AMERICAN automakers and the UAW have squared off in formal contract negotiations. But the real adversary isn't even at the bargaining table: a global auto glut.
Enormous world-wide overcapacity in autos -- much of it directed at the lucrative U.S. market -- confronts the Big Three with another big round of plant closures and the UAW with wide-spread job losses. It also threatens to drive a wedge between the automakers and the autoworkers, splintering the fragile new cooperative working relationship that is fundamental to the future economic health of this vital industry.
The arithmetic is simple and stark: In a good year, the U.S. market can absorb less than 12 million passenger-car units. Domestic and foreign automakers currently have 15.5 million units of car production focused on the U.S. market. So there are already roughly four million units of excess capacity today -- and much more in the offing.
By 1990, another 2.5 million units will come on line from new foreign-owned assembly plants already scheduled to open in North America. Then you have to add in new imports from countries that have discovered that an auto-export industry is a fast ticket to good jobs, hard currency, a positive balance of payments and a rising standard of living: South Korea, Brazil, Mexico, Taiwan, Yugoslavia and even the Soviet Union (yes, the Muskvich 2141 is coming!).
Totaling this all up you get, by the early 1990s, a glut of autos targeted on North America amounting to as much as seven million units of unneeded capacity. Very simply, the world is awash with too many automakers building too many cars to sell to too few American buyers.
For the U.S. industry the implications are ominous. If current competitive trends continue, by 1990 American automakers will utilize only 15 percent -- yes, less than one-sixth -- of their small-car production capacity; 43 percent of midsize production capacity; 55 percent of luxury-car capacity; and 62 percent of sporty-car capacity. The large-car segment is the only part of the market where U.S. automakers are likely to be operating at full capacity -- assuming no future energy crisis. Overall, American automakers face a future in which they can run their plants at an average of only 66 percent of capacity -- barely the break-even point for the auto business.
There is one very direct solution for this problem: close U.S. plants. Just today's four-million-unit overcapacity translates into closure of 10 average-sized car assembly plants, roughly one out of six such plants in North American. Such a shrinkage would permit automakers to rationalize production systems and save money. But what saves money costs jobs. Employment in auto assembly plants peaked at 700,000 UAW jobs a decade ago; by 1990 the auto glut could reduce the number to a scant 370,000 jobs. Still larger job losses would be experienced in supplier industries.
The danger here is not just the hardship of lost jobs and depressed communities. The global auto glut could easily knock the underpinnings from beneath the auto industry's growing management-labor alliance -- the industry's signal contribution to all other U.S. businesses beleaguered by foreign competition. Over the past few years, management and labor in the auto industry have cautiously but continuously negotiated contracts pointing to a new, less adversarial relationship. In words and deeds, the automakers and autoworkers have expressed the powerful new understanding that the two sides are mutually dependent and jointly responsible for the company's performance; that both need to learn to share information and decision-making; and that better quality and lower cost American-made cars ultimately depend on this two-way trust and cooperation.
Both the 1982 and 1984 auto contracts incorporate these new attitudes in specific innovations: new programs to preserve jobs; substantial funds for worker retraining; efforts to create new business that could provide new jobs; and a series of joint management-labor committees from the plant floor to the board room to share information and, ultimately, decision-making.
The changes have already had positive benefits. U.S. automakers are producing better products, with higher quality. Their costs are far more competitive, even before taking into account the benefit of a cheaper dollar on foreign-exchange markets. And management and labor are working together to make this happen. Says one UAW member at Ford's assembly plant in Wayne, Mich.: "It's not the company that's giving us a hard time any more. It's the outside world."
The outside world is about to give the UAW and company management an even harder time, thanks to the global auto glut. As a result, the new attitudes and practices of the past few years may be in jeopardy. Pressured by the stress of overcapacity, management and labor could each pursue their separate, short-term interests. Or -- more optimistically -- the lessons of the past few years could prevail: both sides would understand that global auto competition changes the nature of their relationship.
For the Big Three -- GM, Ford and Chrysler -- the main event is no longer a fight among themselves. Now it is the American enterprise system versus the enterprise systems of other nations. And it is the ongoing relationship among American management, labor and government that will determine the success of U.S. business, the employment levels of U.S. workers and our overall standard of living. If that lesson sticks, then we could see a 1987 auto negotiation that extends the principles and practices of the past two contracts.
On the automakers' side, that would mean: full acceptance of labor as a policy partner in the business; treating seriously workers' concerns for job security; extending the commitment to worker training and retraining; structuring corporate strategies that serve the shared interests of labor and stockholders; and, of great importance, offering a single profit-sharing formula for both management and labor that reinforces their sense of partnership and interdependence.
On the autoworkers' side, it means accepting a full share of responsibility for how the company performs. The UAW has to face up to the fact that it has lost its monopoly on auto labor not only abroad, but even in the United States, where component suppliers and workers in foreign-owned companies are often non-union. The acid test in this regard will be UAW acceptance of company-specific bargains -- separate deals tailored to the competitive situation of each of the Big Three. The UAW can lead by advancing agreements that permit more flexibility in pay and work practices in exchange for a greater voice in company decisions -- including cracking down on problem employes in exchange for greater job security for the vast majority of strong performers.
Finally, both sides need to think about ways to teach the government how to be a more responsible partner. While management and labor have been learning to work together over the past few years, the federal government remains a distant and uninvolved actor, capable of causing problems, seemingly incapable of creating solutions. Management and labor should figure out what they need, and can reasonably expect, from government to help drive down costs, improve quality and cushion unemployment. Part of the 1987 contract agenda should be a bill of particulars, sensible ways that the federal government can help the industry contend with the global auto glut -- and then to challenge the global competition.
Malcolm Salter is a professor at the Harvard Business School. Alan Webber is managing editor of the Harvard Business Review. With Davis Dyer they are co-authors of "Changing Alliances," a recently published study of the auto industry.