Reversal of Fortunes GM's NAO comeback stymied by strikes

Reversal of FortunesJust as General Motors Corp.'s North American Operations were starting to show some profit punch, the United Auto Workers union put on the gloves, effectively knocking out the automotive giant in June.

And more bad news may be coming. Even after strikes at two key plants in Flint (MI) are settled, GM's war with the UAW likely will continue through the summer. The next front: a Flint powertrain plant that could cripple the strategically crucial launch of the new 1999 Chevrolet Silverado and GMC Sierra big pickups.

It's a strategy of hit-and-run guerilla tactics that gives the union enormous leverage, testing GM's resolve and its own reservoir of firepower.

"This is Gettysburg," says Sean McAlinden, a senior labor economist at the University of Michigan and a long-time observer of GM-UAW combat. "The company won't back down, and the UAW is intent on causing a system-wide shutdown for a real long time."

But Gettysburg only lasted three days. GM and the UAW may be going at it for three months, perhaps longer. The ongoing civil war between the world's largest automaker and its U.S. hourly workforce costs upwards of $65 million a day.

Historically speaking, Gettysburg was a mistake. The Union and Confederate armies never planned to face off in the tiny Pennsylvania village. Historically speaking, Flint has been a battleground between GM and the UAW nonstop since the first sit-down strikes there more than 60 years ago. Recent skirmishing has been fanned by GM's decision to close the huge Buick City complex there late next year, eliminating 3,800 jobs.

Typically, the battle is waged over jobs on one hand and productivity on the other. The UAW has lost 44,000 jobs in Flint, GM's original home city and a company town if there ever was one, since 1978. Despite that downsizing, GM's remains a Godzilla in the central Michigan city of 170,000 some 60 miles (96 km) north of Detroit; its Flint-area payroll still stands at 32,000. The walkouts at the stamping plant on June 5 and at Delphi Automotive Systems components plant June 11 had vitually shut down all GM vehicle assembly operations by June19.

GM, by all accounts the least efficient U.S.automaker, is determined to get its costs in line. And that means changing work rules and eliminating jobs.

By one reliable estimate, GM wants to slice 40,000 UAW workers from its payroll, including thousands in Flint, to get its costs in line with its competitors. With its ranks cut in half to 750,000 since 1978, the union is in no mood to give more ground.

GM's next strike, which could come late this month or early August, would also affect the supply of the 3800 V-6 engines that power most of GM's midsize cars. Of greater strategic significance is the Flint powertrain plant's role as a primary source of torque converters for a variety of vehicles, including the redesigned 1999 pickups GM is betting on to recapture market share and improve profits.

"It's by far the most ambitious launch plan we've had within GM," G. Richard Wagoner, president of GM North American Operations, tells WAW on the eve of the Flint walkouts. The trucks, which compete in one of the fastest growing and most profitable market segments, have been redesigned for the first time in 11 years. The GMT800 chassis eventually will be the foundation for all of GM's large sport/utility vehicles such as the Chevrolet Tahoe, GMC Yukon Denali, Chevrolet and GMC Suburban and the 1999 Cadillac Escalade.

Through the early weeks of the strike GM kept the new truck launch on track, largely because it removed dies from the Flint plant that would have been used to stamp out hoods and fenders for Silverado and Sierra. But that soon may change.

Sources close to the UAW say stamping plants in Indianapolis and Mansfield, OH, the very plant GM used to undercut the UAW's strike at the aging and inefficient Flint stamping plant, also are near impasses that could lead to walkouts. Those plants also supply the Oshawa, Ont.; Pontiac, MI; and Fort Wayne, IN, plants that assemble the new trucks.

The June strikes already have sapped GM car and truck inventories to dangerously low levels. If no settlement is reached by mid-July the cost in lost profits could soar to between $400 million and $500 million a week.

Both sides are determined to slug it out. Clearly GM has the cash - $13.6 billion as of the end of March - to outlast the UAW. It also is becoming increasingly apparent that Chairman John F. (Jack) Smith Jr. and his management team have the will to weather the short-term damage no matter how severe.

It's not surprising that the UAW is driving a stake in the ground when things had been looking up at NAO, a perennial laggard on GM's bottom line. After losing $13 billion between 1991 and 1993, NAO last year fed $2.3 billion into GM's profit bin, before a $2.4 billion accounting charge for ongoing plant closings and productivity improvements. (see chart p.44).

And things only got better during this year's first quarter, with NAO earnings reaching an all-time high for any quarter of $826 million. This feat was all the more remarkable because GM's International Operations, a perennial cash cow that long has offset NAO's poor profit performance, hit the skids (see story p.45).

NAO's flood of black ink, which ironically may have whet the UAW's appetite for a showdown, also was achieved despite heavy incentive costs.

Chairman Smith for more than four years has promised investors a 5% return on sales and a 12.5% return on net assets. But the first quarter performance, good as it was in actual dollars, showed a 3.2% return on sales in North America.

Analysts say the return on net assets was in the neighborhood of 10%.

While that is a huge improvement from the bleak days of the November 1992 boardroom coup that put Mr. Smith in the driver's seat, GM's profit margins lag well behind both U.S. competitors. Ford Motor Co. earned 5% on sales in the first quarter. Chrysler Corp.'s margin was 6.3%.

In mid-July the annual productivity report by Harbour & Associates, a Troy, MI, manufacturing consultant, will show once again that GM remains the high-cost producer behind Toyota, Nissan, Honda, Chrysler and Ford.

It still relies too much on costly overtime. It is still sourcing a larger percentage of its parts from its own plants, and it remains strapped by above-average wages, restrictive work rules and old technology.

Take, for example, the metal fabricating plant in Flint where this latest conflict erupted. A year ago GM announced it would invest $300 million in new tooling if UAW Local 659 agreed to more flexible work rules and reduced the number of production job classifications from 30 to seven.

Sources familiar with the agreement say the local's leaders accepted those conditions, but never made them clear to the rank and file. Consequently, the plant continued to function with the same restrictions.

Quota production systems, which allow workers to stamp out a set number of engine cradles, then stop after four or five hours and get paid for a full shift, did not change.

Meanwhile, more than 30 skilled trades classifications, which enable the plant's highest paid hourly workers to refuse work not explicitly defined in their category's job description, remained in effect.

So just before Memorial Day, GM removed dies from the Flint plant and trucked them to another plant in Mansfield, OH, in order to make hoods and fenders for the new GMT800 pickup trucks. UAW leaders went ballistic.

"At a time when the corporation is making record profits and its top executives are being rewarded with excessive compensation, it is unjustifiable that GM's workers are being forced by management to face hazardous working conditions and serious threats to their job security," says UAW Vice President Richard Shoemaker.

GM officials find it equally unjustifiable that there are 60 job classifications in one stamping plant while its competitors benefit from greater flexibility or, in some cases, outsourcing some stamping work from non-union suppliers. Even GM's other stamping operations are substantially more efficient.

"We aren't expecting these employees (in Flint) to do anything we wouldn't ask employees or expect other employees to do at other facilities with very similar equipment and processes," says Donald E. Hackworth, GM group executive in charge of passenger car manufacturing.

Escalating the conflict is an internal GM document outlining the top secret "Yellowstone" project that the UAW began circulating in the early days of the Flint stamping plant strike. The gist of the project calls for building a new lean production small-car plant, possibly in Mexico, to replace the company's Lordstown, OH, assembly plant.

This concept is based on GM's Gravatai, Brazil, assembly operation, known internally as "Blue Macaw," where GM is encouraging a small cadre of suppliers to design and build large chunks, or modules, of a small car. These modules are delivered almost to the assembly line on a just-in-time basis. One effect is to simplify the assembly process and radically reduce the need for GM production workers.

It holds the potential to radically reduce costs, but UAW officials see it as a grave threat to the union's long-term survival.

"We are trying to share ideas around the world," says Mr. Wagoner. "We don't just come up with a great idea in Brazil and ignore it in the rest of the world. We're obviously learning from that concept (Blue Macaw)."

Unfortunately, this depressingly dysfunctional relationship overshadows GM's significant progress.

For example:

n Through its enormous $70 billion-a-year purchasing system, GM is buying from suppliers around the world in greater quantities than ever, leveraging lower prices per unit than nearly all its competitors. Specifically, it has invited Korean and Brazilian steelmakers to help cut its $5 billion annual steel budget.

n GM is getting substantially more output from its engineers. John J. Wetzel II, vice president and general manger of technical centers, says consolidating 12 independent engineering teams into four helped boost engineering productivity by 13% in 1997. Consequently, the average development time for a new vehicle has been trimmed from 30 months to about 25 months just in the last year. The goal is to cut that to 18 months by 2000.

n There are fewer layers at the top of its once-unwieldy management structure. One manufacturing executive, Mr. Hackworth, is in charge of all car programs. Another, Thomas J. Davis, is in charge of all trucks. Mr. Hackworth doubles as the primary manufacturing executive for the entire corporation, while Mr. Davis oversees design and engineering staffs.

"That's the kind of thing that matters a lot inside the company, but nobody on the outside cares," says Mr. Wagoner.

The global purchasing strategy has been especially effective. When a company has as much global sweep as GM, the economies of scale are staggering.

Take the new pickup trucks, for example. This is a $6 billion program that eventually will produce about 1.2 million pickups and sport/utility vehicles per year. So, for parts like tires you multiply that by five, including a spare. At those kinds of volumes, suppliers will bend over backwards to cut their price per unit.

But GM's purchasing warriors didn't stop there. Many of the more commodity-like parts for the GMT800 platform were put out for bid with yet another high-volume passenger car program, thenext-generation Opel Vectra and Saturn LS.

GM now pays $100 or less for antilock brakes that once cost $1,000 per vehicle.

Long-term contracts are locking in prices for components such as air conditioning compressors or seats or headliners that will be lower in 2003 than they are today.

That purchasing leverage accounts for a huge chunk of GM's $2.3 billion in North American cost reductions last year, and it will go a long way toward reaching the $3 billion cost-cutting target for 1998.

Meanwhile, GM is trying to convert Asia's economic woes into a cost-cutting windfall that can bolster the bottom line back home. As currencies have been devalued in countries such as Thailand, Indonesia and Korea, the cost of labor in those markets falls.

The problem is that demand for big-ticket items, including cars, has all but disappeared in those nations. Consequently, GM has reduced the size and delayed starting up its new assembly plant in eastern Thailand from this year until the first half of 2000. But, if suppliers who have already set up joint ventures in Asia, can ship their batteries or wiring harnesses or spark plugs back to the West, suddenly even Mexico looks like a high-cost manufacturing environment.

"Obviously we're not talking about going out and buying an engine (in Asia)," says Harold R. Kutner, vice president in charge of GM's worldwide purchasing.

"But when you think about some of the simpler non-technical type of products we buy, there's an opportunity to buy them from that part of the world. Excess capacity and lower (Asian) demand has driven down the price of copper, oil and plastics. I would identify this as a windfall opportunity."

Such talk about global purchasing infuriates UAW officials, but it reflects a solid consensus among management that there's no other way to close the gap versus Ford, Chrysler, Toyota and Honda.

There's also no way any automaker can continue producing fuel filters, spark plugs and speedometers at the union's average wage and benefit cost of $45 an hour. That's the bitter reality at issue in the strike at the Delphi Automotive Systems plant in Flint that began on June 11. This is a plant where 5,800 workers are producing low-tech components that easily could be made most anywhere for a fraction of the cost.

"There's no way around it, that plant is just not competitive," says Diane Swonk, deputy chief economist for First Chicago NBD who closely follows the auto industry. "Plants like that have to be closed eventually, but the way they've gone after the UAW hasn't been real smart. GM has the money to offer buyouts, and in this economy, most of those workers will land on their feet."

In the end, the Flint showdown is about the price GM is willing to pay to get its older workers to retire. Many outsiders wonder why buyouts weren't offered months ago.

"For the cost of one week of the strike, they could have reached the number of retirements they want," says U-M's Mr. McAlinden.

But many of GM's older workers, even those eligible to retire after 30 years, aren't eager to leave.

Under the UAW's seniority system, those with the most years of service are entitled to the physically easiest jobs. Many of them are 51, maybe 52 years old, with mortgages, boats or children in college.

"They're making $60,000 to $80,000 a year doing the easiest work in the plant," says Mr. McAlinden. "What's the incentive for retiring and taking a pension that runs around $2,400 a month?"

GM spokesman Gerald Holmes acknowledges that about 20% of GM's hourly workers are eligible for "30 and out" retirement, but the company's attrition has held steady in recent years at 4%.

"We probably do have the money for substantial buyouts and we have done it often in the past in places like Tarrytown (NY), where we have closed plants," Mr. Holmes says. "But in these Flint plants, head count has not really been the issue. The problem in our view is non-competitive work practices."

Even optimists within the UAW camp don't see more than 12,000 to 15,000 GM jobs in Flint in 2008, maybe fewer, regardless of how this summer's hostilities are resolved. That's less than half the current number, and down from 76,000 in 1978.

This would make GM more competitive on paper, but measuring the full cost is difficult. It goes well beyond the calculations on Wall Street spreadsheets.

Are people tuning out the repetitive headlines, bored by a fight in which they have little stake? Do they support the company's aggressive resolve? Is there any impact on GM's brand equity? How do people perceive products coming out of plants with so much conflict?

"You have to think that throughout the nation this has some subliminal impact on the buying public," says Bill Donohue, president of the Genesee County Area

Focus Council, who has served as a diplomat building bridges between GM and the UAW in Flint.

Surveys conducted during the early days of the strike showed very little public support for the UAW workers, unlike the groundswell of goodwill for United Parcel Service drivers who went on strike last summer.

Perhaps the only leverage the UAW has left is the strength of its relations at Ford and Chrysler. Sure, those companies buy more of their parts from independent lower-cost suppliers. But they also grapple with many of the same cumbersome work rules as GM.

Those familiar with the UAW's relations with Chrysler and Ford say it is not unusual, especially at Ford, for skilled trades people to perform work outside their narrowly defined job description. "They do it because it keeps jobs in the plant and it makes them more productive," says U-M's Mr. McAlinden.

Meanwhile, German labor officials already have agreed to give the UAW one seat on the supervisory board of DaimlerChrysler AG. That level of cooperation is inconceivable at GM.

Says First Chicago NBD analyst Ms. Swonk: "Every day these strikes go on, Ford, Chrysler and the Japanese are licking their chops."