Its going to take a little work to get this firing on all cylinders again.

In the ongoing debate over my commentary on Unions and striking an idea was championed that Unionization in some respects was the reason for GM’s fall from grace as a dominate Auto-Manufacturer. This makes perfect sense; other companies can utilize cheaper labor pools, and the auto industry is remarkably lean thereby not offering a lot of opportunities to create a high margin product to offset higher labor costs.

So why am I going to argue the Union is not to blame?

That’s easy, because monopolies are to blame!As absurd as that sounds, its exactly what I think happened and we have the laws of unintended consequences and short term thinking to blame. This idea actually isn’t mine either, go figure I heard it on a conservative talk radio show (not usually the people who champion unions).

Additionally we’ll look at product mix as a contributing factor as well.

Background on Auto Manufacturing

According to a Michigan in Brief a non-profit group dedicated to Michigan state government and public policy, at its height Michigan produced a full 25% of the entire world’s automobiles (the US was a full 75% of world’s production). My guess is that in addition to the 75% world production figure; domestic sales were probably approaching 90-95% (unfortunately I wasn’t able to dig up the number).

In effect if you bought a car in the US before 1980 most likely you bought “American”

Monopolies vs. Unions

When you have as much market power as Ford and GM did the primary concern motivating almost any decision is how do I keep “printing money”. With unions having shown a track record of striking from the late 30′s, keeping them working was the absolute top priority.

This led to a “give them what they want mentality” including fully paid hospitalization, and sick leave benefits, as well as profit sharing. Which has led to autoworkers being compensated on a level that was substantially better than their counterparts.

Without significant compensation in effect US automakers were only competing against themselves, and keeping the assembly lines rolling was the largest obstacle to profitability. With so much money flowing in both sides (employers and union leaders) acted in their short-term best interests.

Enter the Japanese

By the early 80′s Honda and Toyota were off the ground and becoming a legitimate offering stateside. The Japanese offering was cheaper, smaller, more fuel efficient, and had the perception of being more reliable as it aged. With a new competitor coming in concessions made to workers (unions) now had a substantial impact on GM, and Ford’s ability to compete with this new low cost model.

Compounding union wages was the the Japanese auto manufacturer’s mastery of the “Just in Time” manufacturing approach of stocking inventory which reduced costs by maintaining leaner inventory levels.

It didn’t take long for Japan to supplant the United states as the largest producer of vehicles in the world, a distinction they maintained until 1992.

Product Mix

It also almost seems as if US auto manufacturers have been 1 step behind in every trend in the automotive world outside of SUVs since the 80′s. The fuel efficient car has never been a mainstay focus of the US based product lineup the way it has been with Honda and Toyota.

An indifference to the rising price of gasoline by leveraging a product mix with better feul economy has been a glaring issue. One could even argue it was the product mix, as well as the financial crisis that has put all of these companies on death’s door. At the height of Oil costs in 2007-08 SUVs and small trucks were as close to a toxic asset as you could get.

Lack of fuel economy is also one of the significant reasons Japanese cars were able to splash so largely in the US market in the early 80′s.

Take-Away: Its really easy to get away from fundamentals and deep financial analysis of your business model when you are flying high. The idea of putting the brakes on is almost counter-intuitive to a businessman, but sometimes its exactly what you should be doing. You see examples of people paying too much for a deal/merger (Google and YouTube come to mind), or of employers paying through the nose for a resource they need to  continue hitting a high growth rate.

That being said your job in a company is to ask: What is the outlook for this business? Does it make sense long term to make these concessions? Am I being a good steward for the company. In the end these are really hard questions to answer especially since Wall St. and corporate incentive structures tend to support short term growth as the goal instead of longer term sustainability.

In the case of the US car manufacturers when it came to their product mix, and employment decisions I personally have a hard time thinking someone sat down and thought about what impact these decisions would have down the road.