Detroit carmakers' new opportunity to turn the corner
When the top leaders of General Motors and the United Auto Workers finally sat down at the bargaining table this week to renegotiate the current autoworkers' contract, they were making American labor history. Imagine! The two sides now now agree that in return for a lowering of wages and benefits on the part of both union and management there will be a commensurate lowering of GM's sticker prices on new cars. In other words, a direct pass-through of savings to consumers.Skip to next paragraph
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The agreement, still to be worked out in detail, represents a burst of pragmatism in an industry that for too many years had lost touch with real circumstances. Domestic car sales have plummeted. Yet, despite a recession, sticker prices on the types of new cars sought by American consumers are invariably $10,000 and above.
Granted, the industry's problems have hardly been one-sided. Labor over the recent decade pushed for glittering wage and benefit packages. That led to the current price advantage for Japanese cars of roughly $1,500, since Japanese wage levels are lower. US manufacturers, for their part, have created a huge management-level force, quite unlike the leaner-structured Japanese firms.
What may be perplexing about the current contract renegotiations is why it has taken the parties so long to conclude that wages and prices have gotten out of kilter. The guiding rule on production costs and prices was spelled out long-ago out by the doyen of the US auto industry, Henry Ford: ''Our policy is to reduce the price, extend the operations, and improve the article. You will notice that the reduction of price comes first. We have never considered any costs as fixed. Therefore, we first reduce the price to a point where we believe more sales will result.''
Those were hardly mere words at Ford Motors back in the early years of the industry. Take the 1920 recession. In June of that year, Ford sales began dropping. So what did Henry Ford do? He slashed the price of his basic touring car a hefty 20 percent from $575 to $440 -- ''far below the cost of production, '' as he later noted. His firm survived.
The success of the US industry's early years, when price was crucial, must not be overlooked. It is imperative that all parties involved work out as extensive a rollback on prices as possible. A symbolic cut, of say $100, will not be enough, as evidenced by current rebates, which are far more generous. Since hourly wages now account for only about $12 of the $20 an hour in benefits and compensation that GM now pays workers, there should be latitude for concessions. GM's executive and management staff should hold to its promise to make proportionate sacrifices.
What about profits and dividends? GM's dividend was slashed from $1.15 to 60 cents in 1980. Labor negotiators will be tempted to ask for more cuts. But the industry will have to exercise caution. It would make little sense to so reduce the dividend as to drive shareholders into selling their stock.
The auto renegotiations represent a historic turning point that should be emulated by GM's domestic competitors. The talks show that there is yet plenty of spark -- and responsibility -- in the US car industry. That speaks well for Detroit's future.