Monday, October 17, 2005

Delphi and Detroit's Real Legacy Costs

by Tom Bozzo

The bankruptcy of auto parts supplier Delphi, formerly a unit of GM, has set the stage for a massive assault on manufacturing wages and benefits. Delphi would like to to reduce its manufacturing workers' wages towards burger-flipping and telemarketing jobs' territory — while contending, incredibly, that its executives are underpaid — and Krugman is worried (Times Select subscription required):
[Delphi's] chief executive, Robert S. Miller, wants the company's workers to accept drastic wage cuts, from an average hourly wage rate of about $27 to as little as $10 an hour.

...Delphi's bankruptcy is a much bigger deal than your ordinary case of corporate failure and bad, self-dealing management. If Delphi slashes wages and defaults on its pension obligations, the rest of the auto industry may well be tempted - or forced - to do the same. And that will mark the end of the era in which ordinary working Americans could be part of the middle class.

There was a time when the American economy offered lots of good jobs - jobs that didn't make workers rich but did give them middle-class incomes. The best of these good jobs were at America's great manufacturing companies, especially in the auto industry.

But it has been a generation since most American workers could count on sharing in the nation's economic growth. America is a much richer country than it was 30 years ago, but since the early 1970's the hourly wage of the typical worker has barely kept up with inflation.

The contrast between rising national wealth and stagnant wages has become even more extreme lately. In 2004, which was touted both by the Bush administration and by Wall Street as a year in which the economy boomed, the median real income of full-time, year-round male workers fell more than 2 percent.
Writing in AutoWeek, Kevin A. Wilson dumps some more cold water on the standard line that labor costs are the main cause of the domestic auto industry's woes:
When talking about the burdens their predecessors have laid on them, it might be wise for the execs to own up to the other legacy battle they are fighting. GM vice chairman Bob Lutz came close to doing so recently when he said “a good company that loses its product development expertise, or whose manufacturing quality declines, might coast four or five years before it pays the penalty” of seeing sales decline. Similarly, he suggested, it will take a comparable length of time for improved products to pay off...

People have to hear from the top that Detroit understands the other “legacy costs” it is paying. Today proud engineers all over Detroit routinely point out how they have benchmarked industry leaders (Lexus, Honda, BMW, whatever applies) and figured out how to do things like make panels that fit properly, or a chassis with the stance the designers sought, or cabins that are both quiet and easy on the eye... But where, one has to wonder, was this kind of initiative when it was needed most? To put cars on the ground today, it had to start four or five years ago—what in heaven’s name were they so sanguine about 15 years ago, or 10?

The primary legacy cost a Fusion or a Pacifica or a Lucerne carries into the showroom is not found on the window sticker. It’s in the memories of buyers who fought bad transmissions, paint jobs that peeled off like sunburned flesh, or fires in parked cars. How many years of substandard quality in order to bolster the quarterly dividend by a few cents equals one year of finally getting it right?
This echoes a point I've made here before: there's no problem Detroit has that couldn't be solved with lineups of cars which, like the blue-chip Japanese and European makes, could be sold for something quite a bit closer to the prices the bean counters put on the window sticker.

When the marketers are putting $4,000 on the hood to move metal, it is not a matter of inexorable business logic to pin the blame on the active and retired workforce for $1,525 in health care-related unit compensation costs — a substantial fraction of which, it is important to note, is also borne by much of the foreign competition one way or another.

If you haven't done so, you should also read Dean Baker's pre-emptive strike on Delphi's party line last week at MaxSpeak. As Baker notes, while retrospective blame could readily be placed on management and shareholders, the law only permits past compensation of line workers to be taken back, not past executive salaries and shareholders' dividends.
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