REAL NEW LABOR DEAL

Learning from Japanese and German Labor, Management, Government Collaboration

The United Auto Workers Union (UAW is now celebrating its new deal with what are today known as the Detroit Auto Makers (GM, Ford, Chrysler) that will bring the union workers of those companies a pay raise of about 33 percent.

It is hard to argue about whether or not this is a good thing. If I were a worker at one of what used to be called the Big Three, I for sure would think it was a very good thing. But in announcing the deal, UAW chief Shawn Fain made a comment suggesting a potential down side. He promised that the UAW would unionize the “transplants”.

Let me explain. In the past (as recently as 1980), the three Detroit auto producers made virtually all the vehicles that were sold in the United States and the UAW organized all of their workers as union members. When Fain’s predecessors spoke, they spoke for the entire auto maker work force, and because they did, people of the highest rank listened.

BEETLES AND THE JAPANESE

In the late 1970s and early 1980s, however, the scene began to change, kind of like going bankrupt, slowly at first and then all at once. The German Volkswagen (VW), nicknamed the Beetle for its unique shape, began to appear on U.S. college campuses when I was a student in the 1960s, and by 1978 VW had opened an assembly plant to make them in New Stanton, Pennsylvania. That was just the beginning.

When I was named Counselor to the Secretary of Commerce in the Reagan administration in 1981, one of my first tasks was to help conclude an agreement with Japan under which it would “voluntarily” limit the number of vehicles its auto makers were shipping annually to the U.S. market to 1.68 million units. A lot, but still only sixteen percent of the U.S. market. “If you want to sell more in America”, we told the Japanese, “you will have to build factories in the United States and make your cars and trucks here.”

Well, that is exactly what they and then more of the Germans and then the Koreans did. As a result, one no longer hears the term “Big Three”. No one born after 1980 has any idea what it means or meant. Today, the Detroit auto makers, as we now call them, make about forty percent of the vehicles sold in the United States. Transplants (as we call the U.S. auto factories of Toyota, Honda, and other foreign auto brands) account for about twenty percent of U.S. production. Also, we now have Tesla and other new electric vehicle makers producing substantial volumes of light vehicles. The point is that none of the workers in these factories are union members. Thus, even as auto production has expanded in the U.S. the percent of auto workers who are UAW members has declined dramatically to about sixteen percent.

THE RIGHT TO WORK

To be sure, the UAW workers tend to make more in wages and benefits than the non-union workers in the transplant and new EV auto factories, but the age of these workers is inexorably rising as their number, both absolute and as a percentage, continues inexorably to decline.

In order to win for the long run, Fain must not only organize the transplants and Tesla and other new EV makers. He must also dramatically reduce the imports from Mexico, Japan, South Korea, and Europe while preventing any rise in auto imports from China.

The truth is that Fain cannot do all of this and very probably can do none of it. His brave talk of organizing the likes of Toyota, Honda, and Tesla ignores the power of the Right to Work laws in twenty eight states. These laws make it illegal to force a worker to join a union or to pay union dues even if the company he/she works for is organized by a labor union. Of course, most of the transplant factories are located in states with such laws in order to avoid having to deal with American style labor unions like the UAW.

So let’s say that Fain decides to try to crack Honda USA, the biggest of the foreign producers in the U.S. Most of Honda’s production is done in Ohio which is a right to work state. Honda may not pay exactly the same as Ford or GM, but it pays well and it has never ever laid off a full time production worker which cannot be said of the Detroit producers. Moreover, Honda has been part of the growing market share of foreign brand autos in the U.S. market not a continual loser of market share like the gang from Detroit. Add to this the fact that Japanese companies tend to emphasize team work and team spirit and try very hard to maintain congenial work places. If you were a Honda worker (and especially if in the past you had been laid off by a Detroit maker) how do you think you would respond, keeping in mind that you would have to start paying union dues and probably be subject to more restrictive work rules. You would also have to keep in mind that while higher UAW level wages might be nice, they could also induce higher prices for made in America vehicles that would trigger rising levels of imports that in turn could lead to factory closures and layoffs that you are trying to avoid.

My guess is that you would hesitate and finally tell Mr. Fain that you are happy with the status quo. That means you are glad the UAW is alive and setting wage levels for the Detroit makers. Those levels serve as a benchmark for the whole industry. Honda won’t match them, but it will use them as a guideline that will keep you in the style to which you have become accustomed.

The only problem is that in the long run if Fain cannot organize Honda and the other non-union auto makers. there will be no Detroit makers, or they may still exist with headquarters in Detroit, but their autos will all be made in Mexico. The Detroit Three are simply not as competitive as the transplants and the imports and never will be without a dramatic change of ways.

WAYS

In the United States, this discussion always centers narrowly on wages and whether factories and corporations are unionized or not. But the real issue of competitiveness in the industry is much, much broader and involves management and government as well as unions and the extent of their participation.

Since we have been talking wages, let’s begin by looking at CEO pay. Mary Barra of GM made $29 million last year. This despite a year on year decline of sales of about $400 million and a decline of almost fifty percent since 2015. From 1931 until 2008, GM was the world’s biggest auto maker. Today it is number five with total sales of just a bit over half those of number one producer Toyota. Yet Barra earned over six times the $4.5 million paid to Toyota CEO Koji Sato. The world’s second largest auto maker is Volkswagen. Its CEO, Matthias Mueller made about $12 million last year which was about double what he made the year before (VW had a record year last year). Obviously, the whole concept of management, of a manager’s value, and of his/her relationship with the worker rank and file as well as with the general public are quite different between America on the one hand and Germany and Japan, to which I could also add South Korea (the fourth major auto country), on the other.

Another factor never discussed but of enormous importance is that of the intersection of the interests of workers, owners, managers, and governments. Along with much else, the United States inherited from Great Britain the notion that business owners and top managers are a law unto themselves driven by a short term focus on profit maximization at the expense of workers who deserve nothing beyond subsistence remuneration and of the public at large which it is thought should be grateful for the riches delivered to it by the great men/women of business. In this milieu, getting as rich as possible as fast as possible is the main driving force of owners and top managers. Anything that gets in the way, workers or citizens or government, are opponents and even enemies to be vanquished. Thus, war is the best way to think of the nature of organized labor-management relations in America. Perhaps this is a bit of an overstatement since workers at most large U.S. corporations such as Apple, Microsoft, and JP Morgan are not organized by labor unions. But the unions would argue, with some credibility, that this is due to the obstacles to organization that these corporations have been able to have enacted into U.S. law and interpretation.

That is decidedly not the case in Germany, Japan, and South Korea. I could add China as well, but its system of Communism with Chinese Characteristics is alien to all the others and not something from which we here in America can learn as we can from the experience of the others.

Germany has a two board of directors system. There is a Management Board which is responsible for running the company day to day and which is composed mainly of the senior executives of the company. On top of this is a Supervisory Board which is more akin to the Board of Directors of a U.S. corporation. But of great importance is that Labor is strongly represented on the Supervisory Board. In the case of large companies, the employees of the company elect half of the members of the Supervisory Board. In smaller corporations, they elect one third of the supervisory board. In all cases, at least two Union representatives must be elected to the Supervisory Boards. Thus the oversight of the corporation is to a very significant extent in the hands of the workers and their unions. It should also be noted that in 2019, Germany adopted what it calls the National Industrial Strategy 2030 which strongly reinforces the doctrine of Make It In Germany that has long informally guided German labor unions and German Supervisory boards. In short, in Germany labor, management, and government are not all at war with each other. Rather they are a team aiming for as much industrial global leadership as possible.

Japan’s Board of Directors structure and system is nominally very similar to that of the United States. In fact, however, there are a number of large mitigating elements that make the Japanese system look more like that of Germany than that of America. One major factor has been the long arm of government industrial policy. As a lead U.S. trade negotiator with Japan in the past, I am more than well aware of the very close ties that have long existed between the Japanese government and Japanese business as well as the informal but very sticky ties that exist between many Japanese corporations. CEOs in Tokyo do not ignore phone calls from the government and the corporations like Toyota keep it well informed. Even more than Germany, Japan has been guided by industrial policy and owes a great deal of its economic success to the partnership of industry, labor, and government.

As for labor unions, Japan nominally has national labor union structures similar to those of the U.S. and other industrial nations. But the key union in Japanese corporations is the company union. That is to say that the most important union that Toyota, for example, has to deal with is the Toyota Corporate Union which includes virtually all of its employees including significant numbers of top management executives. These unions virtually never go on strike, and we see that the top executive of the world’s largest and most successful auto company earns only a fraction of what the CEO of failing General Motors earns. This is in significant part because the CEO of Toyota or of any other Japanese corporation could not look his employees and company union members in the eye if he accepted such a huge pay-out. That would be considered a betrayal of the team whose members all cooperate to make Toyota and Japan the most competitive corporation and country.

As in the case of Germany, Japanese top management is not at war with its workers or with its government. Everyone is thinking of themselves as being on the same team and they are acting in the best way for the team (Team Toyota or Team Sony and also Team Japan) not just the CEO and a few top managers, to win.

The story in South Korea is very similar. There too business and economics are seen as team sports and the objectives of management, the government, and of labor are to WIN by dint of team play.

In this context, I should add the point that these economies have not been financialized as the Anglo-American economies have been. That is to say that while they, of course, do have shareholders and are traded on the global exchanges their investors tend to have a longer term orientation than those in Anglo-American corporations and their executives are not incentivized with stock options and bonuses anywhere near those of the Americans. They do not pay a lot of attention to the quarterly earnings reports as is the case in the United States. Indeed, a recent WTW study shows that U.S. top executives earn two to three times as much as their European counterparts and five or six times as much as top Japanese executives. Most of this huge difference can be accounted for not by salaries but by financial incentives that are focused on top management rather than being more broadly spread among the whole work team.

WHAT MUST FAIN DO

The revitalization of the U.S. auto industry and, indeed of U.S. industry in general, must begin with de-financialization. The next quarter or next six months earnings should not be significant milestones. Of course, eventually the corporation must earn good returns for investors, but focusing on the next three months can easily harm the longer term results. Nor should compensation be administered in a way such that what might be good for the CEO is at odds with the longer term welfare of the corporation and the workers. The incentives must be arranged such that they apply to the team and not just a few of its members.

One step would be to simply to do away with public quarterly earnings reports. Six month or even just annual reports would incentivize longer term planning and performance. Above forecast earnings for the year or five years should result in bonus payments for all executives and workers, not just for the CEO and a handful of top executives. Declining sales and earnings should negatively impact the earnings of all executives and workers as well. When things go badly, provisions for reduced salaries and wages would enable a corporation to survive longer with more time to fix the problems and find a way to stay alive.

A second step would be to make it illegal for a corporation to buy its own shares. Such investment not only does not contribute to any improvement in any aspect of the corporation’s activity, but may increase its debt in order to reward shareholders in the short term at the longer term expense of the work force and the corporation’s long term productivity and competitiveness. Over the years 2009-2019, such buybacks totaled $4 trillion constituting fifty two percent of total corporate earnings. That is a huge sum of money that might have been invested in R&D, in more productive production facilities, and in better wages for workers, rather than on essentially making rich investors richer in an anti-productive way.

Labor representation on the boards of directors of medium and large corporations a la Germany is a step for which both American labor and the public at large should be pressing. There are many good reasons for this. One is that it would help to create the “all on one team” environment that has been so successful in Germany and Japan. It would also create more incentive for the directors and executives of the corporation to run it for the broad benefit of the societies it serves. A final step in a similar direction would be for the U.S. Congress to pass legislation specifically stipulating that a corporation is not a person and does not have the same rights to contribute to political parties and activities as human citizens. This would be a huge step in the direction of reducing the power of corporate political lobbying and of assuring that American corporations would be operating in the best interests of American workers, consumers, and national interests rather than acting as lobbyists for powerful foreign countries in which they might also be doing business.

An American corporation operating in Germany or Japan or Korea would find it necessary to pay its local workers the same wages that competing Japanese, German, and Korean corporations are paying. Turn about is only fair play. The U.S. Congress should pass legislation requiring that foreign corporations operating in the United States pay the same wages for the same work as their American competitors.

These kinds of measures are what Fain should be aiming for rather than making an inevitably fruitless stab at directly organizing the transplant auto operations. Furthermore, even partial success would produce substantially greater benefits than persuading a few of the auto transplant workers to join the AUW.