenting a series of windows into the industry that conveys its complexity. A combination of qualitative and quantitative data is featured to provide a visceral and comprehensive sense of the industry and its challenges. Not all the pivots described in the Ford–UAW book or in the industry more broadly were successful. There were certainly strategic choices in the 1980s and 1990s that, in retrospect, were ill-advised, and there are still pivotal challenges ahead.
It has been argued that a transformation in employment relations requires aligned switches at the strategic level, the collective bargaining or institutional level, and the front-line workplace level (Kochan, Katz, and McKersie 1986). In the domestic auto industry and particularly in the Ford–UAW case, we find evidence of transformational switch at all three levels, tho’ it is still incomplete, and there are many threats to progress. Thus, the aim of this paper is to make clear the limitations of simplistic assumptions about labor and management, pointing instead to a deep appreciation for the sources of resilience in an industry whose extended footprint accounts for an estimated Four.Five percent of U.S. employment, or one of every twenty two U.S. jobs.Three
The balance of the paper proceeds as goes after. It commences with a comparison of the auto industry’s response to the 1979–1982 and 2006–2009 crises to illuminate how the industry copes with adversity, and to demonstrate how it has remade itself in response to the most latest crisis. The paper then takes a detailed look at labor costs and work rules to dispel some of the most persistent myths surrounding the auto industry. Next, it examines a number of factors shaping U.S. automakers, including the arrival of transplants, the shifting geography of the industry, and evolving supplier relations. Ultimately, the paper details how the industry has been transformed by the shift to knowledge-driven work, the spread of lean/Six Sigma systems, and the development of fresh technologies.
A historical comparison: The 1979–1982 and 2006–2009 crises
For the auto industry, the 1979–1982 period was as cataclysmic as the recession that, for automakers, began in 2006. Putting the two crisis periods side-by-side helps illustrate how the industry copes with adversity, and is instructive about how both labor and management take into account the public interest to a much greater degree than almost any other industry.
The logic of placing the two recessions side-by-side is evident in Figure A, which indicates that both represent the most precipitous declines in auto sales in the past half century.Four
Seasonally adjusted lightweight U.S. vehicle sales (millions of units)
Source: Reproduced from Goolsbee and Krueger (2015)
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While a combination of monetary policy and global energy issues drove the recession of the early 1980s, the auto industry felt the influence in early 1979, as Automotive News recalls:
Auto sales were off to a rousing embark in 1979. Sales of domestic vehicles in the very first ten days of the year were up twenty three percent. Then all hell broke liberate. On Jan. 16, 1979, the Shah of Iran was overthrown, and the Ayatollah Khomeini came to power. He cut Iran’s oil production, which diminished shipments of crude oil to the United States. Gasoline prices soared, and the American economy plunged into a recession. (Sawyers 2013)
Subsequently, sales of the more fuel-efficient Japanese cars took off. Sales for Toyota, Datsun (now Nissan), and Honda—the three top-selling Japanese brands—rose from 1.1 million in one thousand nine hundred seventy eight to 1.Four million in 1982, a twenty nine percent increase. Indeed, in 1982, Japan surpassed the United States, even if only shortly, as the world’s largest producer of cars and trucks. At Ford, the situation was eerily similar to the late 2000s recession. Ford’s car sales dropped forty seven percent, from Two.Five million in one thousand nine hundred seventy eight to 1.Four million in 1982. The company had already lost $1.Five billion in one thousand nine hundred eighty and $1.0 billion in one thousand nine hundred eighty one (equivalent to $Four.6 billion and $Two.7 billion, respectively, in two thousand fourteen dollars), with hourly employment pulling down by forty six percent (approximately 100,000 jobs) during the same period (Cutcher-Gershenfeld, Brooks, and Mulloy 2015, 27).
In an unprecedented stir, contract negotiations inbetween the UAW and the U.S. companies were opened six months early, and the automakers demanded and achieved an end to what was termed the Annual Improvement Factor (AIF). For over three decades prior, autoworkers received an annual wage increase of three percent (separate from extra inflation-based cost-of-living increases). The three percent year-over-year increase in base wages corresponded to a three percent year-over-year increase in productivity during that same period. This formula was adopted to varying degrees by other major U.S. industries and played a central role in building the U.S. middle class.
The next section of the paper will concentrate more fully on the implications of cracking from this pattern. Very first, however, it is instructive to highlight another joint UAW–automaker response to the recession: effective efforts to retrain displaced workers. All three major auto manufacturers established joint training funds, originally supported at the rate of five cents for each hour worked by union members and later expanded to ten cents and higher amounts, with extra premiums for overtime hours. The joint funds required both union and management signatures before money could be spent and were targeted at establishing retraining programs with community colleges and other service providers. Remarkably, within approximately two years over ninety percent of the laid-off autoworkers had been placed in fresh jobs (Ferman et al. 1991). This commitment to invest in workers who would most likely never work in the auto industry again cushioned the influence of the recession on individuals, families, and communities.
In addition to violating from the Annual Improvement Factor and establishing joint training funds, the UAW–Ford contract in particular was notable for the launch of what were termed Mutual Growth Forums. The principle of “mutual growth” preserved the spirit of the AIF, linking worker prosperity with business development, and recognized the need for a regular forum for dialogue inbetween labor and management on these matters. We will come back to all three developments in the context of the 2007–2009 recession.
The late 2000s recession followed more than four decades of declining market share, as is indicated in Figure B.
Percent of total U.S. auto industry market share, by automaker, 1961–2014
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The data underlying the figure.
Source: WardsAuto (various years)
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By the end of the 1990s it was clear that the U.S. domestic manufacturers lagged competitors on quality, and Toyota in particular benefited with the fastest growth in market share. In the 2000s, however, the story is one of enhancing recognition of the need for transformation in the domestic auto industry—and, in the case of Ford, clear progress in halting the decline.
Before the utter influence of a transformation was realized, the entire auto market collapsed in the most latest recession. The seasonally adjusted annual sales (SAAR) of cars and trucks dropped from a projection of more than seventeen million vehicles at the beginning of two thousand six to under eleven million in 2008. During 2006–2007, the hourly workforce at Ford was diminished from over 90,000 to approximately 40,000. These developments made the headlines. What was not as visible was the adjustment process, which paralleled and even went beyond what had happened in the early 1980s.
There was again concession bargaining, resulting in two thousand seven in the establishment of a fresh $14.20 entry wage that was approximately sixty percent of the regular production embarking hourly wage. Importantly—unlike two-tier wage systems in other settings—once twenty percent of the workforce was entry wage, the very first employees hired would stir up to the utter wage. Instead of unilaterally cutting retiree health care, which happened in many non-union firms, each of the domestic original equipment manufacturers (OEMs) negotiated with the UAW their own separate Voluntary Employee Benefit Associations (VEBAs). (The term “OEM” refers to the companies designing and building the vehicles, in contrast to what are termed first-, second-, and third-tier suppliers.) The collective Overall Post-Employment Benefit (OPEB) liability of the three companies totaled $115 billion. In total the companies contributed approximately $70 billion in cash and stock to fund the retiree health care benefits. With the stroke of a pen, the VEBA, an independent entity managed by a board with a majority of non-UAW directors, became one of the nation’s largest providers of health care benefits, and the members had much greater assurances of continuity of benefits than if they had relied on companies that might go into bankruptcy.
As was the case in the early 1980s, all three auto companies went far beyond almost all other U.S. firms in their efforts to cushion the downsizing’s influence on employees. Ford went the furthest—there was not one single involuntary layoff. Instead, all 50,000 workers who lost their jobs did so through voluntary separation packages. There were at least fourteen distinct packages, ranging from a special early retirement program suggesting $100,000 and six months of health care coverage to a non-retirement-eligible educational chance program providing four years of college tuition (up to $15,000 a year), half salary, and total benefits for four years. Unnecessary to say, these and other comparable programs far exceeded what most displaced workers experienced during the latest recession. The influence on individuals, families, and communities was far less severe than it would have been otherwise. Reflecting on the practice, current Ford CEO Mark Fields (and then president of the Americas, covering North and South American operations) observed:
We went through a giant transformation. . . . We had to say goodbye to almost fifty percent of the hourly workforce and almost forty percent of the salaried workforce. The key thing about the transformation is that we did not miss a unit of production during this time and quality went up. (Cutcher-Gershenfeld, Brooks, and Mulloy 2015, 74)
From this comparison of the responses of labor and management in the early 1980s recession and the most latest recession, it is clear that the values of the union and of the employers combined to generate outcomes that mitigated the harm to workers, their families, and their communities. The original concept of a corporate charter was a social contract in which organizational leaders were indemnified from lawsuits in exchange for contributing to what was termed the commonweal (by providing employment, supplier purchases, and tax revenue that would contribute to the effective functioning of the economy and society). The mitigation of the influence of the recession on workers, families, and communities reflects attention to the public interest in keeping with the spirit of this fundamental social contract. We also see that the union was not intransigent—there was a capacity to adjust wages and benefits to the fresh competitive realities, but it was a negotiated process of adjustment rather than a unilateral cut. Eventually, we see that there were tangible benefits in cost and quality that are still evident today. These benefits are part of a business case for the industry’s constructive response to the downturn. It would be interesting to know the degree to which leaders in other industries fully explored such options, as compared with just replicating common practices such as involuntary layoffs with limited assistance or severance payments.Five
The rate of switch in productivity and wages
In one thousand nine hundred fifty UAW President Walter Reuther led the negotiation of what has come to be called the “Treaty of Detroit” with General Motors, which was followed by similar agreements with Ford and Chrysler. This five-year agreement introduced cost-of-living adjustments to wages, the concept of an actuarially sound pension plan, a no-strike provision during the term of the agreement, reserved management rights to run the business, and a link inbetween wages and productivity (termed the Annual Improvement Factor). In many respects, the legacy of this agreement still shapes labor–management relations in the auto industry.
The influence of the “Treaty of Detroit” is evident in Figure C, which depicts the rate of switch in nationwide productivity, overall hourly wages, overall hourly wages and benefits, and hourly wages among Ford assembly workers (which are similar to those of their GM and Chrysler counterparts).
Cumulative percent switch in U.S. productivity, U.S. hourly wages and compensation, and Ford assembly line worker hourly wages, 1947–2013
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The data underlying the figure.
Source: Adapted from Cutcher-Gershenfeld, Brooks, and Mulloy (2015)
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In the U.S. economy, for the three decades following World War II, wage growth matched the rate of switch in productivity. The combined increase in productivity and purchasing power fueled a remarkable period of economic growth in the United States. However, by the early 1970s, the rate of switch in wages had begun to go plane. To some extent this was mitigated by continued growth in benefits (health care and pensions are indicated in the figure), tho’ combined compensation (wages and benefits) was also flattening out by the early 1980s. Tho’ it is not represented on this chart, household income continued to grow as 2nd wage earners (women) entered the workforce, tho’ the rate of switch in household income went plane by the 1990s. At this point most households did not have a third wage earner able to inject the workforce, and this marked the beginning of the stagnation in purchasing power that contributed to the latest recession.
Compensation for Ford assembly workers displays much greater variability since adjustments are generally made through three-year cycles of collective bargaining (with some longer-term agreements). The more latest addition of profit sharing has smoothed out some of the variability, but the main story is that the rate of switch in auto industry wages continued to track the rate of switch in productivity for two extra decades after the break from the AIF formula. It was not until the 2000s that the rate of switch went vapid in this industry.
There are already indications that stagnant hourly wages will be an issue in the auto industry’s two thousand fifteen negotiations. There are also indications that efforts will be made to connect this issue with executive compensation. These are complicated issues, and some aspects of them are beyond the scope of labor negotiations. Even issues that are within the scope will be challenging to resolve. For example, the entry wage has directly led to job growth among U.S. automakers that was either slated for suppliers or for other countries, such as Mexico. As noted previously, an estimated Legal,000 fresh jobs have been created within Ford through fresh work and extra shifts in a number of domestic plants. As such, the issues surrounding pay become intertwined with issues pertaining to job creation.
Ultimately, the challenge facing the auto industry, the U.S. economy, and the global economy more broadly is finding a way to ensure a continued linkage inbetween pay and productivity—so that purchasing power resumes to keep rhythm with the generation of products and services.
Myths and realities regarding labor costs and work rules
Two often-misunderstood facets of the U.S. auto industry are labor costs and work rules. While these issues are often at the core of criticisms of the U.S. auto industry, they are not the stagnant haul on the industry that they are typically seen to be. Moreover, there are other competitive factors—such as product mix, product quality, supply chain spectacle, and enterprise business strategy—that are far more significant to the fortunes of the industry.
The role of labor costs and work rules
Direct labor costs (for hourly and salaried workers) represent approximately 18–20 percent of the total costs of an automotive enterprise (with hourly workers accounting for approximately half that amount). Most of the total costs are associated with purchased parts, energy, research and design, warranty, overhead, and other factors. Indeed, Helper and MacDuffie (2008) place the cost of purchased parts at seventy percent of total costs. Additionally, work rule plasticity has been enlargening through pilot experiments since the introduction of the mutual growth forums in 1982, with major gains over the last decade-and-a-half as the industry has moved more systematically to team-based work systems.
Far more consequential than labor costs or work rules are strategic choices, such as Ford’s decision to purchase fresh brands in the 1990s and early 2000s (Volvo, Land Rover, Jaguar, Aston Martin) and to undertake share buybacks, rather than reinvesting in domestic operations. In 2006, as the market was collapsing, Ford permitted the UAW to select a financial accomplished to conduct a detailed review of the business so that there would be total transparency on the extent of the crisis the company faced. This individual, Eric Perkins, who would later be named research director for the UAW, recalls the briefings to the union membership he provided based on his findings:
I told the membership that the company was in terrible form. They should prepare for the worst. There were limber assets shops only running one product. Money had been wasted on share buybacks and special dividends, rather than investment in fresh products. Purchased component costs (two-thirds of vehicle costs) were toughly $Two,000 higher for Ford than for Toyota and maybe a thousand higher than they were at GM on equivalent vehicles, primarily because of lousy volume predictions at the time of product approval.
There was too much complexity in the design. Their time to market was two to three years longer than the Japanese and one year longer than GM. Ford had generated many innovative products such as the Explorer and the Expedition, but the success covered up underlying problems. Further, most of the Big three market share loss since two thousand one had been at Ford, and this included the very profitable products such as Explorers, Expeditions, and even pickups—product segments Ford had once predominated. I said this company is on the brink of bankruptcy and they needed to make a radical transformation. Purchasing and design accounted for more of the problem than labor. I said that tho’ we were only twenty percent of the problem, every penny counted. Many UAW members wielded stock and identified with Ford. People thought of themselves as working for a good company—so it was a difficult message to produce. (Cutcher-Gershenfeld, Brooks, and Mulloy 2015, 43)
As the quote indicates, business strategy is much more salient to the fortunes of the industry than labor costs or work rules. Yet in 2008, the Wall Street Journal still laid all the problems of the industry on the doorstep of employee benefits and UAW work rules, writing in a December one editorial:
Consider labor costs. Take-home wages at the U.S. car makers average $28.42 an hour, according to the Center for Automotive Research. That’s on par with $26 at Toyota, $24 at Honda and $21 at Hyundai. But include benefits, and the picture switches. Hourly labor costs are $44.20 on average for the non-Detroit producers, in line with most manufacturing jobs, but are $73.21 for Detroit.
This $29 cost gap reflects the way Big Three management and unions have conspired to make themselves uncompetitive – increasingly so as their market share has collapsed. . . .
The absence of the UAW also gives [transplant] car producers the plasticity to deploy employees as needed. Work rules vary across company and plant, but foreign rules are generally less limitary. At Detroit’s plants, electricians or mechanics tend to perform certain narrow tasks and often sit idle. That infrequently happens outside Michigan. In the nonunionized plants, improvised workers can also be hired, and let go, as market conditions dictate.
The editorial did point to some UAW locations—such as the GM–Toyota Fresh United Motors, Inc., joint venture in Fremont, California (NUMMI)—as exceptions, but it failed to take into account the VEBA negotiated in two thousand seven and the progress with team-based work systems that preceded the collapse of the market and that continued even in the face of the departure of approximately half of the workforce. Moreover, the legacy pension and health care costs were not the product of what the Wall Street Journal editorial termed “a conspiracy to be uncompetitive.” Instead, they were the product of business success and a determination to share the gains across numerous generations of the workforce.
The evolution of fringe benefits
The health care and pension benefits provided by U.S. automakers are an significant mechanism for broadly sharing companies’ prosperity, and for ensuring that the automakers uphold their end of the social contract. The provision of what became termed “fringe benefits” emerged during World War II under the National War Labor Board as an alternative to wage increases, which were constrained by national wage and price controls.6 Following the war, in the 1950s, the UAW pressed unsuccessfully for national health care legislation. The company-provided health benefits represented what the union eyed as an acceptable but less-preferred alternative, which began with active worker coverage and was later extended to retirees.
At various times when national health care arrangements have been debated in the United States, the domestic auto companies have been largely silent, but privately supportive of policies that would level the playing field vis-à-vis foreign competitors by lowering the companies’ benefit costs. Indeed, a two thousand three Fresh York Times articled indicated that Ford Chairman and CEO William Clay Ford Jr. “said that a national health care system, in some form, could help level the playing field with Japanese and European competitors based in countries with national health systems” (Hakim 2003). His comments were partly in response to a criticism of the domestic auto companies as “H.M.O.s on wheels.” Because the domestic firms didn’t have to cover health care costs in Canada, for example, this provided a cost advantage for some production to be shifted to Canada at various times during the past four decades.
When transplant facilities arrived in the United States they also suggested company-provided health benefits for active workers, but did not primarily have retirement-eligible workers for whom pension or health care benefits would be needed. In addition, some have shifted from defined benefit to defined contribution 401(k) pension plans, and some have eliminated retiree healthcare benefits. Note, however, that BMW in South Carolina does still have a defined benefit pension plan, and others do contribute cash into the defined contribution plans. Perhaps a more significant factor is the use of makeshift workers, with lower wages and lower benefit costs. For example, as much as twenty percent of the Toyota workforce is made up of improvised workers.
The evolution of work rules
Cost issues loom large in the daily operations of all auto plants. Most plants operate with what are termed “labor and overhead” budgets in which hourly and salaried labor accounts for around eighty percent of the operating budget (since purchased parts, warranty, research and development, and other costs are not considered “within the four walls” of a plant budget). Thus, for a plant manager, labor costs are a major portion of the budget they manage—particularly since each year these managers are faced with a cost-cutting “task” to be accomplished through efficiencies and diminished head count. The primary method of meeting the task is through efficiency improvements. Thus, work rules have historically been contested terrain—where management has an incentive to speed up operations and workers have an incentive to avoid work intensification. The rise of team-based work systems and continuous improvement instruments and methods (discussed more fully below) has helped to shift a historically contentious issue into an area of mutual growth.
In the face of enhanced market volatility, there has been mutual interest in developing work rules that permit for more modular and more nimble forms of production.7 Two decades ago, it would have been considered an significant accomplishment to have two or three products built on the same platform and the same assembly line. Today, there are a number of plants that can produce as many as six distinct products on the same assembly line—allowing for much more pliable responses to variation in product request (without as many complications due to established physical infrastructure). This has, of course, required enlargened plasticity within teams for training and work assignments, which the UAW has supported. In latest years, there have also been experiments with different forms of skilled trades teams, including what is termed “line-side deployment” (having various trades stationed on the side of the production line rather than in a separate implement room). Ford’s Powertrain Plant of the Future initiative is an example of the substantial increases in uptime that can result from these models (Cutcher-Gershenfeld, Brooks, and Mulloy 2015, 151).
Further, the volatility of the markets means that labor costs can be very consequential during a downturn. This goes beyond work rules. Given the large immobilized capital investment, a major drop in volume quickly erodes any profit margins and requires attention to the two primary variable costs—labor (hourly and salaried) and purchased parts. There are penalties in both cases to a reduction in spending, so the adjustments are costly. With suppliers, the purchase agreements are premised on predicted volumes, with extra costs imposed when those volumes are not achieved (and often with collective savings when gains exceed what was anticipated in the contract). With the workforce, the original assurances of job security in exchange for contributions to continuous improvement (discussed further in a later section) have been relaxed, but the mutual commitment to cushioning the deep-throat for displaced workers is a cost, albeit one that benefits the rest of society.
The role of collective bargaining
What is perhaps most significant in understanding labor costs and union work rules is that both are a product of collective bargaining. Agreements are reached through the give and take of negotiations. Historically, auto negotiations are very structured events, involving hundreds of union and management representatives serving on twenty or more subcommittees addressing issues such as quality, safety, sourcing, and other matters. Overall agreements on wages and benefits are made at the “main table,” which is also where the work in the subcommittees is reviewed and final agreements are reached. Importantly, the auto industry provides a vivid example of how this very structured process can adjust in a crisis.
In the two thousand seven UAW–Ford negotiations, the parties engaged in a “bargaining over how to bargain” process in which they redesigned the way they negotiated to emphasize problem solving (Cutcher-Gershenfeld 2011). For each subcommittee a multistep process was developed that included the following steps:
- Developing a collective vision for success
- Jointly collecting data
- Analyzing underlying interests
- Brainstorming options
- Identifying potential language/elements of agreements (as adequate)
- Anticipating implementation, including recommended communication and training
With periodic calibration at the main table, this process guided negotiators in developing a collective vision for success on their subcommittee topic. It also provided them with data, an analysis of underlying interests, and a brainstorming of options before the actual negotiations began. While the bargaining at General Motors and Chrysler was not restructured to the same degree, the two thousand seven negotiations with these companies were also characterized by a high degree of problem solving. As noted earlier, the two thousand seven negotiations generated the establishment of a VEBA that was funded to take over responsibility for retiree health care. The VEBA took an enormous liability off the U.S. auto companies’ books. Along with improvements in vehicle margins, diminished warranty costs, and other developments, the influence on Ford is evident in Figure D, which shows that the company’s credit rating began improving at the actual launch of the VEBA in two thousand ten and, by 2013, had moved back into the investment-grade range.
Standard and Poor’s issuer rating for the Ford Motor Company, 2000–2013
Source: Reproduced from Cutcher-Gershenfeld, Brooks, and Mulloy (2015)
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This is just one example of labor and management using collective bargaining to reach agreements with transformative influence, not just to make incremental adjustments in wages, benefits, and working conditions.
Factors shaping the industry in latest decades: Transplants, shifting geography, and supplier relations
In the last two decades, the U.S. auto industry has been shaped by globalization and the associated arrival of transplants. These compels have caused the geography of the U.S. auto industry to fall under a dramatic transformation. They have also had significant effects on the wages and benefits of the domestic auto manufacturers and on their supply chains.
The arrival of transplants and shifting industry geography
The one thousand nine hundred ninety four North American Free Trade Agreement (NAFTA) accelerated the growth of auto component production and auto assembly plants in Mexico (and to some degree, Canada). Political and market pressure on Japanese and European (and later, Korean) manufacturers to reduce imports to the United States has led to a rising number of “transplants” supplying auto components and assembling autos.
Primarily, the transplants operated in the Midwest, including assembly plants in Illinois (Mitsubishi), Michigan (Mazda), Ohio (Honda), and Pennsylvania (Volkswagen), along with California (Toyota’s joint venture with General Motors, now a Tesla facility). More recently, however, the growth has been in Southern states, including assembly plants in Alabama (Honda, Hyundai, and Mercedes-Benz), Georgia (Kia), Kentucky (Toyota), Mississippi (Nissan and Toyota), South Carolina (BMW and Mercedes-Benz), Tennessee (Nissan and Volkswagen), and Texas (Toyota). In Mexico there are current and planned assembly operations for Audi, BMW, Chrysler/Fiat, Ford, General Motors, Honda, Kia, Mercedes-Benz, Nissan, Porsche, Peugeot, Renault, and Volkswagen. In Canada, there are assembly plants for Chrysler/Fiat, Ford, General Motors, Honda, Suzuki (a joint venture with General Motors), and Toyota—a much smaller mix of manufacturers compared with Mexico.
In addition to the transplant assembly plants, there are a large number of transplant suppliers. Even tho’ Ford did not seek the same bailout as did General Motors and Chrysler, it fully supported government intervention since a failure of either of its major competitors would have had devastating impacts on the supply chain, which would have affected all firms (even the transplants). (Indeed, scholars have seen the government intervention as a de facto regional industrial policy on the part of the U.S. government [Klier and Rubenstein 2011]).
As a result of these trends, the geography of the auto industry is no longer almost as concentrated in the Midwest as it once was. The trend for overall motor vehicle manufacturing employment (original equipment manufacturers and parts suppliers) is introduced in Figure E (which was developed with a concentrate on Tennessee, a state that has been in the public spotlight due to intense political opposition to a UAW organizing drive at the Volkswagen plant in Chattanooga). As Figure E illustrates, the greatest growth has been in Mexico, with the greatest loss of employment in the Midwest, the United States outside of the South and the Midwest, and Canada.
North American motor vehicle manufacturing employment, by country and U.S. region, 1994–2012
Source: Reproduced from Brookings Institution (2013)
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Against these larger geographic trends it is noteworthy that the 2007, 2009, and two thousand eleven negotiations all involved dialogue and agreements about jobs to be maintained in the United States. In some cases, jobs targeted for Mexico were instead located in domestic plants. Thus, albeit the direction of the trends is clear, the trends are not immutable.
Transplants’ effects on the Big Three’s wages and benefits
The arrival of the transplants has resulted in a gap inbetween the compensation of the domestic manufacturers and that of transplants, as almost all transplants are non-union and located in lower-wage locations—undermining the original objective of the UAW to take wages out of competition. The gap is not just a product of lower base wages, but is also due to the absence of retiree pension and retiree healthcare costs for the newer organizations. In 2005, there was a gap of $Trio.62 inbetween the average hourly wage of $27.41 at Ford and $23.79 for the transplants. When fringe benefits, legally required payments, pension benefits, retiree health care, and other post-employment labor costs are added in, the gap grew to $20.55 ($64.88 versus $44.33).
During the government bailout negotiations in 2009, the U.S. government pressured the UAW to agree to what it termed competitive wages, competitive benefits, and competitive work rules, and to convert fifty percent of the VEBA to equity. Albeit the union did agree to a makeshift shift in compensation from an annual wage increase to annual lump sums (among other adjustments), it was able to forestall deeper cuts. In 2010, following the two thousand seven introduction of the entry wage and concessions made during the two thousand nine government bailout, the wage gap stood at $Four ($28 for Ford versus $24 for the transplants), and the gap when including fringe benefits and post-employment costs stood at $6 ($58 for Ford versus $52 for the transplants). In retrospect, given the current profitability of the industry, it is clear that deeper wage cuts were not needed to enable the industry’s recovery. In this case, the collective bargaining process generated sufficient concessions to sustain the crisis, but preserved what are considered good middle-class jobs to a much greater degree than would have occurred through unilateral activity by management or government.
The gap in post-retirement costs inbetween the domestic manufacturers and the transplants is closing due to the VEBA, joint healthcare initiatives inbetween the UAW and the domestic manufacturers, and rising costs for the transplants. Among the transplants, four (BMW, Honda, Subaru, and Toyota) provide PPO health care through age sixty five with varying degrees of premium sharing (Honda is at one hundred percent versus Toyota at fifty percent, for example). These companies also make contributions to healthcare retirement accounts (HRAs) based on service. Nissan offers an account-based health plan with premium sharing up to age 65, but has cut off the HRA for those hired after two thousand six (presumably due to concerns with rising costs). Others (Hyundai, Kia, Mercedes, and Volkswagen) do not suggest any post-retirement healthcare coverage. In this context, the VEBA is a competitive advantage in that it permits the UAW-represented workforce to have high quality healthcare coverage in retirement without imposing extra costs on the balance sheets of the domestic manufacturers.
Shifts in supply chains
The larger trends related to transplants and shifting industry geography obscure a number of extra shifts in the supply chains. Very first, in the late 1990s and early 2000s, there was a stir by all three of the major U.S. original equipment manufacturers to outsource many aspects of component design to suppliers. This was seen as a cost-saving budge, with the companies focusing on what they termed their “core” business. This strategy proved problematic, however, as key skill within the OEMs on the component designs dissipated, reducing the capability to oversee the work. As costs and warranty issues with component parts began to climb on, the OEMs have begun to bring more engineering and design work in-house.
Moreover, there has been a major shift in the way the domestic auto industry interacts with suppliers. Historically, the Big Three would pit suppliers against one another in competitive bidding processes and treatment ongoing relations from a low-trust, high-control perspective. Annual surveys by Planning Perspectives, Inc. calculate a Working Relations Index, based on a supplier’s rankings of its automaker customers. As shown in Figure F, from two thousand two to 2008, on a scale from zero to five hundred (where 0–250 indicates poor supplier relations and 350–500 indicates very good supplier relations), the range of scores for Toyota was three hundred fourteen to 415, and the range for Honda was two hundred ninety seven to 384. In contrast, the range for GM was one hundred fourteen to 174, Ford’s range was one hundred fifty seven to 191, and Chrysler’s range was one hundred sixty one to 218. As Figure F indicates, however, the story since two thousand eight has been one of overall improvement by all three domestic manufacturers, as well as some decline among the major transplant manufacturers.
Original equipment manufacturer–supplier working relations index, by automaker, 2002–2014
Source: Reproduced from Planning Perspectives (2014)
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Switching the underlying treatment to supplier relations is just one aspect of a broader set of cultural shifts happening in the auto industry. As is discussed more fully in the following section, these are rooted in the rise of knowledge-driven work systems that employ lean/Six Sigma principles, and in the influence of fresh technologies. Front-line hourly workers responsible for quality, for example, are increasingly expanding the scope of their work to include supplier visits and even technical assistance with suppliers on the use of quality-focused operating procedures. In the more dynamic marketplace, the interdependencies among manufacturers and suppliers are growing.
With the enlargened importance of digital technology in cars there are fresh challenges in the supply chain. Key technology suppliers, such as Microsoft and Google, are not well-attuned to a business context where the reboot of a computer or a need for a software upgrade counts as one “thing gone wrong” in the J.D. Power quality standards. Thus, bringing fresh technology features to the customer, such as GM’s OnStar and Ford’s Sync, has contributed to a reversal in quality spectacle since 2010. Of course, maintaining constancy of purpose with regard to quality—both at the OEMs and among all the suppliers (not just the technology suppliers)—is a never-ending challenge for the industry.
Knowledge-driven work, lean/Six Sigma systems, and fresh technology
To understand the auto industry in the 21st century, it is crucial to consider how fresh technologies and systems to achieve quality and efficiency improvements are challenging the industry’s core operating assumptions.
The auto industry is the archetypical industry of the industrial revolution. In some of the social sciences, the mass production model is still referred to as “Fordism.” Interestingly, the rise of lean principles (such as just-in-time delivery of parts, value stream mapping, continuous improvement suggestion systems, preventative and predictive maintenance, and error proofing) also has roots in the auto industry, building on the Toyota production system. What is not widely appreciated, however, is the degree to which lean principles have a deeply embedded operating assumption centered on the value of distributed skill across the workforce (Murman et al. 2002; Cutcher-Gershenfeld et al. 1998). Organizations that just attempt to apply lean production devices, but that don’t wrestle with this core assumption, will have limited success. While the Six Sigma principles (such as reducing variance before improving a system, identifying spectacle relative to “opportunities” for errors, and process-improvement projects) emerged very first at Motorola and then were popularized at GE (both outside of the auto industry), they have come to be integrated with lean principles and depend identically on valuing distributed skill.
The quotes in the prologue illustrate just how difficult it is to shift operating assumptions about front-line skill. The very first pivotal event in shifting these assumptions involved the combination of an embrace of what was termed “employee involvement” and the mutual growth forums, both of which emerged in the late 1970s and early 1980s. At the time, there was an understanding that an enhanced degree of job security was needed in exchange for a commitment from the workforce to share ideas about improving efficiency.
The initial concentrate on employee involvement was aimed not at improving companies’ bottom lines, but at addressing what were termed “blue neck corset blues”—worker alienation on the job. The publication of the book The Machine That Switched the World in one thousand nine hundred ninety one brought the features of the Toyota Production System and what the authors and associated researchers termed “lean production” to a broad audience (Roos, Womack, and Jones 1991; Krafcik 1986). Within the U.S. auto industry the very first exposure to these principles, such as at the GM–Toyota Fresh United Motor Manufacturing, Inc. (NUMMI) joint venture, resulted in more piecemeal rather than systematic learning on the part of the U.S. manufacturers. This was ironic since the lean production systems involve deeply integrated organizational learning principles. Still, the results from the NUMMI case could not simply be dismissed. As Paul Adler (1992) notes from his analysis of the case:
The NUMMI case presents a number of particularly interesting features. Very first, the plant’s design and operating philosophy were a very close copy of Toyota’s Takaoka plant in Japan. Kamata (1983) had given a harrowing account of his practice of exploitation and alienation as a improvised worker at Toyota City. Observers have thus been impatient to learn how U.S. workers would react to the intense discipline for which Toyota is renowned. 2nd, 85% of the workers hired by the fresh company were former employees of the GM-Fremont facility that NUMMI took over, and the United Auto Workers (UAW) continued to represent them. The GM-Fremont plant had an abysmal record of productivity, quality and labor strife. When it closed in 1982, there were over seven hundred outstanding grievances, and absenteeism was running at approximately 25%. Its productivity and quality were among the worst in the entire GM system. . .
Within two years of start-up, the fresh plant had become the most productive auto assembly plant in the U.S. and the quality of the plant’s principal product, the Nova, was ranked by consumers and internal GM audits in the highest category among domestic and foreign cars. Moreover, worker morale seemed high: in the very first four years of operation, only some thirty grievances had been filed, of which only three had gone to arbitration; absenteeism averaged Two.5%; personnel turnover averaged inbetween 6% and 8%; and over 70% of the workers annually participated in the suggestion program, contributing on average approximately six suggestions per employee. Over the more latest years, the plant has sustained these exceptional levels of business and personnel management spectacle.
The domestic auto firms have varied in the speed with which they have learned the lessons from the Toyota production system, particularly from the adapted version in the U.S. context at NUMMI. We document a number of false starts in the Ford–UAW case, and others have documented the same dynamics in the GM–UAW case (Rubinstein and Kochan 2001). Even however the learning could have been swifter, particularly during the 1990s when the lessons were increasingly clear, significant progress has been made across the 2000s. Today, lean and closely related Six Sigma principles are pervasive in the industry. A key lesson from our analysis of the Ford–UAW transformation is that these principles challenged deeply embedded operating assumptions.8 Surfacing operating assumptions is hard to do; switching them is even stiffer.
Certain operating assumptions pertaining to management evolved to incorporate lean and Six Sigma principles. For example, the assumption that quality and safety should be driven by inspection shifted to the assumption that they should be driven by prevention. Shifting that assumption required enhanced communication and coordination inbetween fresh product development and manufacturing (based on “design for assembly” and related principles), training of leaders and workers in a non-blaming treatment to tracking and learning from “near misses,” and uncountable other switches in quality and safety operating procedures. A similar set of switches in operating assumptions involved setting aside the treatment dating back to Frederick Taylor (1914) that put the design of work and the larger enterprise in the mitts of accomplished engineers and managers, substituting instead the assumption of quality experienced W. Edwards Deming (1986) that it was significant to “[p]ut everybody in the company to work to accomplish the transformation. The transformation is everybody’s job.” At its root, this is a shift from what Douglas McGregor (1960) termed a “Theory X” assumption that people need to be monitored and managed on the job, to a “Theory Y” assumption that people want to do a good job, and the concentrate should be on providing them with the implements and resources to do the best job they can.
For the UAW, the shift in operating assumptions is still ongoing and no less central to its operations. Historically, unions have derived power from the threat of withholding labor. However, there is a shift underway whereby the UAW is learning to derive power by enabling work (Cutcher-Gershenfeld, Brooks, and Mulloy 2015, 335). This is evident in the expertise the union now brings to discussions of quality, safety, predictive and preventative maintenance, workforce development, team-based operations, and other such topics. This is challenging internally for the union—it is a very centralized organization and, like management, it has had to increase its appreciation for distributed front-line expertise, and demonstrate plasticity in response to this diffusion of expertise. This is most evident with the individuals who are in what are termed “appointed roles” (rather than elected roles) in local unions. Appointees are designated to oversee quality, safety, training, and other such domains, as well as to pack roles such as Six Sigma black belts. As these individuals become subject matter experts, they must still honor and respect the primacy of the elected leaders—that is the heart of the union’s identity—but their skill must also be given weight in ways that switch how a local or international union operates. At the root of this shift is an expansion of the domains in which the union is able to react in a “pull” style, using distributed skill to advance the interests of its members. Other service organizations are facing similar challenges to their operating assumptions, whether in health care, human services, or other related domains.
Some switches in operating assumptions were not as widely documented in the management literature, but were also pivotal. In the Ford–UAW case, these included a shift in the safety operating system from focusing identically on all safety incidents, to a special concentrate on what were termed “low frequency, high consequence events.” These include lacerations, amputations, and, in a few instances, deaths. Labor and management learned that the practices required for preventing the low frequency, high consequence events were not the same as for other aspects of safety prevention. Similarly, a number of switches in operating assumptions about training and development were needed. Instead of assuming that training should be provided by trainers through formal training events with a comprehensive curriculum, the assumption shifted to organizing training around single-point lessons delivered when needed by supervisors with access to instructor guides—an assumption of leaders as teachers and learning being delivered on a “pull” basis rather than a “push” basis (Cutcher-Gershenfeld, Brooks, and Mulloy 2015, 298).
Even less visible within management was a shift in operating assumptions about the treating of bad news. Traditionally, leaders in the Ford culture assumed that problems within their domain were their responsibility to solve. As such, problems with a fresh product launch, for example, would only be collective with other leaders if it was evident that they could not be contained and resolved. When Alan Mulally joined Ford as CEO, he sought to switch this assumption through weekly Business Plan Review (BPR) meetings for all managers, with Special Attention Review (SAR) sessions to go after up on problems that were identified. For the very first few months of these meetings, the managers were careful to only present status reports that were color-coded as “green” or “yellow,” with no one daring to break the norm of treating problems internally by putting up a status of “red.” The pivot happened when the company’s then–president of the Americas, Mark Fields (now CEO), indicated that a product launch for which he was responsible was “red,” that is, in trouble on quality and cost. Mulally’s response was to embrace the problem and enlist everyone’s help in resolving it, rather than to react with blame, as was typical in the company’s culture. As the vice presidents and directors of manufacturing each set up BPR and SAR processes within their domains, the shift in this embedded operating assumption began to permeate the organization (Cutcher-Gershenfeld, Brooks, and Mulloy 2015, 103).
Looking to the future, there are even more deeply embedded operating assumptions associated with the accelerating rhythm of switch in technology. This is visible in manufacturing operations—where many of the most challenging jobs on the assembly line (such as the installation of windshields or the painting of vehicles) are now entirely treated by robots—and in engineering design, where the entire process utilizes computer-aided design (CAD) processes that directly translate into simulation models and manufacturing specifications. But the role of technology goes much further. A car may have approximately Ten,000 component parts, but software’s role in the functioning of all of these parts is now pervasive in every aspect of the vehicle’s operation. Recently, for example, General Motors enhanced its staff of software engineers from 1,400 to 8,000 (Bennett 2015). This expansion wasn’t undertaken with a concentrate only on vehicle design; the expanded internal capability enabled the development of an improved customer direct ordering system for GM. Similarly, Tesla’s decision to build a large-scale battery facility, what it calls a “gigafactory,” in Nevada represents a strategic choice to not only be more of a vertically integrated enterprise, but to also set technology standards for batteries more broadly in the industry by supplying batteries to other companies (Ramsey 2014). Moreover, as Ford Chairman Bill Ford comments:
The chance and challenge looking ahead is that switches are coming like we have never seen. Self-driving vehicles are coming. Vehicles will be connected to the cloud. We will be transitioning into being a technology company as a result. (Cutcher-Gershenfeld, Brooks, and Mulloy 2015, 243)
Thus, an appreciation of the auto industry today and in the future is inextricably entwined with the advances of technology.
Conclusion
The auto industry is converting from the archetypical mass production industry to a knowledge-driven, technology-infused industry with enterprises committed to providing transportation solutions for the 21st century. Nevertheless, most policymakers and outside observers still make simplistic assumptions about the U.S. auto industry, viewing it as uncompetitive and badly lagging foreign rivals. The aim of this report has been to provide a few very accessible windows into the industry and its operations to motivate a rethinking by outside observers and to prompt fresh ideas for policy and practice.
Simple-minded characterizations of the industry’s challenges as being a product of high wages or union work rules miss the mark in numerous ways. The gap inbetween union and non-union competitors in the domestic industry has been largest around post-employment legacy benefit costs. This was originally an artifact of the non-union transplants being newer organizations with few retirees, and is now also a reflection of the establishment of the VEBAs, as well as transplants’ higher usage of makeshift workers. Not only is the competitive situation switching over time, but the UAW has worked with management at the Big Three in establishing a VEBA, which has addressed a major portion (and the most rapidly growing part) of this cost differential. And far from union work rules being a barrier, the union has been a utter fucking partner for more than a decade in experimenting with innovations in work organization.
More consequential for the industry, in the brief run, are the challenges of coping with swings in the marketplace. This is already driving enhanced team plasticity in operations, innovation in managing voluntary departures, enhanced attention to supplier relations, and a budge to modular product platforms. In the long run the challenges are even greater as fresh technologies permeate vehicles and the broader enterprise.
As labor and management in the domestic industry prepare for two thousand fifteen collective bargaining, a key question will be the degree to which the parties are able to address short-term issues around wages, hours, and working conditions—as well as the degree to which they use collective bargaining as a forum to lay the groundwork for jointly facing the challenges that lie ahead.
About the authors
Joel Cutcher-Gershenfeld is professor (and former dean) in the School of Labor and Employment Relations at the University of Illinois, Urbana–Champaign, and freshly appointed as professor at Brandeis’ Heller School of Social Policy and Management (beginning January 2016). He is an experienced on workplace innovation and served as a consultant to the UAW and Ford for over two decades.
Dan Brooks served as a union leader with the UAW for thirty five years, rising from local elected positions to co-lead many of the national UAW–Ford joint programs.
Martin Mulloy rose in management over thirty four years to serve as Ford’s Vice President for Global Labor Affairs. He is the two thousand fifteen president of the Labor and Employment Relations Association.
Endnotes
1. The VEBA was the largest contributor to closing the gap ($17), but other factors contributed, including the later elimination of cost-of-living adjustments, lump-sum wage payments, the elimination of what were termed job banks, and the rising costs of the transplants’ total fringed costs from $47 to $55. By two thousand fourteen it was just a $6 gap. At the time the CEOs testified before Congress, the gap was around $10–12.
Two. The pivotal events in the book are introduced in the present progressive tense, as tho’ you were there at the time (however with quotes from people we interviewed looking back on the event). Here we draw on some of the same material, but we present them in the past tense.
Three. The Center for Automotive Research reports that “over 1.7 million people are employed by the auto industry. In addition, the industry is a enormous consumer of goods and services from many other sectors and contributes to a net employment influence in the U.S. economy of almost eight million jobs. Approximately Four.Five percent of all U.S. jobs are supported by the strong presence of the auto industry in the U.S. economy. People in these jobs collectively earn over $500 billion annually in compensation and generate more than $70 billion in tax revenues” (Hill, Menk, and Cooper 2010).
Four. The decade preceding the period covered in Figure A includes the very first oil shock of 1973–1974, which was also very consequential.
Five. There is a well-established literature around what was very first termed “institutional isomorphism,” which refers to the way institutional practices tend to look alike, without necessarily reflecting functional differences that would be expected to generate a greater degree of variation. See DiMaggio and Powell 1983. Violating from such traditions does stand out—consider the attention that Netflix has received for its treatment to severance payments not just in a crisis, but as part of its regular operations. See McCord 2014.
6. The actual term for these benefits is reportedly a product of a meeting of the War Labor Board where they were discussing what to call these extra benefits that were being negotiated. The Broadway play Oklahoma! was popular at the time, and someone in the meeting was evidently humming the tune “Surrey with a Fringe on Top” when someone suggested that they be called “fringe benefits.”
7. See, for example, Muffatto and Roveda 2002; and Simpson, Siddique, and Jiao 2006.
8. This draws on Edgar Schein’s notion of the deeply embedded assumptions in an organization’s culture. See Schein 1990.
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The Decline and Resurgence of the U
The Decline and Resurgence of the U.S. Auto Industry
Introduction and executive summary
Over the past thirty years the U.S. auto industry has faced numerous existential crises, illustrating both the cost of lost opportunities and the power of innovation as the archetypical industrial enterprise adapts to a post-industrial skill economy.
Most policymakers and outside observers still make simplistic assumptions about labor and management in the auto industry, assuming, for example, that the industry’s problems can be alleviated just by reducing labor costs and calming union work rules. In contrast, the overarching aim of this report is to present a series of windows into the industry that convey its complexity, and that make clear the limitations of simplistic assumptions about labor and management. In particular, this paper aims to develop a deeper appreciation of the industry’s problems and of the sources of resilience in the industry, which include management leadership, union partnership, and front-line workforce teamwork.
A more holistic understanding of the industry is significant since its footprint accounts for an estimated one in every twenty two U.S. jobs—and because the lessons are relevant to other industries facing transformational challenges. To increase understanding and appreciation of the strategic dynamics facing the industry, we suggest a comparison of the industry’s responses to two major recessions (the early 1980s recession and the Excellent Recession); a look at the relationship inbetween productivity and compensation; a specific concentrate on labor costs and work rules; an examination of the geography of the industry, including the role of what are termed “transplants” (foreign-owned assembly and supplier facilities); and a consideration of how fresh technologies and systems to achieve quality and efficiency improvements are challenging core operating assumptions.
A number of themes emerge:
- The U.S. auto industry has been revitalized in latest years through a commitment to quality, innovative production and management technics, a constructive relationship inbetween management and labor, and improved relations with suppliers.
- As an example of the industry’s latest success, Ford loved profits of $6.Two billion in 2011, $7.Two billion in 2012, $8.Trio billion in 2013, and $6.9 billion in 2014. As a result, the company’s workers received profit sharing checks of $6,200 for 2011, $8,300 for 2012, $8,800 for 2013, and $6,900 for 2014.
Prologue
The two thousand three national negotiations inbetween UAW and Ford were not, in most respects, pivotal. Embedded in the negotiations, however, were two signals of the transformational switch that is a concentrate of this report.
Most of the two thousand three negotiations involved traditional bargaining, continuing a longstanding practice of trading incremental gains in wages and benefits for labor peace and union/worker participation in joint programs on safety, quality, work-life balance, and other matters. The two transformational signals were largely invisible to policymakers and the general public.
Very first, the quality subcommittee (one of over twenty subcommittees in the negotiations) utilized an interest-based, problem-solving treatment to bargaining and generated an innovative agreement to have hourly workers designated as Quality Operating System Coordinators (QOSCs) in key areas of all the plants, taking responsibility for driving standardized work processes and joining with team leaders to generate continuous improvement suggestions from work teams. This harnessing of front-line skill in the early 2000s was pivotal to Ford’s progress from near last in quality to best-in-class by 2010.
2nd, the union proposed that hourly workers also be permitted to earn what is termed a “black belt” in lean/Six Sigma principles. Earning a black belt involves completing required coursework in statistical process control and related matters, as well as leading a major process improvement project through the stages of Define, Measure, Analyze, Improve, and Control (DMAIC), typically generating savings of hundreds of thousands of dollars up to a million dollars. Ford’s vice president of quality at the time could not conceive how an hourly worker could lead a switch initiative on this scale, which would have entailed directing the work of the associated engineers and managers. The proposal was rejected.
Swift forward to 2008, when the results of front-line engagement were increasingly evident. Even with 50,000 workers taking severance packages to depart from the company during the downturn, quality made year-over-year improvements. The UAW again raised the idea of hourly black belts, and this time Ford leadership agreed to support an initial cohort of thirty five hourly workers coming in training to earn a lean/Six Sigma black belt.
Armentha Youthfull is a UAW member in the Dearborn Truck Plant and a QOSC who was part of the very first graduating class of black belts in 2010. Reflecting on the two years of training for this very first cohort of trainees, she said:
No longer were we management and employee, we were team members pursuing the same objective. This practice doesn’t eliminate the notion of salaried versus hourly, but for me personally it demonstrated how much more we as an organization can achieve when titles, classifications, and separation aren’t the central concentrate. (Cutcher-Gershenfeld, Brooks, and Mulloy 2015, 147)
Back on the job, she describes the influence of the training:
I am able to problem solve [and] coach team leaders. It is not just the statistical part; it is the basic DMAIC process for scoping problems and getting to root causes.
Youthful further comments on the role of front-line skill:
Company successes are not just due to the minds of the people at the top who are being paid all the money, but the minds of people at the bottom. This is not a false empowerment but truly and genuinely acknowledging that we have each chosen our part of the job and both are part of success. . . . People are loyal to the company—there has to be respect and loyalty because we are all providing our best and it doesn’t matter where you are in the structure.
In reflecting on the practice, she adds that there are still cultural barriers in the minds of some:
Black belt training has empowered me. People in management do respect you more. Some didn’t believe a person without a statistics background could pass. When I did pass, some begrudgingly shook my palm. You could see it in their faces: they were amazed. I thought, “You’ve got to be kidding me.” They were, like, “Oh my god, she passed and did it on the very first time.”
The comment is a little insulting—there are slew of people who could do this. People have abilities that managers don’t know anything about. One should never be comfy making an assumption about another person’s skill set or talents simply by their classification, association with a group, or a particular organization and/or appearance. (Cutcher-Gershenfeld, Brooks, and Mulloy 2015, 53)
As is evident from this last quote, despite considerable progress in valuing the distributed skill of the utter workforce, there were still deeply embedded assumptions that had not fully switched. At the same time, the very existence of hourly employees with black belts speaks of many deeply embedded assumptions that have switched.
We share this story for three reasons. Very first, it is illustrative of a long-term transformation that has delivered results and switched lives. The QOSCs and black belts are just two of many pivotal examples that break from common stereotypes about the auto industry.
2nd, it highlights the auto industry’s capacity for resurgence. When Congress and the Obama administration were debating a bailout of the auto industry, it was seen as troubled in ways comparable to the financial sector. Industry leaders were berated for flying corporate jets to testify before Congress (Wutkoski 2008). The congressional representatives’ questions exposed just how little they knew about this industry and the roles of labor and management in working to convert quality, safety, and other operational aspects. Unlike the financial sector, the auto industry in 2007–2008 (when the congressional hearings were taking place) was already well along on a transformational journey. By 2008, for example, the quality gains at Ford had translated into a reported savings of $1.Two billion in warranty costs (Kavanagh 2008). An improvement of this magnitude does not happen lightly or quickly; it is the product of constancy of purpose over many years in product design and manufacturing.
During the brief time that Cerberus, a venture capital hard, possessed Chrysler it became very clear that running an auto company required deep expertise that was not lightly acquired. Consider that a typical car will have as many as Ten,000 components with an assembly process involving the coordinated efforts of over Four,000 workers. Tolerances of thousandths of an inch are required for quality standards, and if the assembly line doesn’t run due to a threat to quality or something not going as planned, it can cost a company as much as $15,000 a minute. The heartbeat of an auto assembly plant is measured in the plant producing approximately one fresh car a minute.
The challenge for the auto industry when the congressional hearings were taking place was not figuring out how to improve—that was clear, and improvements were underway. It was the cash-flow implications of the short-term unprecedented collapse in the consumer market. Ford lost over $12 billion in two thousand six as it adjusted to declining sales and lost market share, for example. Working with the UAW, Ford met that challenge and is now a national leader in job creation, generating an estimated Legal,000 fresh jobs in the United States since the recession, including jobs that had been slated for Mexico. Overall, Goolsbee and Krueger (2015) document that motor vehicles and parts manufacturing accounted for an estimated increase of 256,000 jobs inbetween June two thousand nine and July 2014. This represents six percent of the nation’s growth in jobs, even tho’ this industry only accounts for two percent of total employment. Ford liked profits of $6.Two billion in 2011, $7.Two billion in 2012, $8.Three billion in 2013, and $6.9 billion in two thousand fourteen (even with substantial investments in fresh products, such as the fresh fuel efficient, aluminum figure F150 truck). Moreover, workers received profit sharing checks of $6,200 for 2011, $8,300 for 2012, $8,800 for 2013, and $6,900 for two thousand fourteen (each paid in the very first quarter of the next year). General Motors workers received profit sharing payouts of $Four,300 for 2011, $6,750 for 2012, $7,500 for 2013, and $9,000 for two thousand fourteen (again, each paid in the very first quarter of the next year) based on profits of $7.6 billion for 2011, $Four.9 billion for 2012, $Trio.8 billion for 2013, and $200 million for 2014. Albeit there is variability in profit sharing payouts, in the last four years autoworkers have received far larger payouts than have most U.S. workers.
As former chairs of the Council of Economic Advisers during the industry crisis, Goolsbee and Krueger (2015) report being astonished by the industry’s resurgence, commenting, “We are both pleased and a bit astonished by how well the past five years have played out for the domestic auto industry.” These authors go on to conclude, “We are both thrilled and relaxed with the result: the automakers got back on their feet, which helped the recovery of the U.S. economy. Indeed, the automakers outsize contribution to the economic recovery has been one of the unexpected consequences of government intervention.” These authors capture well the uncertainty felt in government during the tumult of the recession, but as we indicate in this report, a deep skill of the internal workings of the industry suggests that the capacity for resurgence was much stronger than many assumed. Also, while government intervention was essential for the industry’s recovery, also key were continuous improvement processes, organizational restructuring, and collective bargaining agreements that preceded the crisis.
A third motivation for sharing the QOSC and lean/Six Sigma black belt story is that it illustrates the constructive role of the union. Many viewed the UAW as part of the problem, citing what they eyed as inflexible wages and limitary work rules. For example, U.S. Senator Bob Corker (R-Tenn.) criticized the UAW, stating that “it’s about confrontation, it’s about fighting,” adding, “[t]here’s no question that the UAW has had a negative influence on the big three automakers” (DePillis 2014). In fact, the union was a key driving force behind innovations such as the Quality Operating System Coordinators and the lean/Six Sigma black belts. The union also agreed to far-ranging work rule switches at various times before two thousand seven (including the negotiation of over thirty competitive operating agreements at Ford plants in 2006, generating estimated efficiency improvements of over $500 million). Additionally, the union agreed to a lower entry wage in two thousand seven for up to twenty percent of the workforce, after which workers would receive the higher regular wage. As is discussed more fully below, the two thousand seven establishment of a Voluntary Employee Benefit Association (VEBA), funded to take on responsibility for retiree health care, helped reduce the gap in compensation (wages and benefits) inbetween the Big Three automakers and transplants from approximately $35 per hour to $6 per hour.1 By the time the industry was asked to testify before Congress in November 2008, the president of the UAW had clear evidence to indicate that labor was very responsive to the economic challenges facing the industry and engaged in utter partnership to enable industry success.
This report features material from a forthcoming book titled Inwards the Ford-UAW Transformation: Pivotal Events in Valuing Work and Delivering Results (Cutcher-Gershenfeld, Brooks, and Mulloy 2015), which presents a total of fifty six pivotal events over thirty years that add up to a transformation in the Ford–UAW relationship.Two This does represent an orientation in the report toward the one company that didn’t take a government bailout, but many of the Ford–UAW pivots have counterparts at GM and Chrysler that are significant to understanding their part in the industry’s resurgence. In addition to drawing on material from the Ford–UAW book, this report also incorporates material from other sources with the overarching aim of presenting a series of windows into the industry that conveys its complexity. A combination of qualitative and quantitative data is featured to provide a visceral and comprehensive sense of the industry and its challenges. Not all the pivots described in the Ford–UAW book or in the industry more broadly were successful. There were certainly strategic choices in the 1980s and 1990s that, in retrospect, were ill-advised, and there are still pivotal challenges ahead.
It has been argued that a transformation in employment relations requires aligned switches at the strategic level, the collective bargaining or institutional level, and the front-line workplace level (Kochan, Katz, and McKersie 1986). In the domestic auto industry and particularly in the Ford–UAW case, we find evidence of transformational switch at all three levels, however it is still incomplete, and there are many threats to progress. Thus, the aim of this paper is to make clear the limitations of simplistic assumptions about labor and management, pointing instead to a deep appreciation for the sources of resilience in an industry whose extended footprint accounts for an estimated Four.Five percent of U.S. employment, or one of every twenty two U.S. jobs.Three
The balance of the paper proceeds as goes after. It embarks with a comparison of the auto industry’s response to the 1979–1982 and 2006–2009 crises to illuminate how the industry copes with adversity, and to demonstrate how it has remade itself in response to the most latest crisis. The paper then takes a detailed look at labor costs and work rules to dispel some of the most persistent myths surrounding the auto industry. Next, it examines a number of factors shaping U.S. automakers, including the arrival of transplants, the shifting geography of the industry, and evolving supplier relations. Eventually, the paper details how the industry has been transformed by the shift to knowledge-driven work, the spread of lean/Six Sigma systems, and the development of fresh technologies.
A historical comparison: The 1979–1982 and 2006–2009 crises
For the auto industry, the 1979–1982 period was as cataclysmic as the recession that, for automakers, began in 2006. Putting the two crisis periods side-by-side helps illustrate how the industry copes with adversity, and is instructive about how both labor and management take into account the public interest to a much greater degree than almost any other industry.
The logic of placing the two recessions side-by-side is evident in Figure A, which indicates that both represent the most precipitous declines in auto sales in the past half century.Four
Seasonally adjusted lightweight U.S. vehicle sales (millions of units)
Source: Reproduced from Goolsbee and Krueger (2015)
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While a combination of monetary policy and global energy issues drove the recession of the early 1980s, the auto industry felt the influence in early 1979, as Automotive News recalls:
Auto sales were off to a rousing begin in 1979. Sales of domestic vehicles in the very first ten days of the year were up twenty three percent. Then all hell broke liberate. On Jan. 16, 1979, the Shah of Iran was overthrown, and the Ayatollah Khomeini came to power. He cut Iran’s oil production, which diminished shipments of crude oil to the United States. Gasoline prices soared, and the American economy plunged into a recession. (Sawyers 2013)
Subsequently, sales of the more fuel-efficient Japanese cars took off. Sales for Toyota, Datsun (now Nissan), and Honda—the three top-selling Japanese brands—rose from 1.1 million in one thousand nine hundred seventy eight to 1.Four million in 1982, a twenty nine percent increase. Indeed, in 1982, Japan surpassed the United States, even if only shortly, as the world’s largest producer of cars and trucks. At Ford, the situation was eerily similar to the late 2000s recession. Ford’s car sales dropped forty seven percent, from Two.Five million in one thousand nine hundred seventy eight to 1.Four million in 1982. The company had already lost $1.Five billion in one thousand nine hundred eighty and $1.0 billion in one thousand nine hundred eighty one (equivalent to $Four.6 billion and $Two.7 billion, respectively, in two thousand fourteen dollars), with hourly employment ripping off by forty six percent (approximately 100,000 jobs) during the same period (Cutcher-Gershenfeld, Brooks, and Mulloy 2015, 27).
In an unprecedented budge, contract negotiations inbetween the UAW and the U.S. companies were opened six months early, and the automakers demanded and achieved an end to what was termed the Annual Improvement Factor (AIF). For over three decades prior, autoworkers received an annual wage increase of three percent (separate from extra inflation-based cost-of-living increases). The three percent year-over-year increase in base wages corresponded to a three percent year-over-year increase in productivity during that same period. This formula was adopted to varying degrees by other major U.S. industries and played a central role in building the U.S. middle class.
The next section of the paper will concentrate more fully on the implications of cracking from this pattern. Very first, however, it is instructive to highlight another joint UAW–automaker response to the recession: effective efforts to retrain displaced workers. All three major auto manufacturers established joint training funds, originally supported at the rate of five cents for each hour worked by union members and later expanded to ten cents and higher amounts, with extra premiums for overtime hours. The joint funds required both union and management signatures before money could be spent and were targeted at establishing retraining programs with community colleges and other service providers. Remarkably, within approximately two years over ninety percent of the laid-off autoworkers had been placed in fresh jobs (Ferman et al. 1991). This commitment to invest in workers who would most likely never work in the auto industry again cushioned the influence of the recession on individuals, families, and communities.
In addition to cracking from the Annual Improvement Factor and establishing joint training funds, the UAW–Ford contract in particular was notable for the launch of what were termed Mutual Growth Forums. The principle of “mutual growth” preserved the spirit of the AIF, linking worker prosperity with business development, and recognized the need for a regular forum for dialogue inbetween labor and management on these matters. We will comeback to all three developments in the context of the 2007–2009 recession.
The late 2000s recession followed more than four decades of declining market share, as is indicated in Figure B.
Percent of total U.S. auto industry market share, by automaker, 1961–2014
The data below can be saved or copied directly into Excel.
The data underlying the figure.
Source: WardsAuto (various years)
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By the end of the 1990s it was clear that the U.S. domestic manufacturers lagged competitors on quality, and Toyota in particular benefited with the fastest growth in market share. In the 2000s, however, the story is one of enlargening recognition of the need for transformation in the domestic auto industry—and, in the case of Ford, clear progress in halting the decline.
Before the total influence of a transformation was realized, the entire auto market collapsed in the most latest recession. The seasonally adjusted annual sales (SAAR) of cars and trucks dropped from a projection of more than seventeen million vehicles at the beginning of two thousand six to under eleven million in 2008. During 2006–2007, the hourly workforce at Ford was diminished from over 90,000 to approximately 40,000. These developments made the headlines. What was not as visible was the adjustment process, which paralleled and even went beyond what had happened in the early 1980s.
There was again concession bargaining, resulting in two thousand seven in the establishment of a fresh $14.20 entry wage that was approximately sixty percent of the regular production beginning hourly wage. Importantly—unlike two-tier wage systems in other settings—once twenty percent of the workforce was entry wage, the very first employees hired would budge up to the utter wage. Instead of unilaterally cutting retiree health care, which happened in many non-union firms, each of the domestic original equipment manufacturers (OEMs) negotiated with the UAW their own separate Voluntary Employee Benefit Associations (VEBAs). (The term “OEM” refers to the companies designing and building the vehicles, in contrast to what are termed first-, second-, and third-tier suppliers.) The collective Overall Post-Employment Benefit (OPEB) liability of the three companies totaled $115 billion. In total the companies contributed approximately $70 billion in cash and stock to fund the retiree health care benefits. With the stroke of a pen, the VEBA, an independent entity managed by a board with a majority of non-UAW directors, became one of the nation’s largest providers of health care benefits, and the members had much greater assurances of continuity of benefits than if they had relied on companies that might go into bankruptcy.
As was the case in the early 1980s, all three auto companies went far beyond almost all other U.S. firms in their efforts to cushion the downsizing’s influence on employees. Ford went the furthest—there was not one single involuntary layoff. Instead, all 50,000 workers who lost their jobs did so through voluntary separation packages. There were at least fourteen distinct packages, ranging from a special early retirement program suggesting $100,000 and six months of health care coverage to a non-retirement-eligible educational chance program providing four years of college tuition (up to $15,000 a year), half salary, and utter benefits for four years. Unnecessary to say, these and other comparable programs far exceeded what most displaced workers experienced during the latest recession. The influence on individuals, families, and communities was far less severe than it would have been otherwise. Reflecting on the practice, current Ford CEO Mark Fields (and then president of the Americas, covering North and South American operations) observed:
We went through a massive transformation. . . . We had to say goodbye to almost fifty percent of the hourly workforce and almost forty percent of the salaried workforce. The key thing about the transformation is that we did not miss a unit of production during this time and quality went up. (Cutcher-Gershenfeld, Brooks, and Mulloy 2015, 74)
From this comparison of the responses of labor and management in the early 1980s recession and the most latest recession, it is clear that the values of the union and of the employers combined to generate outcomes that mitigated the harm to workers, their families, and their communities. The original concept of a corporate charter was a social contract in which organizational leaders were indemnified from lawsuits in exchange for contributing to what was termed the commonweal (by providing employment, supplier purchases, and tax revenue that would contribute to the effective functioning of the economy and society). The mitigation of the influence of the recession on workers, families, and communities reflects attention to the public interest in keeping with the spirit of this fundamental social contract. We also see that the union was not intransigent—there was a capacity to adjust wages and benefits to the fresh competitive realities, but it was a negotiated process of adjustment rather than a unilateral cut. Ultimately, we see that there were tangible benefits in cost and quality that are still evident today. These benefits are part of a business case for the industry’s constructive response to the downturn. It would be interesting to know the degree to which leaders in other industries fully explored such options, as compared with just replicating common practices such as involuntary layoffs with limited assistance or severance payments.Five
The rate of switch in productivity and wages
In one thousand nine hundred fifty UAW President Walter Reuther led the negotiation of what has come to be called the “Treaty of Detroit” with General Motors, which was followed by similar agreements with Ford and Chrysler. This five-year agreement introduced cost-of-living adjustments to wages, the concept of an actuarially sound pension plan, a no-strike provision during the term of the agreement, reserved management rights to run the business, and a link inbetween wages and productivity (termed the Annual Improvement Factor). In many respects, the legacy of this agreement still shapes labor–management relations in the auto industry.
The influence of the “Treaty of Detroit” is evident in Figure C, which depicts the rate of switch in nationwide productivity, overall hourly wages, overall hourly wages and benefits, and hourly wages among Ford assembly workers (which are similar to those of their GM and Chrysler counterparts).
Cumulative percent switch in U.S. productivity, U.S. hourly wages and compensation, and Ford assembly line worker hourly wages, 1947–2013
The data below can be saved or copied directly into Excel.
The data underlying the figure.
Source: Adapted from Cutcher-Gershenfeld, Brooks, and Mulloy (2015)
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In the U.S. economy, for the three decades following World War II, wage growth matched the rate of switch in productivity. The combined increase in productivity and purchasing power fueled a remarkable period of economic growth in the United States. However, by the early 1970s, the rate of switch in wages had begun to go plane. To some extent this was mitigated by continued growth in benefits (health care and pensions are indicated in the figure), tho’ combined compensation (wages and benefits) was also flattening out by the early 1980s. Tho’ it is not represented on this chart, household income continued to grow as 2nd wage earners (women) entered the workforce, tho’ the rate of switch in household income went vapid by the 1990s. At this point most households did not have a third wage earner able to come in the workforce, and this marked the beginning of the stagnation in purchasing power that contributed to the latest recession.
Compensation for Ford assembly workers displays much greater variability since adjustments are generally made through three-year cycles of collective bargaining (with some longer-term agreements). The more latest addition of profit sharing has smoothed out some of the variability, but the main story is that the rate of switch in auto industry wages continued to track the rate of switch in productivity for two extra decades after the break from the AIF formula. It was not until the 2000s that the rate of switch went plane in this industry.
There are already indications that stagnant hourly wages will be an issue in the auto industry’s two thousand fifteen negotiations. There are also indications that efforts will be made to connect this issue with executive compensation. These are elaborate issues, and some aspects of them are beyond the scope of labor negotiations. Even issues that are within the scope will be challenging to resolve. For example, the entry wage has directly led to job growth among U.S. automakers that was either slated for suppliers or for other countries, such as Mexico. As noted previously, an estimated Legal,000 fresh jobs have been created within Ford through fresh work and extra shifts in a number of domestic plants. As such, the issues surrounding pay become intertwined with issues pertaining to job creation.
Ultimately, the challenge facing the auto industry, the U.S. economy, and the global economy more broadly is finding a way to ensure a continued linkage inbetween pay and productivity—so that purchasing power proceeds to keep rhythm with the generation of products and services.
Myths and realities regarding labor costs and work rules
Two often-misunderstood facets of the U.S. auto industry are labor costs and work rules. While these issues are often at the core of criticisms of the U.S. auto industry, they are not the stagnant haul on the industry that they are typically seen to be. Moreover, there are other competitive factors—such as product mix, product quality, supply chain spectacle, and enterprise business strategy—that are far more significant to the fortunes of the industry.
The role of labor costs and work rules
Direct labor costs (for hourly and salaried workers) represent approximately 18–20 percent of the total costs of an automotive enterprise (with hourly workers accounting for approximately half that amount). Most of the total costs are associated with purchased parts, energy, research and design, warranty, overhead, and other factors. Indeed, Helper and MacDuffie (2008) place the cost of purchased parts at seventy percent of total costs. Additionally, work rule plasticity has been enhancing through pilot experiments since the introduction of the mutual growth forums in 1982, with major gains over the last decade-and-a-half as the industry has moved more systematically to team-based work systems.
Far more consequential than labor costs or work rules are strategic choices, such as Ford’s decision to purchase fresh brands in the 1990s and early 2000s (Volvo, Land Rover, Jaguar, Aston Martin) and to undertake share buybacks, rather than reinvesting in domestic operations. In 2006, as the market was collapsing, Ford permitted the UAW to select a financial accomplished to conduct a detailed review of the business so that there would be utter transparency on the extent of the crisis the company faced. This individual, Eric Perkins, who would later be named research director for the UAW, recalls the briefings to the union membership he provided based on his findings:
I told the membership that the company was in terrible form. They should prepare for the worst. There were lithe figure shops only running one product. Money had been wasted on share buybacks and special dividends, rather than investment in fresh products. Purchased component costs (two-thirds of vehicle costs) were toughly $Two,000 higher for Ford than for Toyota and maybe a thousand higher than they were at GM on equivalent vehicles, primarily because of lousy volume predictions at the time of product approval.
There was too much complexity in the design. Their time to market was two to three years longer than the Japanese and one year longer than GM. Ford had generated many innovative products such as the Explorer and the Expedition, but the success covered up underlying problems. Further, most of the Big three market share loss since two thousand one had been at Ford, and this included the very profitable products such as Explorers, Expeditions, and even pickups—product segments Ford had once predominated. I said this company is on the brink of bankruptcy and they needed to make a radical transformation. Purchasing and design accounted for more of the problem than labor. I said that however we were only twenty percent of the problem, every penny counted. Many UAW members possessed stock and identified with Ford. People thought of themselves as working for a excellent company—so it was a difficult message to supply. (Cutcher-Gershenfeld, Brooks, and Mulloy 2015, 43)
As the quote indicates, business strategy is much more salient to the fortunes of the industry than labor costs or work rules. Yet in 2008, the Wall Street Journal still laid all the problems of the industry on the doorstep of employee benefits and UAW work rules, writing in a December one editorial:
Consider labor costs. Take-home wages at the U.S. car makers average $28.42 an hour, according to the Center for Automotive Research. That’s on par with $26 at Toyota, $24 at Honda and $21 at Hyundai. But include benefits, and the picture switches. Hourly labor costs are $44.20 on average for the non-Detroit producers, in line with most manufacturing jobs, but are $73.21 for Detroit.
This $29 cost gap reflects the way Big Three management and unions have conspired to make themselves uncompetitive – increasingly so as their market share has collapsed. . . .
The absence of the UAW also gives [transplant] car producers the plasticity to deploy employees as needed. Work rules vary across company and plant, but foreign rules are generally less limitary. At Detroit’s plants, electricians or mechanics tend to perform certain narrow tasks and often sit idle. That infrequently happens outside Michigan. In the nonunionized plants, makeshift workers can also be hired, and let go, as market conditions dictate.
The editorial did point to some UAW locations—such as the GM–Toyota Fresh United Motors, Inc., joint venture in Fremont, California (NUMMI)—as exceptions, but it failed to take into account the VEBA negotiated in two thousand seven and the progress with team-based work systems that preceded the collapse of the market and that continued even in the face of the departure of approximately half of the workforce. Moreover, the legacy pension and health care costs were not the product of what the Wall Street Journal editorial termed “a conspiracy to be uncompetitive.” Instead, they were the product of business success and a determination to share the gains across numerous generations of the workforce.
The evolution of fringe benefits
The health care and pension benefits provided by U.S. automakers are an significant mechanism for broadly sharing companies’ prosperity, and for ensuring that the automakers uphold their end of the social contract. The provision of what became termed “fringe benefits” emerged during World War II under the National War Labor Board as an alternative to wage increases, which were constrained by national wage and price controls.6 Following the war, in the 1950s, the UAW pressed unsuccessfully for national health care legislation. The company-provided health benefits represented what the union eyed as an acceptable but less-preferred alternative, which began with active worker coverage and was later extended to retirees.
At various times when national health care arrangements have been debated in the United States, the domestic auto companies have been largely silent, but privately supportive of policies that would level the playing field vis-à-vis foreign competitors by lowering the companies’ benefit costs. Indeed, a two thousand three Fresh York Times articled indicated that Ford Chairman and CEO William Clay Ford Jr. “said that a national health care system, in some form, could help level the playing field with Japanese and European competitors based in countries with national health systems” (Hakim 2003). His comments were partly in response to a criticism of the domestic auto companies as “H.M.O.s on wheels.” Because the domestic firms didn’t have to cover health care costs in Canada, for example, this provided a cost advantage for some production to be shifted to Canada at various times during the past four decades.
When transplant facilities arrived in the United States they also suggested company-provided health benefits for active workers, but did not primarily have retirement-eligible workers for whom pension or health care benefits would be needed. In addition, some have shifted from defined benefit to defined contribution 401(k) pension plans, and some have eliminated retiree healthcare benefits. Note, however, that BMW in South Carolina does still have a defined benefit pension plan, and others do contribute cash into the defined contribution plans. Perhaps a more significant factor is the use of makeshift workers, with lower wages and lower benefit costs. For example, as much as twenty percent of the Toyota workforce is made up of makeshift workers.
The evolution of work rules
Cost issues loom large in the daily operations of all auto plants. Most plants operate with what are termed “labor and overhead” budgets in which hourly and salaried labor accounts for around eighty percent of the operating budget (since purchased parts, warranty, research and development, and other costs are not considered “within the four walls” of a plant budget). Thus, for a plant manager, labor costs are a major portion of the budget they manage—particularly since each year these managers are faced with a cost-cutting “task” to be accomplished through efficiencies and diminished head count. The primary method of meeting the task is through efficiency improvements. Thus, work rules have historically been contested terrain—where management has an incentive to speed up operations and workers have an incentive to avoid work intensification. The rise of team-based work systems and continuous improvement contraptions and methods (discussed more fully below) has helped to shift a historically contentious issue into an area of mutual growth.
In the face of enhanced market volatility, there has been mutual interest in developing work rules that permit for more modular and more limber forms of production.7 Two decades ago, it would have been considered an significant accomplishment to have two or three products built on the same platform and the same assembly line. Today, there are a number of plants that can produce as many as six distinct products on the same assembly line—allowing for much more nimble responses to variation in product request (without as many complications due to established physical infrastructure). This has, of course, required enhanced plasticity within teams for training and work assignments, which the UAW has supported. In latest years, there have also been experiments with different forms of skilled trades teams, including what is termed “line-side deployment” (having various trades stationed on the side of the production line rather than in a separate device room). Ford’s Powertrain Plant of the Future initiative is an example of the substantial increases in uptime that can result from these models (Cutcher-Gershenfeld, Brooks, and Mulloy 2015, 151).
Further, the volatility of the markets means that labor costs can be very consequential during a downturn. This goes beyond work rules. Given the large stationary capital investment, a major drop in volume quickly erodes any profit margins and requires attention to the two primary variable costs—labor (hourly and salaried) and purchased parts. There are penalties in both cases to a reduction in spending, so the adjustments are costly. With suppliers, the purchase agreements are premised on predicted volumes, with extra costs imposed when those volumes are not achieved (and often with collective savings when gains exceed what was anticipated in the contract). With the workforce, the original assurances of job security in exchange for contributions to continuous improvement (discussed further in a later section) have been relaxed, but the mutual commitment to cushioning the suck for displaced workers is a cost, albeit one that benefits the rest of society.
The role of collective bargaining
What is perhaps most significant in understanding labor costs and union work rules is that both are a product of collective bargaining. Agreements are reached through the give and take of negotiations. Historically, auto negotiations are very structured events, involving hundreds of union and management representatives serving on twenty or more subcommittees addressing issues such as quality, safety, sourcing, and other matters. Overall agreements on wages and benefits are made at the “main table,” which is also where the work in the subcommittees is reviewed and final agreements are reached. Importantly, the auto industry provides a vivid example of how this very structured process can adjust in a crisis.
In the two thousand seven UAW–Ford negotiations, the parties engaged in a “bargaining over how to bargain” process in which they redesigned the way they negotiated to emphasize problem solving (Cutcher-Gershenfeld 2011). For each subcommittee a multistep process was developed that included the following steps:
- Developing a collective vision for success
- Jointly collecting data
- Analyzing underlying interests
- Brainstorming options
- Identifying potential language/elements of agreements (as adequate)
- Anticipating implementation, including recommended communication and training
With periodic calibration at the main table, this process guided negotiators in developing a collective vision for success on their subcommittee topic. It also provided them with data, an analysis of underlying interests, and a brainstorming of options before the actual negotiations began. While the bargaining at General Motors and Chrysler was not restructured to the same degree, the two thousand seven negotiations with these companies were also characterized by a high degree of problem solving. As noted earlier, the two thousand seven negotiations generated the establishment of a VEBA that was funded to take over responsibility for retiree health care. The VEBA took an enormous liability off the U.S. auto companies’ books. Along with improvements in vehicle margins, diminished warranty costs, and other developments, the influence on Ford is evident in Figure D, which shows that the company’s credit rating began improving at the actual launch of the VEBA in two thousand ten and, by 2013, had moved back into the investment-grade range.
Standard and Poor’s issuer rating for the Ford Motor Company, 2000–2013
Source: Reproduced from Cutcher-Gershenfeld, Brooks, and Mulloy (2015)
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This is just one example of labor and management using collective bargaining to reach agreements with transformative influence, not just to make incremental adjustments in wages, benefits, and working conditions.
Factors shaping the industry in latest decades: Transplants, shifting geography, and supplier relations
In the last two decades, the U.S. auto industry has been shaped by globalization and the associated arrival of transplants. These compels have caused the geography of the U.S. auto industry to go through a dramatic transformation. They have also had significant effects on the wages and benefits of the domestic auto manufacturers and on their supply chains.
The arrival of transplants and shifting industry geography
The one thousand nine hundred ninety four North American Free Trade Agreement (NAFTA) accelerated the growth of auto component production and auto assembly plants in Mexico (and to some degree, Canada). Political and market pressure on Japanese and European (and later, Korean) manufacturers to reduce imports to the United States has led to a rising number of “transplants” supplying auto components and assembling autos.
Primarily, the transplants operated in the Midwest, including assembly plants in Illinois (Mitsubishi), Michigan (Mazda), Ohio (Honda), and Pennsylvania (Volkswagen), along with California (Toyota’s joint venture with General Motors, now a Tesla facility). More recently, however, the growth has been in Southern states, including assembly plants in Alabama (Honda, Hyundai, and Mercedes-Benz), Georgia (Kia), Kentucky (Toyota), Mississippi (Nissan and Toyota), South Carolina (BMW and Mercedes-Benz), Tennessee (Nissan and Volkswagen), and Texas (Toyota). In Mexico there are current and planned assembly operations for Audi, BMW, Chrysler/Fiat, Ford, General Motors, Honda, Kia, Mercedes-Benz, Nissan, Porsche, Peugeot, Renault, and Volkswagen. In Canada, there are assembly plants for Chrysler/Fiat, Ford, General Motors, Honda, Suzuki (a joint venture with General Motors), and Toyota—a much smaller mix of manufacturers compared with Mexico.
In addition to the transplant assembly plants, there are a large number of transplant suppliers. Even however Ford did not seek the same bailout as did General Motors and Chrysler, it fully supported government intervention since a failure of either of its major competitors would have had devastating impacts on the supply chain, which would have affected all firms (even the transplants). (Indeed, scholars have seen the government intervention as a de facto regional industrial policy on the part of the U.S. government [Klier and Rubenstein 2011]).
As a result of these trends, the geography of the auto industry is no longer almost as concentrated in the Midwest as it once was. The trend for overall motor vehicle manufacturing employment (original equipment manufacturers and parts suppliers) is introduced in Figure E (which was developed with a concentrate on Tennessee, a state that has been in the public spotlight due to intense political opposition to a UAW organizing drive at the Volkswagen plant in Chattanooga). As Figure E illustrates, the greatest growth has been in Mexico, with the greatest loss of employment in the Midwest, the United States outside of the South and the Midwest, and Canada.
North American motor vehicle manufacturing employment, by country and U.S. region, 1994–2012
Source: Reproduced from Brookings Institution (2013)
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Against these larger geographic trends it is noteworthy that the 2007, 2009, and two thousand eleven negotiations all involved dialogue and agreements about jobs to be maintained in the United States. In some cases, jobs targeted for Mexico were instead located in domestic plants. Thus, albeit the direction of the trends is clear, the trends are not immutable.
Transplants’ effects on the Big Three’s wages and benefits
The arrival of the transplants has resulted in a gap inbetween the compensation of the domestic manufacturers and that of transplants, as almost all transplants are non-union and located in lower-wage locations—undermining the original aim of the UAW to take wages out of competition. The gap is not just a product of lower base wages, but is also due to the absence of retiree pension and retiree healthcare costs for the newer organizations. In 2005, there was a gap of $Three.62 inbetween the average hourly wage of $27.41 at Ford and $23.79 for the transplants. When fringe benefits, legally required payments, pension benefits, retiree health care, and other post-employment labor costs are added in, the gap grew to $20.55 ($64.88 versus $44.33).
During the government bailout negotiations in 2009, the U.S. government pressured the UAW to agree to what it termed competitive wages, competitive benefits, and competitive work rules, and to convert fifty percent of the VEBA to equity. Albeit the union did agree to a improvised shift in compensation from an annual wage increase to annual lump sums (among other adjustments), it was able to forestall deeper cuts. In 2010, following the two thousand seven introduction of the entry wage and concessions made during the two thousand nine government bailout, the wage gap stood at $Four ($28 for Ford versus $24 for the transplants), and the gap when including fringe benefits and post-employment costs stood at $6 ($58 for Ford versus $52 for the transplants). In retrospect, given the current profitability of the industry, it is clear that deeper wage cuts were not needed to enable the industry’s recovery. In this case, the collective bargaining process generated sufficient concessions to get through the crisis, but preserved what are considered good middle-class jobs to a much greater degree than would have occurred through unilateral act by management or government.
The gap in post-retirement costs inbetween the domestic manufacturers and the transplants is closing due to the VEBA, joint healthcare initiatives inbetween the UAW and the domestic manufacturers, and rising costs for the transplants. Among the transplants, four (BMW, Honda, Subaru, and Toyota) provide PPO health care through age sixty five with varying degrees of premium sharing (Honda is at one hundred percent versus Toyota at fifty percent, for example). These companies also make contributions to healthcare retirement accounts (HRAs) based on service. Nissan offers an account-based health plan with premium sharing up to age 65, but has cut off the HRA for those hired after two thousand six (presumably due to concerns with rising costs). Others (Hyundai, Kia, Mercedes, and Volkswagen) do not suggest any post-retirement healthcare coverage. In this context, the VEBA is a competitive advantage in that it permits the UAW-represented workforce to have high quality healthcare coverage in retirement without imposing extra costs on the balance sheets of the domestic manufacturers.
Shifts in supply chains
The larger trends related to transplants and shifting industry geography obscure a number of extra shifts in the supply chains. Very first, in the late 1990s and early 2000s, there was a stir by all three of the major U.S. original equipment manufacturers to outsource many aspects of component design to suppliers. This was seen as a cost-saving stir, with the companies focusing on what they termed their “core” business. This strategy proved problematic, however, as key skill within the OEMs on the component designs dissipated, reducing the capability to oversee the work. As costs and warranty issues with component parts began to climb on, the OEMs have begun to bring more engineering and design work in-house.
Moreover, there has been a major shift in the way the domestic auto industry interacts with suppliers. Historically, the Big Three would pit suppliers against one another in competitive bidding processes and treatment ongoing relations from a low-trust, high-control perspective. Annual surveys by Planning Perspectives, Inc. calculate a Working Relations Index, based on a supplier’s rankings of its automaker customers. As shown in Figure F, from two thousand two to 2008, on a scale from zero to five hundred (where 0–250 indicates poor supplier relations and 350–500 indicates very good supplier relations), the range of scores for Toyota was three hundred fourteen to 415, and the range for Honda was two hundred ninety seven to 384. In contrast, the range for GM was one hundred fourteen to 174, Ford’s range was one hundred fifty seven to 191, and Chrysler’s range was one hundred sixty one to 218. As Figure F indicates, however, the story since two thousand eight has been one of overall improvement by all three domestic manufacturers, as well as some decline among the major transplant manufacturers.
Original equipment manufacturer–supplier working relations index, by automaker, 2002–2014
Source: Reproduced from Planning Perspectives (2014)
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Switching the underlying treatment to supplier relations is just one aspect of a broader set of cultural shifts happening in the auto industry. As is discussed more fully in the following section, these are rooted in the rise of knowledge-driven work systems that employ lean/Six Sigma principles, and in the influence of fresh technologies. Front-line hourly workers responsible for quality, for example, are increasingly expanding the scope of their work to include supplier visits and even technical assistance with suppliers on the use of quality-focused operating procedures. In the more dynamic marketplace, the interdependencies among manufacturers and suppliers are growing.
With the enhanced importance of digital technology in cars there are fresh challenges in the supply chain. Key technology suppliers, such as Microsoft and Google, are not well-attuned to a business context where the reboot of a computer or a need for a software upgrade counts as one “thing gone wrong” in the J.D. Power quality standards. Thus, bringing fresh technology features to the customer, such as GM’s OnStar and Ford’s Sync, has contributed to a reversal in quality spectacle since 2010. Of course, maintaining constancy of purpose with regard to quality—both at the OEMs and among all the suppliers (not just the technology suppliers)—is a never-ending challenge for the industry.
Knowledge-driven work, lean/Six Sigma systems, and fresh technology
To understand the auto industry in the 21st century, it is crucial to consider how fresh technologies and systems to achieve quality and efficiency improvements are challenging the industry’s core operating assumptions.
The auto industry is the archetypical industry of the industrial revolution. In some of the social sciences, the mass production model is still referred to as “Fordism.” Interestingly, the rise of lean principles (such as just-in-time delivery of parts, value stream mapping, continuous improvement suggestion systems, preventative and predictive maintenance, and error proofing) also has roots in the auto industry, building on the Toyota production system. What is not widely appreciated, however, is the degree to which lean principles have a deeply embedded operating assumption centered on the value of distributed skill across the workforce (Murman et al. 2002; Cutcher-Gershenfeld et al. 1998). Organizations that just attempt to apply lean production contraptions, but that don’t wrestle with this core assumption, will have limited success. While the Six Sigma principles (such as reducing variance before improving a system, identifying spectacle relative to “opportunities” for errors, and process-improvement projects) emerged very first at Motorola and then were popularized at GE (both outside of the auto industry), they have come to be integrated with lean principles and depend identically on valuing distributed skill.
The quotes in the prologue illustrate just how difficult it is to shift operating assumptions about front-line skill. The very first pivotal event in shifting these assumptions involved the combination of an embrace of what was termed “employee involvement” and the mutual growth forums, both of which emerged in the late 1970s and early 1980s. At the time, there was an understanding that an enlargened degree of job security was needed in exchange for a commitment from the workforce to share ideas about improving efficiency.
The initial concentrate on employee involvement was aimed not at improving companies’ bottom lines, but at addressing what were termed “blue neck corset blues”—worker alienation on the job. The publication of the book The Machine That Switched the World in one thousand nine hundred ninety one brought the features of the Toyota Production System and what the authors and associated researchers termed “lean production” to a broad audience (Roos, Womack, and Jones 1991; Krafcik 1986). Within the U.S. auto industry the very first exposure to these principles, such as at the GM–Toyota Fresh United Motor Manufacturing, Inc. (NUMMI) joint venture, resulted in more piecemeal rather than systematic learning on the part of the U.S. manufacturers. This was ironic since the lean production systems involve deeply integrated organizational learning principles. Still, the results from the NUMMI case could not simply be dismissed. As Paul Adler (1992) notes from his analysis of the case:
The NUMMI case presents a number of particularly interesting features. Very first, the plant’s design and operating philosophy were a very close copy of Toyota’s Takaoka plant in Japan. Kamata (1983) had given a harrowing account of his practice of exploitation and alienation as a makeshift worker at Toyota City. Observers have thus been anxious to learn how U.S. workers would react to the intense discipline for which Toyota is renowned. 2nd, 85% of the workers hired by the fresh company were former employees of the GM-Fremont facility that NUMMI took over, and the United Auto Workers (UAW) continued to represent them. The GM-Fremont plant had an abysmal record of productivity, quality and labor strife. When it closed in 1982, there were over seven hundred outstanding grievances, and absenteeism was running at approximately 25%. Its productivity and quality were among the worst in the entire GM system. . .
Within two years of start-up, the fresh plant had become the most productive auto assembly plant in the U.S. and the quality of the plant’s principal product, the Nova, was ranked by consumers and internal GM audits in the highest category among domestic and foreign cars. Moreover, worker morale seemed high: in the very first four years of operation, only some thirty grievances had been filed, of which only three had gone to arbitration; absenteeism averaged Two.5%; personnel turnover averaged inbetween 6% and 8%; and over 70% of the workers annually participated in the suggestion program, contributing on average approximately six suggestions per employee. Over the more latest years, the plant has sustained these exceptional levels of business and personnel management spectacle.
The domestic auto firms have varied in the speed with which they have learned the lessons from the Toyota production system, particularly from the adapted version in the U.S. context at NUMMI. We document a number of false starts in the Ford–UAW case, and others have documented the same dynamics in the GM–UAW case (Rubinstein and Kochan 2001). Even tho’ the learning could have been swifter, particularly during the 1990s when the lessons were increasingly clear, significant progress has been made across the 2000s. Today, lean and closely related Six Sigma principles are pervasive in the industry. A key lesson from our analysis of the Ford–UAW transformation is that these principles challenged deeply embedded operating assumptions.8 Surfacing operating assumptions is hard to do; switching them is even tighter.
Certain operating assumptions pertaining to management evolved to incorporate lean and Six Sigma principles. For example, the assumption that quality and safety should be driven by inspection shifted to the assumption that they should be driven by prevention. Shifting that assumption required enlargened communication and coordination inbetween fresh product development and manufacturing (based on “design for assembly” and related principles), training of leaders and workers in a non-blaming treatment to tracking and learning from “near misses,” and innumerable other switches in quality and safety operating procedures. A similar set of switches in operating assumptions involved setting aside the treatment dating back to Frederick Taylor (1914) that put the design of work and the larger enterprise in the palms of pro engineers and managers, substituting instead the assumption of quality experienced W. Edwards Deming (1986) that it was significant to “[p]ut everybody in the company to work to accomplish the transformation. The transformation is everybody’s job.” At its root, this is a shift from what Douglas McGregor (1960) termed a “Theory X” assumption that people need to be monitored and managed on the job, to a “Theory Y” assumption that people want to do a good job, and the concentrate should be on providing them with the devices and resources to do the best job they can.
For the UAW, the shift in operating assumptions is still ongoing and no less central to its operations. Historically, unions have derived power from the threat of withholding labor. However, there is a shift underway whereby the UAW is learning to derive power by enabling work (Cutcher-Gershenfeld, Brooks, and Mulloy 2015, 335). This is evident in the expertise the union now brings to discussions of quality, safety, predictive and preventative maintenance, workforce development, team-based operations, and other such topics. This is challenging internally for the union—it is a very centralized organization and, like management, it has had to increase its appreciation for distributed front-line expertise, and demonstrate plasticity in response to this diffusion of expertise. This is most evident with the individuals who are in what are termed “appointed roles” (rather than elected roles) in local unions. Appointees are designated to oversee quality, safety, training, and other such domains, as well as to pack roles such as Six Sigma black belts. As these individuals become subject matter experts, they must still honor and respect the primacy of the elected leaders—that is the heart of the union’s identity—but their skill must also be given weight in ways that switch how a local or international union operates. At the root of this shift is an expansion of the domains in which the union is able to react in a “pull” style, using distributed skill to advance the interests of its members. Other service organizations are facing similar challenges to their operating assumptions, whether in health care, human services, or other related domains.
Some switches in operating assumptions were not as widely documented in the management literature, but were also pivotal. In the Ford–UAW case, these included a shift in the safety operating system from focusing identically on all safety incidents, to a special concentrate on what were termed “low frequency, high consequence events.” These include lacerations, amputations, and, in a few instances, deaths. Labor and management learned that the practices required for preventing the low frequency, high consequence events were not the same as for other aspects of safety prevention. Similarly, a number of switches in operating assumptions about training and development were needed. Instead of assuming that training should be provided by trainers through formal training events with a comprehensive curriculum, the assumption shifted to organizing training around single-point lessons delivered when needed by supervisors with access to instructor guides—an assumption of leaders as teachers and learning being delivered on a “pull” basis rather than a “push” basis (Cutcher-Gershenfeld, Brooks, and Mulloy 2015, 298).
Even less visible within management was a shift in operating assumptions about the treating of bad news. Traditionally, leaders in the Ford culture assumed that problems within their domain were their responsibility to solve. As such, problems with a fresh product launch, for example, would only be collective with other leaders if it was evident that they could not be contained and resolved. When Alan Mulally joined Ford as CEO, he sought to switch this assumption through weekly Business Plan Review (BPR) meetings for all managers, with Special Attention Review (SAR) sessions to go after up on problems that were identified. For the very first few months of these meetings, the managers were careful to only present status reports that were color-coded as “green” or “yellow,” with no one daring to break the norm of treating problems internally by putting up a status of “red.” The pivot happened when the company’s then–president of the Americas, Mark Fields (now CEO), indicated that a product launch for which he was responsible was “red,” that is, in trouble on quality and cost. Mulally’s response was to embrace the problem and enlist everyone’s help in resolving it, rather than to react with blame, as was typical in the company’s culture. As the vice presidents and directors of manufacturing each set up BPR and SAR processes within their domains, the shift in this embedded operating assumption began to permeate the organization (Cutcher-Gershenfeld, Brooks, and Mulloy 2015, 103).
Looking to the future, there are even more deeply embedded operating assumptions associated with the accelerating rhythm of switch in technology. This is visible in manufacturing operations—where many of the most challenging jobs on the assembly line (such as the installation of windshields or the painting of vehicles) are now entirely treated by robots—and in engineering design, where the entire process utilizes computer-aided design (CAD) processes that directly translate into simulation models and manufacturing specifications. But the role of technology goes much further. A car may have approximately Ten,000 component parts, but software’s role in the functioning of all of these parts is now pervasive in every aspect of the vehicle’s operation. Recently, for example, General Motors enhanced its staff of software engineers from 1,400 to 8,000 (Bennett 2015). This expansion wasn’t undertaken with a concentrate only on vehicle design; the expanded internal capability enabled the development of an improved customer direct ordering system for GM. Similarly, Tesla’s decision to build a large-scale battery facility, what it calls a “gigafactory,” in Nevada represents a strategic choice to not only be more of a vertically integrated enterprise, but to also set technology standards for batteries more broadly in the industry by supplying batteries to other companies (Ramsey 2014). Moreover, as Ford Chairman Bill Ford comments:
The chance and challenge looking ahead is that switches are coming like we have never seen. Self-driving vehicles are coming. Vehicles will be connected to the cloud. We will be transitioning into being a technology company as a result. (Cutcher-Gershenfeld, Brooks, and Mulloy 2015, 243)
Thus, an appreciation of the auto industry today and in the future is inextricably entwined with the advances of technology.
Conclusion
The auto industry is converting from the archetypical mass production industry to a knowledge-driven, technology-infused industry with enterprises committed to providing transportation solutions for the 21st century. Nevertheless, most policymakers and outside observers still make simplistic assumptions about the U.S. auto industry, viewing it as uncompetitive and badly lagging foreign rivals. The aim of this report has been to provide a few very accessible windows into the industry and its operations to motivate a rethinking by outside observers and to prompt fresh ideas for policy and practice.
Simple-minded characterizations of the industry’s challenges as being a product of high wages or union work rules miss the mark in numerous ways. The gap inbetween union and non-union competitors in the domestic industry has been largest around post-employment legacy benefit costs. This was originally an artifact of the non-union transplants being newer organizations with few retirees, and is now also a reflection of the establishment of the VEBAs, as well as transplants’ higher usage of makeshift workers. Not only is the competitive situation switching over time, but the UAW has worked with management at the Big Three in establishing a VEBA, which has addressed a major portion (and the most rapidly growing part) of this cost differential. And far from union work rules being a barrier, the union has been a utter fucking partner for more than a decade in experimenting with innovations in work organization.
More consequential for the industry, in the brief run, are the challenges of coping with swings in the marketplace. This is already driving enlargened team plasticity in operations, innovation in managing voluntary departures, enlargened attention to supplier relations, and a budge to modular product platforms. In the long run the challenges are even greater as fresh technologies permeate vehicles and the broader enterprise.
As labor and management in the domestic industry prepare for two thousand fifteen collective bargaining, a key question will be the degree to which the parties are able to address short-term issues around wages, hours, and working conditions—as well as the degree to which they use collective bargaining as a forum to lay the groundwork for jointly facing the challenges that lie ahead.
About the authors
Joel Cutcher-Gershenfeld is professor (and former dean) in the School of Labor and Employment Relations at the University of Illinois, Urbana–Champaign, and freshly appointed as professor at Brandeis’ Heller School of Social Policy and Management (beginning January 2016). He is an accomplished on workplace innovation and served as a consultant to the UAW and Ford for over two decades.
Dan Brooks served as a union leader with the UAW for thirty five years, rising from local elected positions to co-lead many of the national UAW–Ford joint programs.
Martin Mulloy rose in management over thirty four years to serve as Ford’s Vice President for Global Labor Affairs. He is the two thousand fifteen president of the Labor and Employment Relations Association.
Endnotes
1. The VEBA was the largest contributor to closing the gap ($17), but other factors contributed, including the later elimination of cost-of-living adjustments, lump-sum wage payments, the elimination of what were termed job banks, and the rising costs of the transplants’ utter fringed costs from $47 to $55. By two thousand fourteen it was just a $6 gap. At the time the CEOs testified before Congress, the gap was around $10–12.
Two. The pivotal events in the book are introduced in the present progressive tense, as however you were there at the time (however with quotes from people we interviewed looking back on the event). Here we draw on some of the same material, but we present them in the past tense.
Trio. The Center for Automotive Research reports that “over 1.7 million people are employed by the auto industry. In addition, the industry is a hefty consumer of goods and services from many other sectors and contributes to a net employment influence in the U.S. economy of almost eight million jobs. Approximately Four.Five percent of all U.S. jobs are supported by the strong presence of the auto industry in the U.S. economy. People in these jobs collectively earn over $500 billion annually in compensation and generate more than $70 billion in tax revenues” (Hill, Menk, and Cooper 2010).
Four. The decade preceding the period covered in Figure A includes the very first oil shock of 1973–1974, which was also very consequential.
Five. There is a well-established literature around what was very first termed “institutional isomorphism,” which refers to the way institutional practices tend to look alike, without necessarily reflecting functional differences that would be expected to generate a greater degree of variation. See DiMaggio and Powell 1983. Cracking from such traditions does stand out—consider the attention that Netflix has received for its treatment to severance payments not just in a crisis, but as part of its regular operations. See McCord 2014.
6. The actual term for these benefits is reportedly a product of a meeting of the War Labor Board where they were discussing what to call these extra benefits that were being negotiated. The Broadway play Oklahoma! was popular at the time, and someone in the meeting was evidently humming the tune “Surrey with a Fringe on Top” when someone suggested that they be called “fringe benefits.”
7. See, for example, Muffatto and Roveda 2002; and Simpson, Siddique, and Jiao 2006.
8. This draws on Edgar Schein’s notion of the deeply embedded assumptions in an organization’s culture. See Schein 1990.
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