Auto contracts put industry in good shape to ease its cost drag
Having just weathered tough labor-contract bargaining sessions - and short-lived but disruptive strikes - General Motors and Ford may be in the best wage-and-cost position in almost 40 years.
Auto analysts could not be more pleased for the industry. This year's round of labor negotiations is just about over, and from what the analysts can tell, the industry has come out of it surprisingly well.
Even though the recent strikes in Canada and the United States are likely to cost General Motors $400 million to $500 million in pretax profits this year, estimates Arvid Jouppi, an auto analyst in Detroit, he still believes they are the best set of agreements since 1946. Thomas O'Grady, a former General Motors executive who now works for Chase Econometrics, the economic forecasting firm, calculates that three years from now, when these contracts expire, the manufacturers could actually be paying less for labor than they are now.
''They should be able to save money,'' Mr. O'Grady says. ''If you adjust for inflation and also for productivity improvements over the next three years, there should be a minor or net saving.''
During the life of the contracts, labor costs for Ford and General Motors (Chrysler bargains next year) will rise 20 to 22 percent, estimates John Hammond , an auto expert at Data Resources Inc., another forecaster. If inflation increases 15 percent over that period (averaging 5 percent higher each year), that will leave 5 to 7 percent uncovered. But Mr. Hammond says ''there is absolutely no question'' that improvements in manufacturing productivity will be able to make up this difference.
He echoes O'Grady: ''The corporations will actually be able to reduce their real labor costs over the period, so their profit picture is very much intact.''
Analysts view the wage increases of the Canadian GM pact - which was just ratified Monday after a strike that began Oct. 17 - with a ho-hum. Yes, the United Automobile Workers in Canada got a sweeter deal than its neighbor across the border, but because of the exchange rate, Canadian labor is still cheaper than labor in the United States.
Remember, too, that the Canadian work force makes up about 10 percent of the total number of workers at General Motors, ''a relatively minor part of their whole system,'' says David Cole, who heads the Office for the Study of Automotive Transportation at the University of Michigan.
The significance of the Canadian dispute is not the increase in wages and cost-of-living adjustments, Mr. Cole and other analysts say, but in the disruption it caused in US plants that rely on Canadian parts.
In a massive drive to improve quality and productivity, the US automakers have been trying to redesign their inventory system. The emphasis is now on ''just-in-time'' inventory, a Japanese technique that keeps parts flowing just as they are needed and eliminates major stockpiles of inventory. The Canadian strike, which caused layoffs at 53 US auto plants, showed how the just-in-time concept can break down if there is not a good relationship between manufacturers and suppliers, Mr. Cole says.
''In this modern industry, you have to be a dependable supplier,'' Cole says. ''Sourcing in the future is increasingly going to be directed to businesses that are a reliable source and where there is a lower probablility of some disruption - whether that disruption is in labor, quality, or whatever.''
''The companies right now have to take a hard look and say, 'Is the Canadian labor relationship friendly enough to continue investing in it?' '' O'Grady poses.
The just-in-time concept - and the productivity improvements it brings - will play a role in easing the impact of higher wages. The way the labor contracts are structured, General Motors and Ford will also have greater freedom to shift employees around and lay off workers in efforts to improve productivity.
''We're on the threshold of a major incremental improvement in (auto manufacturing) productivity,'' Cole says. ''The companies have kind of gone through the experimental phase, and now what's happening is, we're picking the best of the experiments and are ready to start propagating them across the system.''
All is not coming up roses, however. It still costs $1,500 to $2,000 less for Japan to make a car than it costs Detroit. ''At best, the contracts allowed (the US) to keep the Japanese advantage from increasing,'' comments Hammond. (Meanwhile, the industry is still sheltered by voluntary Japanese import restraints.)
Also, ''in this industry, cyclicality is the rule, not the exception,'' says Ralph Colello, who heads the automotive unit at the Arthur D. Little consulting firm. ''We're running at a high right now. I don't see anything in the present agreements that accounts for what will happen during the next downturn.''
But others counter that the next recession, now being pinned to 1986, will be slight. ''The last trough was like falling off a roof. This one will be like stumbling off the porch,'' says analyst Jouppi. Anyway, observers argue, the industry has done so much to reduce costs that it's unlikely the next recession will cause any severe losses. UAW negotiation highlights In the US:
The issue is job security. General Motors agrees to set up $1 billion fund to pay and retrain workers laid off because of technology improvements and ''out-sourcing.'' Ford sets up similar fund.
Ford agrees to a three-year moratorium on plant closings.
Average wage increase at both companies in first year is 2.25 percent. In second and third years this is dropped for lump-sum payments plus profit sharing. In Canada
The issue is compensation. Ford contract still unsettled. General Motors promises 2.25 percent wage increase in first year.
Cost-of-living adjustments (COLA) amount to 25 cents an hour in first and second years and 24 cents in third year. Labor economists say that COLA increases are more likely to be continued beyond the contract than lump-sum payments.
No job training fund. Instead, establishment of a third year of income security for workers with more than 10 years' seniority.