The Legacy of Unionization: The Big Three in America and the Loss of Market Dominance

Introduction

In 1953, former GM CEO Charles Wilson was nominated by President Eisenhower to be the U.S. Secretary of Defense. Then, as today, confirmation hearings could be intense and Mr. Wilson had no military background to recommend him for the office. Therefore, many Senators saw the nomination as a political pay-off to Mr. Wilson for his support of Eisenhower and were desperate to tarnish him. So, when Mr. Wilson was asked a question about whether or not he could make a decision as Secretary of Defense that was adverse to GM, he is reported to have famously replied: “What’s good for General Motors is good for America!”[1]

This arrogant statement has long been used to trash and besmirch the scions of industry as being out-of-touch with the common man. However, on its face, Mr. Wilson’s supposed statement is not all that far-fetched. Consider the following statistics: General Motors (GM) was the largest corporation on the planet. It’s only real competitors were the other American automakers: Ford and Chrysler. According to historian John Steele Gordon (2009), the three companies had a combined market share of 95% (50% for GM, 30% for Ford, and 15% for Chrysler). What competition existed was relegated to either the high-end market (sports cars, limousines, and the like) or the exotic (the VW Beetle)! As such, there seemed to be little impetus for change or innovation.

Compare those numbers with the situation today. As recently as 2004, GM, Ford, and Chrysler (known collectively as the Big Three) controlled just 58.6% of the market (GM 27.3%, Ford 18.3%, and Chrysler just 13.0%. (Venkatakrishnan 2005). When you excluded their foreign-owned nameplates (like Jaguar and Saab, for example), that market share fell to below 50% (Associated Press 2007). The top three Japanese automakers, Toyota, Honda, and Nissan, on the other hand, controlled 26.2% of the domestic auto industry (Toyota 12.2%, Honda 8.2%, and Nissan 5.8%). Even today, the Big Three still hold a dominating 2 to 1 advantage over their nearest foreign competition: the Japanese auto industry. Even Chrysler, the most ailing of the three automakers, is larger than its competition individually. It would, therefore, be logical to conclude that the loss of market share (which has been fairly gradual) should not have been devastating. Nonetheless, it is General Motors and Chrysler that are filing for bankruptcy and Ford that is struggling to survive, while the Japanese are still flush with cash despite the recession.

How the Big Three automobile manufacturers arrived at this state is the subject of this paper. Using Five-Force analysis, I will show how the domestic auto industry in the United States bred a monopolistic arrogance between the four main actors: the Big Three and, of course, the United Auto Workers, which represented the line workers of those companies. I will also discuss the forces that opened the domestic auto industry to competition and how the Japanese automakers were poised to take advantage.

A Monopoly in All but Name

Michael Porter’s Five-Force model allows an analyst to describe an industry and a company’s place within it in terms of the forces and influences acting upon it. These forces can affect both the short-term and long-term planning of an organization. As we shall see, the state of the domestic automobile industry in the United States during the 1960s and 1970s was a virtual monopoly shared by the three main auto companies based in Detroit, Michigan: General Motors, an amalgamation of several formerly independents brands, such as Pontiac, Cadillac, and Oldsmobile, Ford Motor Company, and Chrysler Motor Company. Into this mix, we can throw the United Auto Workers, an offshoot of AFL-CIO, and the single largest union organization in the country at the time.

Graphically, the Five-Forces model can be represented as such:

Figure 1. Porter’s Five-Forces Model (Adapted from QuickMBA.com)

The above chart describes the interaction of the five forces that determine an industry’s competitiveness, both within and without. Using the above chart as a sign post, let’s see where the Big Three were between the end of the Second World War and the 1970s.

· Rivalry – With control of the 95% of the market concentrated between just three companies, there was little, if any, true competition for customers. The three manufacturers did what they could to widen the market, as with the introduction of the muscle car in the late 1950s and early 1960s, but any advantage was temporary. With no competition, the three companies felt it a wiser use of their time to cement long-term deals with union leadership to forestall work stoppages and strikes.

· Supplier Power – Each company controlled its own proprietary parts chain (most still do), so there was little threat of forward integration. In fact, with many of the workers at the parts manufacturers being represented by the UAW as well, there was a great deal of pressure to not rock the boat.

· Buyer Power – Consumers are the end purchaser of the automobiles produced by any car company. During this time period, there were no credible alternatives to the Big Three. British roadsters and other imports generally competed for the high-end buyer, a market in which the Big Three never seriously tried to compete. Japanese imports and even many German cars of the period were of inferior quality to their American counterparts and so posed little threat to the average consumer. With the Big Three dominating the market, consumers paid whatever price was asked.

· Threat of Substitutes – The only available substitutes to cars would be public transit (subway, taxi, bus, etc.), train, or airplane. For the most part, these pose little, if any, threat to this day. Public transit is only cost-effective when running on short, well-timed routes in heavily urbanized areas. Trains and airplanes suffer from the opposite problem. They are only cost-effective on longer range routes, such as the Northeast corridor or LAX to BWI. As there is also a high convenience cost to these modes of transportation, the automobile industry has never had a true rivalry from a substitute industry.

· Barriers to Entry – The high cost of competing with the Big Three presented a formidable barrier to smaller car companies hoping to do business in America.

This analysis would seem to present a case where the Big Three control a virtual monopoly and there is little, if any, chance of a new competitor gaining traction. With some justification, therefore, the Big Three each independently concluded that their biggest threat came from work stoppages and strikes. Flush with money and with total control of the market, they cut long-term deals with the UAW that radically increased worker pay, provided generous retirement benefits, and, in many cases, provided cradle-to-the-grave health insurance. However, by the 1980s and 1990s, new competitors were gaining significant market share and radically changing the calculus for the Big Three. How did they do it?

Upheaval and Innovation: The Auto Industry in the 1970s

The answer to that question lies in three political and social events. These phenomena set the stage for a technological advancement that produced the first true threat to American corporate dominance of the domestic auto market.

The first social phenomenon was the rise of the yuppie. A shorthand for young, upwardly-mobile professional, the term first came to prominence in the 1980s (Budd and Whimster, 1992). These young men and women were at the forefront of the consumer-driven culture that shaped the next two decades. Yuppies were the first generation to have large amounts of disposable income. There have been numerous studies that have shown the correlation between per capita GDP and car ownership, as well as a corresponding increase in the number of miles driven per person (see, e.g., Schwartz 2006 and Schipper, Marie-Lilliu, and Lewis-Davis 2001). The second social phenomenon was the increase of two-income households. From 1970 to 2005, the number of two-earner households increased 16% (Pew Report 2008). These two phenomena combined to create a larger and broader car market. All things being equal, the Big Three probably could have continued to maintain their mastery over the domestic auto industry. However, all things were not equal.

The third phenomenon of the 1970s fundamentally altered the calculus of the domestic auto industry. That event was the oil crisis. Gordon (2009), for one, identifies this moment as one of change for the auto industry. I feel that he does not go far enough, however. It is entirely possible, perhaps even probable, that the oil crisis would not have produced any significant changes to the domestic auto industry in the United States. After all, without the social trends identified above driving more and more people into automobiles (thus reducing the number of occupants per vehicle and increasing the family gas budget), it is entirely possible that: a) the oil crisis never happens, or b) it merely drives Americans back to carpooling and public transportation. It is the presence of the yuppie and the increasing number of two-earner households that makes the oil crisis so devastating for the American automakers.

Japanese Automakers Gain a Foothold

Into this perfect storm came three Japanese motor companies: Toyota, Honda, and Nissan.[2] Actually, all three had had some presence in the American market since the post-World War 2 era (Toyota, for instance, had come to America in 1957), but had been relegated to niche status by the behemoths of Detroit. Since the Japanese automakers did not focus on sports cars, muscle cars, or trucks, they had virtually no radar signature for the Big Three (or anyone else participating in the American market, for that matter) to track.

For years, the Japanese automakers had been perfecting the practices of lean manufacturing. By focusing on total quality management, just-in-time (JIT) inventory control, and less labor intensive construction processes, the foreign automakers were able to produce a smaller, lighter, more fuel-efficient vehicle that was superior in quality to what Detroit was producing at exactly the right time (White, 2009). American consumers were finally given a clear choice between American cars with their gas-guzzling engines and crude machining and Japanese cars whose fine-tuned, though somewhat utilitarian designs, achieved better gas mileage and had a lower cost of maintenance. Faced with both rising incomes and rising gas costs (and, perhaps, no longer viewing an automobile as a luxury purchase), Americans began to shift towards the Japanese automakers.

As the introduction showed us, even Toyota, the largest of the Japanese automakers, only controls half of the market that GM does, but it does so at a far lower cost. For one thing, the previously mentioned construction principles result in a higher quality product for a lower cost than most American manufacturers. But, those barriers could be (and eventually were) overcome. Every major automobile manufacturer on the planet now uses total quality management and JIT inventory control. Virtually all have streamlined their production processes to reduce manpower requirements. And yet, Toyota and the other Japanese automakers have remained flush with cash and in a much better competitive position vis-à-vis their American competitors than vice versa.

Ultimately, there is one reason above all else that this remains true: the legacy costs of unionization. To a large extent, Japanese automakers have avoided unionization as they have moved their operations to the United States. Toyota, Hyundai (the major South Korean automaker), Honda, and Nissan all have major assembly plants located in right-to-work states where unionization is next to impossible. While union advocates are quick to point out that these non-unionized workers do not make as much as their unionized brothers, they also do not place as large a burden on their parent companies. GM has estimated that the sticker price of its union legacy costs is $1500 per vehicle (Venkatakrishnan, 2005). Ford and Chrysler, meanwhile, have slightly lower estimates. What this means realistically is that even if the cars and light trucks made by American automakers were of the same quality and virtually indistinguishable from their foreign competitors (and one can make that argument), the American car must still necessarily cost more.

The virtual monopoly of the post-war period fostered a corporate culture of arrogance; one that blinded the American auto industry to technological improvements being made around them. This monopoly caused the domestic auto industry to lose its focus; the companies were transformed from innovative corporations into union-friendly jobs machines. Social and political pressures combined to provide an opening in the domestic auto market for the new innovations made by the Japanese. These technological innovations also provided them with an enormous head-start, one that the American companies could have eroded faster if not for the continued lack of focus. Until, and unless, American automakers are able to find or create new innovations that allow them to undersell their foreign competitors, it is likely that the market share of the Big Three will continue to slide.

Conclusion and Implications

This paper has analyzed the status of the domestic auto market before and after the oil shock of the 1970s. It suggests that, even though a near monopoly fosters arrogance and apathy, it will take some extraordinary game-changing event to break open these industries. Even then companies seeking to compete in them must have the right innovations in the right place at the right time. Even a cursory reading of history, however, will show that this confluence of events is not so difficult to achieve as it sounds at first. A recent article in The Economist (2005) has shown how this pattern has been repeated over and over again in heavily unionized industries, such as the steel industry and the airline industry. Faced with new improvements and new methods of conducting business, the unionized companies in these industries refuse to adapt, preferring to rest on their laurels, ignoring the threat until it is too late.

A longer paper would allow for a far more intensive study of this pattern. Issues, such as reaction from the monopolistic partners and a more in-depth study of labor relations would flesh out the concepts presented here. Comparative studies of the steel, airline, and domestic auto industries should be conducted in order to establish a cycle of dominance. A cursory review of the literature would seem to reveal that this cycle does in fact exist and that most industries proceed on a natural path from disciplined monopoly towards fragmented competitiveness.

The implications for government policy are equally stunning. The single greatest sector where unions are organizing heavily and steadily increasing membership is the public sector. The number of union members employed by public sector agencies has recently exceeded those employed by the private sector. As the public sector is monopolistic by nature (and design), it stands to reason that the pattern identified above will hold true. Already, we see evidence in this recession that the public sector must increases its “prices” (in the form of taxes) in order to pay for its bloated bureaucracies. As the growth of the public sector must necessarily come at the expense of private sector growth and as tax revenue from public sector employees does not really count as revenue per se, it is foreseeable that what befell the auto industry will also befall the public sector as well. Unfortunately, while we could all turn to alternatives for the Big Three’s bloated corporate largesse (i.e. Toyota, Honda, and Nissan), it is difficult to see what alternatives exist for deconstructing the union legacy of the public sector when that bill finally comes due.

References

Associate Press (2009, August 2). Big 3 market share drops below 50%.

Retrieved from http://articles.moneycentral.msn.com/Investing/Extra/Big3FallBelow50Percent.aspx.

Budd, L. and Whimster, S. (1992). Global Finance and Urban Living: A Study of Metropolitan

Change. Routledge.

Gordon, J.S. (2009). G.M.’s fall a case of “creative destruction.” Marketplace Commentary.

Retreived from http://origin-marketplace.publicradio.org/display/web/2009/06/01/pm_gm_historic/.

Pew Report (2008). Inside the Middle Class: Bad Times Hit the Good Life. Retrieved from

http://pewsocialtrends.org/charts/?chartid=537&topicid=5.

Schipper, L., Marie-Lilliu, C. and Lewis-Davis, G. (2001). Rapid Motorisation in the Largest

Counties in Asia: Implication for Oil, Carbon Dioxide and Transportation. Retrieved from http://www.iea.org/papers/2001/rapmot.pdf.

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http://joelschwartz.com/pdfs/Schwartz_UCD_102006.pdf.

The Economist (2005, October) Special Report: Now for the reckoning – Corporate America’s

legacy costs. The Economist, 377(8448), 91. 

Venkatakrishnan, K. (2005). The Big Three: Cracked Rear View Mirror. Retrieved from

http://www.frost.com/prod/servlet/cif-econ-insight.pag?docid=45053431.

White, J. B. (2009, May). How Detroit’s Automakers Went from Kings of the Road to Roadkill.

USA Today, 137(2768), 28.

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[1] For the record, Mr. Wilson actually said the opposite; that what was good for America was also good for GM. Placed in proper context, it presents an entirely different perspective on his answer.

[2] Datsun is often considered to be the third car company, but was, in fact, a name plate for Nissan. Nissan eventually discontinued this brand and merged it into the main company.

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