Detroit faces changing auto industry

Illustration by Francesca Keilb
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By Ariana Assaf, Daily Staff Reporter
Published February 4, 2015

The city of Detroit has been inextricably tied to the automobile industry since Henry Ford established his Detroit-based company in 1903. The Great Depression marked the first of several drastic setbacks for Detroit’s auto industry, and the once-booming economic environment is still recovering from the most recent economic recession.

The Detroit “Big Three” — General Motors, Ford and Chrysler — once dominated the industry, which together with the now-defunct American Motors, accounted for 95 of the market share at one time. The erosion of that power began in 1982, when the Japanese company Honda moved to Marysville, Ohio.

Arthur Schwartz, president of Labor and Economics Associates, an Ann Arbor-based consulting firm, said the Big Three composed 45.5 percent of the market in 2014.

Michigan became the hub of the industry by 1905, just two years after Henry Ford brought his company to Detroit. The city already had several natural advantages — close proximity to sources of coal, iron and copper and a location easily accessible by water and land. Though automobiles were first developed in Germany and France, the United States was the first country to develop mass motorization, largely due to the improvement of the assembly line in 1913 used to create the Ford Model T.

Fast forward to the 21st century. Even before Detroit filed for bankruptcy, the industry’s production was not what it used to be. Car companies struggled as the economy’s health declined. In response, the U.S. government created a short incentive program, called Cash for Clunkers, designed to renew demand for vehicles at a time when the market struggled for cash. Between July and August 2009, buyers who turned in old, fuel-inefficient vehicles received a financial break on a new car.

Yen Chen, a senior research economist at the Center for Automotive Research in Ann Arbor, co-published a research memorandum in 2010 documenting the program’s success. He found that 44 percent of light vehicles sold in these months were due to the program.

“For the first time in a long time, the industry experienced the first signs of recovery,” Chen said.

As production rebounded, workers returned to production lines. Chrysler and General Motors completed restructuring and a planned bankruptcy that shut down production during most of the summer of 2009. Combined with external monetary support and a healing economy, the industry began to take a turn for the better.

As the economy stabilized and Americans found employment, Chen said those workers also purchased cars to ensure their ability to get to work.

“When people find jobs, they need a vehicle to commute,” he said. “The major reason behind vehicle sale, from my point of view, is full-time employment. People find full time employment, they need to be able to commute daily.”

Schwartz, who was general director of labor relations at General Motors during the mid-1980s, was responsible for planning union negotiations.

Schwartz remained on the team through the restructuring of 2009. He recalled the negotiations that attempted to halt decline.

“In ’07 the company was sinking, so something had to be done,” he said.

He cited labor laws as one factor, along with disputes over General Motors’ wages compared to those of Toyota. Another important issue, he said, resulted from General Motors' retirees relying on pensions. Their number of retirees was larger than a company like Toyota, which was much newer to the United States.

“We were carrying hundreds of thousands of retirees, but of course, since Toyota didn’t come in until 1988, they weren’t carrying hardly anything at all,” he said.

That year, General Motors negotiated to turn the liability of about 400,000 of its retirees to the Voluntary Employee Beneficiary Association, a type of trust fund permitted under federal tax law. Though this wouldn’t take effect until 2010, the move freed General Motors from a significant amount of financial responsibility.

“Billions came off the books,” Schwartz said.

Another major, still controversial aspect of that year’s negotiations was the creation of a two-tier wage. Because wages were relatively high for workers not staffing the line, especially compared to Toyota, the company decided that incoming workers would receive a starting salary of $16 per hour instead of $28.50.

Schwartz said the goal was to pay less for easier jobs. However, workers who had been with the company for many years had earned seniority, and thus tended to opt for easier work. To avoid paying senior workers less, negotiators decided that the lower, second-tier wages would be automatically given to new workers.

“VEBA and second-tier wages went a long way in reducing the gap between the Big Three and Toyota, Honda, Nissan as far as labor rates are concerned,” Schwartz said. “Plus, we could bring more work into the plant.”

However, the climate took a bad turn when the 2008 financial crisis occurred. Sales dropped by about 40 percent, a significant decrease for automobile manufacturers. Ford was able to borrow money from private financial institutions, but Chrysler and General Motors had to turn to the government after the banking crisis hit the private sector. This led to the 2009 negotiations that involved the undoing of the second-tier wage ceiling and the discontinuation of a long-standing jobs bank, a program that allowed laid off workers to continue receiving some benefits.

“The whole contract was very painful for everybody, especially the union,” Schwartz said. “I give them a lot of credit on the ‘09 negotiation.”

Schwartz expressed the widely held belief that the government came out ahead by avoiding the cost of social welfare that would have resulted if General Motors had gone bankrupt.

In terms of Detroit as an industry city, Schwartz thinks it’s making a comeback.

“We really haven’t picked up any market share, but we haven’t lost like we were losing before and sales are good," Schwartz said. "We’re making money.”