Friday, June 22, 2007

The Energy Bill and the auto industry: Rock, meet Hard Place

Scarecrow's covered the Energy Bill twice this week at Firedoglake; he notes the Senate version passed making a lot of people unhappy.

Let's face it: this is splitting the baby. NOBODY is going to be happy, and the people of the state of Michigan who've borne the brunt of the automotive industry woes are not going to be better off no matter how this bill was written or passed.

I'm going to explain how we got to this point, and I'm going to say some things that will truly piss off some people. But until they get past the pissed off part and start looking hard at the past and present, there will be no future for the automotive industry in America.

In the past, the automotive industry was like a fall back safety school. If you went to one of several colleges in the United States and got 3.0 or better average grades, you were reasonably assured a job in the auto industry if you had a degree in mechanical, plant or industrial engineering. This is NOT how you create a world class competitive corporation. Ditto for the business degrees; they were not as esteemed at the Big Three, either. Business folks were just paper pushers and bean counters, got far less respect than the engineering folks. Again, not the way to run a highly competitive company or industry. The preference for engineering cred at the expense of business chops was reflected even in the highest of jobs in the industry, but the shareholders failed to make the connection when it came time to vote for CEO's and presidents and other members of the board.

The auto industry was a catch-all for blue collar folks, too. In the late 1970's and early 1980's, if you weren't planning to go to college, you could reasonably assume you could get a line job at the Big Three. Again, not the way to build a lean, mean, fearsome employee base that will produce the best quality products in the world. But unions protected their own to the death. By death, I mean the death of their union. People who could not read were protected tooth and nail by the union, and there were a LOT of these people among the rank and file in the Big Three. If a worker can't read, how can they be trained to do a quality job in a reasonable period of time? How can they be relied upon to read instructions when they run into a problem with a tool or a production process? How much does it cost to keep training and retraining people like this on the most basic of skills?

And this wasn't the only problem with the workforce. There was rampant alcohol and drug abuse in the heyday; it's gotten better, but only after decades and millions and millions of dollars and many lost man hours of production. There was sexual harassment for the longest time, which also cause many problems with integrating better trained workers if they were female. And there was the chronic tension of race. Perhaps in the last decade these issues are finally to a manageable minimum, but the legacy costs of these issues remain with the industry.

These same workers also didn't look ahead to the future; when the 1980's leaned on them, forcing Chrysler into bankruptcy, they didn't see that the future would demand something different of them personally. No, they doubled-down and held the line on wages, becoming an enviable middle class in the eyes of the rest of the world. But they grew so comfortable that they began to vote on single issues. Inflamed by fear-mongering of interest groups, they voted for gun rights and anti-abortion/anti-gay legislators, who in turn were the least friendly to unionization and the protections that workers won over the previous decades. Workers' rights were gradually rolled back against them – and then their wages, and then their benefits, and then their jobs. And without the investment in additional education, they found themselves redundant and forced into retirement, bought out and moved out of state.

The auto industry tried to cut costs through a number of different approaches during the 1980's and 1990's, from introduction of total quality management (TQM), to preferred vendor programs. The first was a step in the right direction, but the unions fought changes tooth and nail as they were seen as a threat to the workers' jobs. What if TQM systems discovered that a union members was simply unfit for a job? They resisted the possibility of discovery.

The vendor programs were implemented and remained, but they were in many ways flawed and often unethical, as unethical as the man who encouraged their introduction into the industry. Jose Ignacio Lopez de Arriortua, at one point considered god-like within General Motors as its purchasing leader, moved beyond the early programs requiring vendors to implement documented, audit-proof quality systems. “Inaki” (as Lopez was nicknamed) demanded vendors bid for work, not merely quote; once a lowest bidder was identified and awarded the job, payments might be made on terms that were highly questionable. Because of Inaki's influence, it became practice in the industry to pay late and later, then demand a rebate before final payment would be made. This required many small vendors to carry too much of the financing of parts and component production on their own backs, and many of these vendors eventually went out of business or were forced to sell out to larger firms. Many of the firms that survived cut corners on quality, as price became more sensitive than quality at this point in time. And many of the firms were purchased by foreign companies, with production consolidated to overseas facilities where labor or materials were cheaper. One additional cross often too burdensome to bear was that refusing to bid often meant that the vendor was permanently blacklisted in the industry. (These practices continue years later even though Lopez left for Volkswagen and was prosecuted for stealing proprietary secrets from GM.) Letting Lopez have his way, though, and realizing short-term savings that made shareholders ecstatic, was easier than putting the screws to the unions and asking them to become competitive both in wages and abilities, though; the long-term, systemic problems that Lopez created were simply ignored or seen as less challenging than similarly long-term and systemic problems posed by the unions.

Other corners that the Big Three cut were in their own operations, much of it now outsourced to other companies. It's hard to find the actual client at one such Big Three facility, once an R&D facility; it now houses thousands of consultant-drones providing services like telephone and computing and accounting that were once done in house, with each of the consultancies required to re-bid their contracts to obtain ever increasing cost reductions.

The one burden that all of the industry shared that could not be controlled in any way by the Big Three was health care. In the last handful of years the cost of health care for workers exceeded the cost of steel used in any car made in America, in spite of double-digit increases in steel prices inside that period of time. The unions did not help with encouraging better health among their workers, instead resisting any cuts to benefits if demanded by the auto industry. Every one of the American firms to which production or services were outsourced faced the same annual double-digit increase in health care costs as well, which both strapped them and forced them to pass on some of the costs at the risk of losing contracts.

From the outside, government did the industry no favors. Standards for miles per gallon were weakened or ignored when gas prices were low, and ramped up too quickly when gas prices rose – none of which happened inside the window of time necessary to turn around new car designs, which at best in the industry today is about 3 years from concept to full production. The tax system also failed to respond in the same time frame, generally operating in two to four year windows from inception of a policy to implementation and reversal. And tax policy often didn't match what would be in the nation's best interests. At one point in the late 1990's-early 2000's farm vehicles could obtain a credit of almost 50% if the vehicle was driven for work purposes; Humvees took off for this reason, with demand outstripping production for years until the tax credit was changed and gas prices had risen dramatically.

And the public did itself no favors being incredibly fickle. What is fashionable changes in less than the three year window as well; if gas prices are high low one year and demand for larger vehicles reflects the change, the car makers cannot change their production fast enough. And all the vendors and the fungibles on the line at either the auto makers or their vendors must be just as willing to cut their jobs or hours or benefits to flex with demand. As most of us who majored in business know, wages are sticky – so jobs get cut first.

The increasing role of risk management in the corporate decision making process also took a toll on the automotive industry; many choices have been made to play it safe rather than risk falling even more behind financially because of the risk of losses. It's not unreasonable to expect a company to sell products that are reasonably safe for their intended used, but with the market demanding even tighter cycle times from concept to production, it is increasingly easy for an auto maker to find itself in serious problems, particularly when there is little capital “seed corn” left.

What does all of this have to do with the current Energy Bill? Think about it. Think deeply about how all of this enters into play with the CAFE standards formulation. There are a lot of voters outside the state of Michigan, home to the Big Three, grumbling about the positions of Senators Stabenow (reelected in 2006) and Levin (up for re-election in 2008). They represent all of the voters under the spectrum described: automotive managers and engineers and business people, union workers actively employed and retired, vendor companies from top to bottom, the businesses in the communities in which the automotive plants are based, the health care industry that in turn supports all of these people. For these Senators to tell these millions of people who voted them into office that they are and have been stupid and screwed themselves and to suck it up would be political suicide, particularly when this state is still in the throes of a budget crisis caused by twelve years of crappy Republican leadership in the governor's office and majorities in both houses of state legislature.

And the 17 electoral votes that this state desperately clings to might well shift another direction if Levin and Stabenow didn't carefully walk the line between doing their constituents' bidding and doing what the future demands of them.

It's so easy to say that the Senators must side with greenest responses first – when you don't live in the state of Michigan, and when there are no easy solutions to any legacy problems let alone the problems the future poses.

thanks -- for someone way too young to remember any of this, this is very informative
nirmal, I cannot emphasize enough that you run out and get a copy of "Rivethead" by Ben Hamper. RUN.

I worked as an engineering co-op student at what is now Delphi, back in the late 70's. Hamper told it exactly as it was. I remember being sent on some horrific sh*t jobs, which while keeping me out of the way of management, gave me an opportunity to learn a lot about the auto industry; when I read Hamper's stuff, it was like a validation of all the crap I'd seen and been put through.

It's taken a generation or two in corporate terms to clean up a lot of what Hamper (and I) saw, but the mentality is still there, buried as in the reptilian brain.
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