Do auto workers make too much?

Are labour costs to blame for the Detroit Three’s collapse?

Do auto workers make too much?

Late last week, Ontario and Ottawa agreed to extend a lifeline to the country’s struggling auto industry. The provincial and federal governments pegged their bailout package at “about 20 per cent” of the amount the U.S. will commit to the beleaguered trio of Chrysler, GM, and Ford. The Bush administration announced on Friday that it would sign over US$17.4-billion to the Detroit Three, meaning Canada’s contribution figures to be in the $4.3-billion range. But rescuing car makers with taxpayer money hasn’t proven to be a universally popular idea on either side of the border, with auto workers’ wages attracting much of the scorn. On average, Canadian auto-sector workers make about $35 an hour—$72,000 a year—plus benefits. The average wage of a Canadian manufacturing-sector employee, by comparison, is $20.75 an hour, or $41,500 a year. Could the auto workers comparatively high wages be to blame for the Detroit Three’s collapse?

Earlier this year, Magna International CEO Frank Stronach warned that high wages at Canadian auto manufacturing plants threatened the industry’s long-term prospects and insisted that both the companies and the unions “have to change.” Industry analyst Tony Faria has also cautioned that Canadian auto workers could soon price themselves out of the market if they resist clawbacks to benefits and wages. And in an editorial on Monday, the National Post blamed the economic quagmire facing the domestic auto industry squarely on labour relations at the Detroit Three: “It’s not their design and development that lags behind the rest of the world, it’s their human resources management […] The unions are going to have to make concessions—big concessions—if they want the companies they work for to survive.” The Canadian Auto Workers, however, have already said “no way.”

Though wages may be part of the problem, a reduction won’t suddenly make the Detroit Three profitable again. After all, the gap in take-home pay between unionized employees at Detroit Three plants and those non-union workers toiling for Japanese builders like Toyota, Honda and Nissan works out to only $2.50 an hour, or about $5,000 a year. And yet, Japanese car makers—known as ‘transplants’ in manufacturing parlance—aren’t in nearly as dire a situation as their North American rivals. The total amount, however, spent on unionized employees by the Detroit Three is considerably higher than what transplant builders spend on their workers. According to CAW data, workers at GM, Ford and Chrysler cost their respective employers about $77 an hour. This figure includes employer-paid benefits like health and dental insurance, the company’s contribution to a pension fund, and the payroll taxes it assumes when it hires workers. By contrast, assuming an 80-cent loonie, their counterparts at transplant car mills in the U.S. come in at a much cheaper $61.25 an hour. The biggest contributor to the disparity is legacy costs, i.e. payments and benefits doled out to former workers. These add $10 an hour to the overall labour costs at unionized plants, while better vacation and other wage-related benefits at union shops makes up the rest of the difference.

Arguably, that’s not the main issue. The Detroit Three’s business model looks to be on increasingly shaky ground: their long-time cash cow, the light truck and SUV market, has crumbled; overall vehicle sales are down across the board, but they’ve been especially bad for North American auto makers; and the ongoing credit crunch has left all three with next to no cash on hand.

Broken down, the governments’ payout amounts to a $2,300 subsidy for every car produced by the Detroit Three in Canada in a year. It’s enough to make North American cars profitable once again in the short term, but the Detroit Three’s dwindling market share and stockpiles of unsold cars make for a murky future once the money runs out. The gap in profitability between the Detroit Three and their foreign competitors is currently huge. Through the first quarter of 2008, on average, Nissan and Honda pocketed $2,051 per vehicle. Toyota collected a smaller but still respectable $1,152 profit per vehicle. The Detroit Three, by contrast, not only failed to turn a profit, they lost money on their vehicles. Chrysler came closest to breaking even, losing $515 per vehicle, while GM and Ford trailed far behind with per vehicle losses of $911 and $1,833, respectively. So while keeping the Detroit Three alive might be possible, turning them around may very well prove too expensive a proposition. Pinning all of the blame on salaries, however, is a tad rich.

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