AutoTidbits

Decision Time for Fiat-Chrysler

On the heels of a successful takeover of Chrysler, Fiat has to decide where it should be based.  CEO Sergio Marchionne is said to be presenting his plan to the Fiat board today. 

While Mr. Marhionne is famous for commuting between Turin, Italy and Auburn Hills, MI., the associated stress and lack of time for either management team it does not aid the creation of a cohesive multi-national enterprise.  Top managers are largely brand and country-specific and the synergies between the two companies could be enhanced.

Political implications could play a strong role in the eventual decision.  Both the Italian and US governments have financially supported Fiat and Chrysler respectively and any suggestion of moving the new global headquarters out of either country will likely cause significant political fallout.  Closely tied to country-specific politics are the issue of labor unions and jobs.  While the pressure to remain in both countries is sure to be great, moving its headquarters to a third location would send a strong message to both Italian and US governments that Fiat-Chrysler is a truly global entity.  And truly global entities are adept at moving production to where it is financially advantageous. 

In addition to politics, tax implications are likely to be a key driver.  Minimizing the tax burden is bound to be a key driver for Fiat-Chrysler.  Were that a sole factor, one could easily envision an administrative corporate headquarter in a tax friendly location such as The Netherlands or United Kingdom.  The company has an existing subsidiary with such a structure, which has been rumored to be a possible model for the company as a whole.

Finally, access to capital might sway the board.  Automobile production is immensely capital intensive and having access to robust capital markets is important for any automaker.  Balancing that access, which could be attained in the US, with minimal tax burdens will prove to challenging. 

Regardless of the board’s eventual decision, labor, capital and governmental interests are likely to be the key decision criteria.

If Unions Are So Destructive, Why Do They Work Elsewhere?

Unions are a menace to society and stand in the way of free enterprise. That’s the predominant message preached in US business schools. Like most good students, I took what my professor’s told me as a fact, rather than what it really is – a political statement of expediency. True, unions constrain the free flow of capital just as all regulations do, whether they are workplace regulations or environmental regulations. After all, the term “free market” is a misnomer. As any economist will gladly tell you, there is no truly free market. 

Regulations by definition “regulate”, meaning they create a framework within which businesses compete.  It is up to the companies to compete successfully while adhering to the rules of the game.  Why is it than that some companies excel in unionized environments while others do not?

The website Remapping Debate.org posted an excellent article that delves into this issue. Specifically, it examines how unionized automakers in Germany are highly successful while US automakers that are unionized often blame their unions for making them uncompetitive.  The average salary of a unionized US auto employee is about half of his or her German counterpart. Yet these German companies manage to overcome their higher cost structures and earn billions in profits.

How is this possible?  There are two driving factors: costs and revenues. On the cost side, as the article explains, the legal structures in Germany are very different from those in the US. For one, unionized and non-unionized employers face much stricter labor rules. Whereas in the US, most employees can be laid off for almost any reason, a legal principle known as termination without cause, this is not the case in Germany. There, employers must have a thoroughly documented history of negative performance reviews to justify letting an employee go.

Worker protections are stronger in Germany. All German companies have councils made up of employees whose purpose is to represent employees at the organizational level. The councils, known as Betriebsräte, advocate for employees, particularly for minorities, women and the handicapped. In addition, it’s the councils' job to ensure that work rules established in national labor agreements are applied correctly at the local level. This system ensures that ordinary workers are exposed to and interact with management, which has a tendency to build trust and allows each party to better understand the other.

Unlike their German competitors, US firms operate largely immune from outside influences. As such, US unions are the only meaningful counterweight to management’s control of a company. This naturally leads to adversarial relationships.  Further complicating the matter is that in Germany, companies are unable to escape unions whereas in the US union influence can be severely curtailed by moving operations to non-union states. This “opt-out” strategy provides significant leverage to employers. It is also something German manufacturers take advantage of when building assembly plants in the US; which are all in non-union states.

What the article does not address is the revenue side of our economic comparison. In order to be profitable with higher costs, revenue must be higher as well. This is why you rarely see any German companies compete on price. They can’t. Instead, German companies sell at the high-end of their respective markets.  Does that mean a higher cost structure due to unionized employees is only viable for companies with high profit margins? Perhaps so. A better conclusion would be that companies with high labor costs (and presumably high overall costs) have difficulty competing on price. No wonder GM was happy to sell trucks in the 90’s while neglecting other, less profitable segments of the market

BMW: The Ultimate Misery

via www.bmwultimatemisery.com

The above image, coupled with the slogan "The Ultimate Misery" almost seems to suggest that autonomous, BMW zombie cars are out to crush the average American.  Suffice it to say, that's not accurate.

The facts are as follows. After 30 years, BMW N.A. decided to close a California parts distribution center. The workers at the center are BMW employees and members of the Teamsters Local 495 union. BMW plans to "shut down" that distribution center August 31, 2011 only to re-open it the next day with "outsourced" employees. This particular facility has received prizes from BMW for its efficiency, employs 71 workers and has operated for 30 years without a work stoppage.

BMW will hand over the operational control of this distribution center to an unaffiliated third party.  One the face of it, this does seem quite capricious. According to the Teamsters PR efforts, BMW made this decision to cut costs on the backs of American workers. What we don't know is what led up to this move. Presumably, the contract negotiations between the two parties broke down and BMW decided to let the contract expire. We don't know that because BMW has been very tight lipped when it comes to this issue. We do know that the Ontario site is not the only one undergoing this change.  Officially, BMW wants to focus on "core competencies".

The union has been effective in shedding light on this issue. It has managed to garner the support of Senator Barbara Boxer and the Los Angeles Times. "Eroding the Middle Class" is the familiar refrain. Just as predictably, the comments to the LA Times piece are dominated by anti-union sentiment, mixed in with anti-government rants, and sprinkled with sensible economic discussions.

There are two aspects of this that are problematic for BMW. First, eliminating middle-class US jobs that include benefits is tough to reconcile for a company that has been playing up its investment in America. Second, BMW is not a financially struggling company that is saddled with union contracts that threaten to break its back.  A press release dated July 7 stated the following:

"Based on the considerably improved outlook, the BMW Group now expects to achieve an even greater improvement in pre-tax earnings than originally predicted."

If a high-margin manufacturer like BMW decides that paying reasonable wages and benefits (reportedly $25/hour plus benefits) is too expensive, where does that leave the rest of the industry? The old "focusing on core competencies" argument is disingenuous. If that were the case, BMW would focus on product design and marketing and it would outsource all of its manufacturing and assembly work to third parties.

Companies cut costs where they can and that is to be expected. This country's anti-union bias is enabling the steady erosion of decently paying, manufacturing jobs. The US job market is becoming more stratified, possibly leading to a time when earning $50,000 or above is reserved for office workers with college degrees.

UAW Seeks International Alliances

Courtesy of United Auto Workers

In a confusing turn of events, the UAW is reaching out internationally in order to strengthen its domestic business.  The union appears to have a two-prong strategy.

First, it's attempting to unionize auto plants located in the South.  This has been a goal for some time.  Automakers have so far outmaneuvered the UAW's attempts to unionize its southern plants.  Key aspects of their winning strategy include the following:

• locating plants in economically depressed areas where well paying jobs are scarce and anti-union sentiment is high
• working closely with state lawmakers to resist any union-friendly legislation
• closely monitoring any organizing attempts
• suggesting that a successful union drive could cause plants to move

While not exemplary, compared to other companies and industries, these tactics are tame and perfectly legal.

To get around these obstacles, the UAW created the "Global Organizing Institute" which trains interns from Asian and European countries who have auto plants located in the South.  After six weeks of training, these interns are supposed to take what they learned and apply pressure to those companies in their home countries.  Presumably, they will argue that foreign (US) workers are treated worse than domestic (Asian and European) workers.

Cost is the number one reason for carmakers to locate plants abroad.  Those costs are multi-faceted and consist of foreign currency risk, regulatory costs, cost of input materials, plant and equipment  and the cost of labor.  Considering that companies such as BMW have had production facilities in the US for some time and no German autoworkers are at risk of losing their jobs because of that, I suspect this type of argument will not gain traction.

The second approach the UAW is taking is to create a global solidarity movement by forging close ties with autoworker unions in other countries.  The aim of this tactic has not been clearly explained. One paper, quoted Mr. Holifield, UAW vice president, saying the aim is to help "the companies that we all represent be that much more prosperous" and "to provide a forum that will aid in finding common ground." What does that mean? Perhaps it’s as simple as learning from the Italian unions just how exactly Chrysler and Fiat CEO Sergio Marchionne managed to reduce their bargaining power so the UAW doesn't suffer the same fate.