U.S. auto industry closing great divide in quality, wages

U.S. auto industry closing great divide in quality, wages

http://www.washingtontimes.com/news/2008/nov/24/us-auto-industry-closing-great-divide-in-quality-w/

U.S. auto industry closing great divide in quality, wages David M.
Dickson (Contact) U.S. automakers have made major progress in recent
years closing both the labor-cost gap and the quality gap with foreign
companies manufacturing autos in the United States.

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

"This is a huge change," Mr. Cole emphasized.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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