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American cars once existed as the benchmark for performance, the epitome of style,

and a symbol of industrial power. According to the article, “The Decline of the North American

Car” in June 2008, Asian and European brands captured 54.2% of overall vehicle sales, edging

out the 45.8% of sales that went to the U.S. brands. This marked the first month in history that

American car buyers preferred the combined offerings of Asian and European automakers to

those of the Big Three(Campbell 34). The Big Three is in their weakest competitive position

ever compared to their overseas rival and this exists as a huge problem for our economy and

the future existence of the Big Three. The auto industry once existed as the staple of the

American economy. Ford, General Motors, and Chrysler, which are known as the Big Three,

provide jobs for hundreds of thousands of Americans. In the same article previously

mentioned, Campbell explains that the workers that keep these companies going are joined

together by their membership in the United Automobile Workers (UAW) union which formed in

1935 (36). The contracts agreed upon by the Big Three and the UAW leaders were

revolutionary at the time, but have since caused problems in the downfall of the Big Three.

What impact do United Automobile Workers labor contracts have on the ability for Ford,

General Motors, and Chrysler to be competitive in the global economy?

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 The United Automobile Workers set up their contract agreements with the Big Three in

such a way that members of the UAW receive full healthcare for themselves and their

dependents. Members of the UAW also receive generous pensions from the Big Three. As

reported by Sharon Carty, UAW President Ron Gettelfinger states:

A typical UAW-represented worker at Chrysler, Ford or General Motors who has

reached eligibility for receipt of an 80 percent Social Security benefit will receive

just over $18,000 per year from his or her employer. Autoworkers who retire

prior to Social Security eligibility are entitled to a supplement which increases

annual income from their employer to about $36,000. When retirees reach the

age for an 80 percent benefit (age 63) or retire after that, they receive only the

basic benefit, and the employer no longer pays the supplement. (Carty 1)

One problem with the UAW union contracts is that they do not allow for automakers to

lay off unneeded employees. If the automakers need to cut back on employees, the only way

that they can get rid of them is to convince them to accept a buyout. According to the article,

“G.M.'s Jobs Bank Looms as Major Obstacle on Road to Survival” American automakers are

attempting to buyout as many current employees as they can, which experts believe will be in

the range of 15,000 workers, so they can hire new employees for lower wages under the

ground breaking deal negotiated last year with UAW. The buyout, if accepted, can be worth up

to $140,000 in a one-time payout (Peters 4). If employees do not accept the buyout, they will

be enrolled in the jobs bank program which basically pays workers full salaries for doing

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nothing. The jobs bank program is currently suspended and the future of it is uncertain, so it

would be smart for some employees to accept the buyout and take the money while they have

the chance.

Many flaws in the UAW union contracts contribute to the current problems that

Detroit’s three automotive companies face. One major flaw is the existence of jobs bank

program which basically pays idle workers to do nothing. Jeremy Peters continues in his article

used above to say that the program, which started in 1984, pays laid off automaker workers to

do whatever they want all day for $31 an hour. Even if Congress approves the $25 billion

bailout, the Jobs Bank program will likely continue, thus forcing American taxpayers to pay

thousands of dollars a year to provide salaries for these idle workers (Peters 3). Even though

the jobs bank program does not provide enormous loses to the companies, it does exist as

another thing that is wrong with the current union contracts. David Cole, chairman of the

Center for Automotive Research says that, "There is not a huge number of people in it, but it's

one of the most negative things that people across the country hold against the auto industry.”

More money for research and development would be available to the Big Three if they could

come to an agreement with the union and eliminate the program. According to Peters, Ford,

General Motors, and Chrysler currently pay an estimated $9.4 million each week for the salaries

of 3,500 idle workers, which does not include their health care or pensions. Recent meetings

between the auto companies and the UAW union have resulted in the suspension of the jobs

bank program, but it remains unclear as to when the program will end. This will save the Big

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Three nearly half a billion dollars per year which could play a key role in their climb back from

the brink of bankruptcy.

A key flaw in the UAW union contracts exists in the section pertaining to retired

employees. According to the hearing in Congress, “What’s Ailing the U.S. Auto Industry”

hundreds of thousands of retired auto workers exist among Detroit’s three automotive

companies and every one of them, including their surviving spouses and other dependents, is

receiving full healthcare (United States 1992). This exists as a huge financial strain on the

American auto industry. The Big Three have a hard time competing with foreign automotive

companies, but when they are paying billions of dollars per year just for healthcare,

competition in the global economy is nearly an impossible task. According to the article, “The

Decline of the North American Car” foreign companies like Toyota and Honda do not have to

worry about this because their workers are covered by government pension and healthcare

systems (Campbell 38). All this extra money not spent on employee healthcare can be put into

research to create more innovative automobiles which gives them a huge advantage over Ford,

GM, and Chrysler.

One solution to the problem pertaining to the Big Three’s liability to pay for full

healthcare for all current and former employees, including their dependents, has been

discussed by the UAW and Big Three. The article, “Big Three Automaker Bailout” says that Ford,

GM, and Chrysler have proposed a healthcare trust, called a Voluntary Employee Beneficiary

Association (VEBA) that would take over the responsibility for worker and retiree benefits

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(Zaleski 2). This healthcare trust is the first step in eliminating the requirement for the Big

Three to provide healthcare to its employees. General Motors President Frederick A.

Henderson says, “The trust, slated to start in 2010, will allow us, along with Ford and Chrysler,

to take the $100 billion liability of employee and retiree healthcare off their books, thus giving

the UAW control over the specific benefits that its members receive.” Forming this trust will

alleviate a good portion of the financial stress on the Big Three. The major problem with the

trust is that it has to be cash funded by the Ford, GM, and Chrysler, who cannot afford to give

up that money when they are on the brink of bankruptcy. Carty reported that on December 3,

2008, the UAW agreed to accept delayed payments of billions of dollars to a union-run health

care trust which will help the automakers survive a cash shortage. GM will pay more than $7.5

billion next year to the union administered fund while Ford owes $6.3 billion (Carty 2). The

additional funds freed up by eliminating company provided healthcare will allow the Big Three

to get back to the point where they can compete in the global economy. According to UAW

President Ron Gettelfinger, “The union-administered trust fund will not take effect until January

1, 2010, but when it does it will save GM about $3 billion per year and Ford about $1 billion per

year.”

While the current union contracts for the UAW have been a key component in the

catastrophic downfall of Detroit’s three big automotive companies, the process of changing

these contracts has begun to take place in the last year, but is it too late? Discussions between

the Big Three and the UAW have resulted in modifications to the union contracts including

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reduced wages effective with newly hired employees as well as the suspension of the jobs bank

program. These modifications are an attempt by the union and the Big Three to prove to

Congress that they are willing to make changes to the problems that have plagued their

industry for years. If Congress sees this as a legitimate attempt at change, they will be more

likely to grant the industry with the $34 billion loan that it is requesting by the end of the year.

Addressing the possibility of bankruptcy for the Big Three, Sean McAlinden, the chief economist

for The Center of Automotive Research says,

A complete shutdown of Detroit Three U.S. production would have a major

impact on the U.S. economy in terms of lost wages, reductions in social security

receipts, personal income taxes paid, and an increase in transfer payments. The

government stands to lose on the level of $60 billion in the first year alone, and

the three year total is well over $156 billion.

The price of American automobile exists as a primary reason that the Big Three has

problems being competitive with foreign car companies such as Toyota, Honda, and Nissan.

The UAW union contracts create many problems for the Big Three regarding the pricing of their

automobiles. According to the article, “5 crucial issues automakers must address to win

support for public bailout” American automotive workers earn a relatively similar salary to

those employed by foreign car companies which is about $48 an hour, but when you take into

account the healthcare and pensions earned by automotive workers for the Big Three, they are

actually earning wages equivalent to $73 per hour. Ford, General Motors, and Chrysler struggle

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to make a worthwhile profit in the current state of the economy because they are restricted by

UAW contracts which force them to pay high value hourly wages. The only way the Big Three

can compensate for these high hourly wages is to pass the costs on to the consumer. The

article previously mentioned written by Sharon Carty, says that in every American made

automobile, $2,800 is added to the price of the car to help pay for the healthcare and pensions

of current and retired workers. This extra $2800 is another hindrance on the Big Three’s ability

to compete with foreign automobile companies.

Foreign car prices are substantially smaller in comparison to the price of American

automobiles because they do not have to pass on as many costs to the consumers like the Big

Three do to pay for high value union wages. According to the article, “Gentlemen, Start Your

Turnaround” Most foreign companies do not worry about pensions or healthcare for

employees because their governments cover it, so that in it of itself is a huge advantage that

foreign companies have over the Big Three (Taylor 77). One way to make the price of

automobiles more competitive between American and foreign brands would be for Congress to

place higher tariffs on imported cars, thus raising their prices and making them more

comparable to that of Ford, GM, and Chrysler. As of now, little to no tariffs exists on imported

automobiles which allow foreign automobile companies to sell their product here for next to no

additional cost.

One major problem which outweighs the discrepancy in price between American and

foreign cars exists as the inability for the Big Three to compete in the quality of product that the

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foreign companies create. A lack of innovation exists as a major problem in the ability for the

Big Three to compete with the innovative vehicles that are being put on the market by foreign

automotive companies led by Toyota and Honda. One reason for the Big Three’s inability to

create more innovative products is that they do not have the money necessary to properly fund

their research and development departments. According to the book, Clean Car Wars : How

Honda and Toyota Are Winning the Battle of the Eco-Friendly Autos, the turn of the century

brought a great deal of innovation from foreign automotive companies led by the

implementation of hybrid technology in several cars made by Toyota (Hasegawa 11). Following

the first release of the Toyota Prius, their first hybrid model, Toyota and Honda have continued

to develop the technology to use alternative fuel sources in the wake of increasing fuel prices

and a greater awareness of the damages to the environment from traditionally fueled gasoline

automobiles. Initially the American automotive companies failed to dedicate themselves to

creating new technology, remaining preoccupied with the gas guzzling SUV’s. According to the

article previously mentioned by Alex Taylor it has just been in the past few years that have they

begun to develop alternative fuel automobiles and each of the Big Three is set to release

several hybrid models in 2009. It all comes back to the labor contracts because the excessive

union wages create a situation for the Big Three in which they do not possess the necessary

finances to properly fund their research and development departments.

A bailout would just be a postponement of the inevitable. Granting the Big Three a $34

billion loan will most likely just postpone their bankruptcy because the same people will still be

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in charge that drove the Big Three into the deep hole that they currently find themselves in. If

the bailout is granted, Congress should replace all top executives in each of the Big Three that

are responsible for driving their companies to the brink of bankruptcy. Congress must also step

in and mandate the contracts of auto workers and eradicate the benefits that retired workers

currently receive from Ford, General Motors, and Chrysler. By eliminating the retirement

pensions, the Big Three could put that money into their research and development

departments, thus creating a more innovative product to keep pace with foreign auto

companies like Toyota and Honda. Doing this would eliminate the $2800 added to the price of

every American made automobile; therefore producing a car that can match the performance,

style, and cost of foreign automobiles. From my research I discovered that experts all over the

country argue the cause for foreign cars dominating American cars in the market. Some argue

that lack of innovation by the Big Three exists as the sole reason that foreign cars are becoming

increasingly preferable for consumers in the United States. Others argue that the Big Three

lacks the ability to invest the necessary funds into research and development to create

innovative products because a large portion of their finances are being used for the bloated

salaries of automobile workers as well as the pensions and insurance of millions of retired

workers. Whether the problem is lack of innovation, misuse of funds, or a combination of both,

the Big Three better come up with a solution in the near future or we may be looking at the last

days of the once world renowned American auto industry.