Opinion and Economic Analysis

HICKS: Management's complicity with union doomed GM

June 8, 2009

General Motors Corp.'s bankruptcy marked the second-largest commercial failure in modern history. It is an opportunity for deep reflection.

More than 170 years ago, Alexis de Tocqueville traveled to our then-toddler nation to describe to his fellow Europeans this new phenomenon of America. Among other things, he noted the capacity of Americans to try again after failing at commercial ventures. Our modern bankruptcy laws have codified what de Tocqueville felt was a cultural trait.

Many famous firms have undergone bankruptcy only to emerge, like the Phoenix, stronger than before. From this perspective at least, there is hope for GM's survival. It would be both unwise and ungenerous to bet too heavily against the rebirth of GM. That said, there is more at issue here than a short string of poor business decisions.

Among all the observations about GM, one stands clear: GM failed simply because it could not sell cars. No doubt a part of GM's woes are based in this recession, but it bears remembering that, in the heyday of U.S. auto sales, GM lost money. The cause for this failure is much deeper.

GM's management argues its cars have finally met the quality standards of the foreign imports. This may be true, but its warranty terms reveal a less flattering story. As late as this summer, the best GM warranties were for half the time of Honda's at the same price. Warranties provide a market revelation regarding quality. Rather soon, perhaps by 2012, GM will have to match the import-car-company quality and support it through warranties. That will be no mean feat in an industry where the product cycle is three to five years.

Poor auto quality is not the sole factor. Even bad cars will sell if the price is right. But GM, like Chrysler, has simply been unable to match price and quality and sustain a profit. Ford hasn't yet, either, but is more hopeful. Toyota, Honda, BMW, Subaru and VW all do--at American factories--with willing workers.

The hard, unspoken truth is that United Auto Workers contracts have beggared these companies. The UAW leadership has spent four decades carefully masking the truth from its members. In order to keep a job, you must be able to be competitive--in both wages and productivity. GM and its workers have failed this acid test.

The complicity of management with the UAW is what everyone means when they speak of a failed corporate culture. The accommodation of unsustainable labor agreements may have prevented short-term labor strife, but it also caused the company to fail.

General Motors may well emerge from bankruptcy. The UAW will not. The failure of the Big Three spells the effective end of manufacturing-based unions in the United States. The UAW offers no wage premium and no job security, just weekly dues. The unions did much good in the last century, but few Americans will lament their passing. The interesting question now is, what will replace them?

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Hicks is director of the Center for Business and Economic Research at Ball State University. His column appears weekly. He can be reached at cber@bsu.edu.

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