How the bankruptcy of the Big Three will save manufacturing in the U.S.

The Problem
The main problem is the cost structure of the Big Three automakers is 30% higher than their competitors, and that is what is making them uncompetitive in the auto industry.(1)

Over the past 30 years, as Toyota and Honda and other foreign manufacturers began to gain market share in the U.S., the Big Three automakers had a choice between: fiscal discipline or buying union votes - and after decades of buying the support of the UAW - the Big Three find themselves stuck in the incredible mess that they created.

Labor Costs
The U.S. manufacturers pay significantly higher labor costs, approx $25-30 more per hour, than Toyota, Honda and Nissan ($48 in labor costs per hour). (2)

GM's per hour labor cost is $73.26. Of this figure, $39.68 is in the form of wages, while $33.58 is in the form of benefits and government-mandated programs.(3)(4)

Ford ($70.51) & Chrysler ($75.86) are in the same boat as GM.(5)

Legacy Retirement & Health Care Costs
In addition to exorbitant per hour labor costs, the Big Three automakers are saddled with an $100 billion in legacy and health care costs for 400,000 retirees (former workers who are no longer producing cars).(6)

Job Bank
On top of immense labor costs and retiree legacy costs, when the Big Three automakers layoff workers - these UAW workers are placed in a "job bank" and the companies are forced to pay 95% of their salary for 2 years if they cannot find a position at another facility for them (or the worker declines the position offered).

Last year alone, the Big Three spent a half-billion dollars to fund idle workers in the job bank. Both GM & Ford had over 1,400 workers in the job bank in 2007, while Chrysler had half that amount.(7)(8)

Work Rules & Labor Contracts
Last but certainly not least, are inflexible job rules and an enormous labor contract that dictates what the companies "are and are not allowed to do" within an inch of their corporate lives.

How will the bankruptcy of the Big Three will save manufacturing in the U.S.?

Bankruptcy Keeps the Company's Doors Open - Not Closed
Too many people hear the word "bankruptcy" and think of closed doors. But in reality, the purpose of bankruptcy is to restructure operations in an attempt to keep the doors open.

If the Big Three were to go into bankruptcy proceedings, as a price for bankruptcy protection, the bankruptcy court would require that the Big Three automakers restructure their labor contracts with the UAW to make them more competitive as compared to foreign competition.

Pattern Bargaining
Collective bargaining in an industry usually follows one of two paths:

* Small to Large - The small fish settle first, and each larger unit receive a "cost + plus differential" contract. For example, in education, a small rural school district would settle first with the union and this would be the "minimum level" for all the rest of the contracts. The larger school districts would come to the table and the union would seek a settlement that is proportionally larger due to its' larger size school district.

* Large to Small - The large fish settles first, and each smaller unit receives a "cost - minus differential" contract. Converse to the prior example, in this case the largest school district would settle first for the "maximum" amount, and subsequent settlements with smaller school districts would be proportionally smaller than that received by the largest school district.

In the auto industry, the pattern for collective bargaining has always been the UAW settles with the Big Three automakers first, and then the suppliers, and then finally ancillary organizations.

So the Big Three-UAW labor contracts set the "maximum" level of pay and benefits in the auto industry. No parts supplier could expect to be paid more than the going rate for those working in the Big Three.

The Big Three-UAW labor contracts established the wage structure for the entire U.S. manufacturing sector
The key is: the Big Three-UAW labor contracts not only established the "maximum" level of pay and benefits for the auto industry - but given the strength of the auto industry - it also set the wage structure for the entire manufacturing sector in the U.S.

So the "maximum" level of labor costs set by the Big Three - would impact far more than just their suppliers and support organizations; it would also set the "max" wages/benefit rates for workers in any manufacturing environment in the U.S.

Therefore, the wage structure of ordinary machinists, steelworkers, electricians, etc in the manufacturing sector were a function of the wage rates established in the UAW's contracts with the Big Three.

Bankruptcy of the Big Three will save manufacturing in the U.S.
Manufacturing is a primary driver of the health of the U.S. economy.

But due to an uncompetitive wage structure, the U.S. has seen the loss of over 3 million manufacturing jobs to foreign locales.9

Since the labor contracts of the Big Three automakers established the wage structure of the manufacturing sector of the U.S., and this wage structure is now uncompetitive and resulting in the off-shoring of millions of manufacturing jobs - it is imperative for the survival and future of the manufacturing sector, a primary driver of the U.S. economy - that the Big Three automaker go through bankruptcy to restructure their uncompetitive labor contracts, in the hopes of setting a new competitive wage structure for manufacturing in the U.S.