GM and the UAW: A One-Sided Negotiation?

From 1947 through 1977, General Motors (GM) dominated the automobile industry capturing an average of 45 percent of the auto market. Of the "Big three "automakers (GM, Ford and Chrysler) GM ranked first in sales in every year during this time frame and ranked first in profits for 16 of the 20 years. Needless to say GM sat comfortably atop the automobile industry.

Now decades later GM's share of the automobile market is down to 25.4% its lowest level since it competed with Henry Ford's Model T. Rumors of bankruptcy abound. In March of 2005 GM lowered its earnings forecast which sent its stock price to its worst one-day fall since October 19 1987 when the stock market crashed. Following this GM announced that it had lost a staggering 1 billion dollars during its first quarter alone. Finally adding insult to injury GM disclosed that its sales were plummeting and for this its stock earned Standard and Poor's grade of junk-bond status. What once was the world's largest and most profitable auto manufacturer is now puttering along in the slow lane.

So who or what is responsible for GM's decline? Though there are numerous factors that are hurting the company one major factor has been the United Auto Workers (UAW) union and its long relationship with GM over the years.

The relationship first took shape during the Depression when demand for cars overall fell sharply and almost half of all autoworkers lost their jobs as a result. Those autoworkers that did keep their jobs received greatly reduced pay because the major auto companies could barely afford to stay in business. However GM through the leadership of Alfred Sloan remained competitive and profitable. But working conditions paled in comparison to today's standards. It was not typical for companies including GM to provide benefits such as health insurance and pension plans were unheard of.

All of this began to change for GM in 1936 when two major players in the UAW Walter and Victor Reuther staged a sit-down strike at one of GM's primary plants Fisher Body Plant No. 1 in GM's hometown of Flint Michigan. Though the governor at the time Frank Murphy instructed over 4000 guardsmen to maintain peace at the strike he did not give them the authority to evict the strikers forcing Sloan to negotiate with the UAW (though Sloan later stated that "we would not negotiate with the union while its agents forcibly held possession of our properties. . .we finally felt obliged to do so"). As a result of the strike GM formally recognized the UAW as a legal organization in 1937. Shortly after in 1941 Ford formally recognized the UAW giving the union even greater power.

What followed was a relationship that endured over the years giving the UAW and its members some of the best benefits in the country. Indeed the UAW was a powerful negotiator. Victor Reuther believing strongly that all workers should have health insurance tried first to bargain with the federal government. After several failed attempts he turned to Sloan at GM. Although Sloan initially viewed Reuther's request for health insurance and pension plans as "extravagant beyond reason" one of Reuther's proposals eventually persuaded him. Previously GM and the UAW engaged in contract renegotiations each year which made it difficult for GM's managers and workers to plan ahead because they were unsure what the costs would be for the following year. Reuther capitalizing on this problem offered to agree to longer contracts. As Sloan later stated "Longer intervals gave the corporation more assurance that it could meet its long-range production schedules." What was the catch to the UAW's concession? In return for longer contracts the UAW insisted that each and every contract be better for the UAW than the one before it. Sloan agreed to the terms of the negotiation setting the stage for health insurance pension plans and other employee benefits.

During the economic boom following WWII demand soared leaving the auto industry rich with profit. As Reuther stated to the auto industry during these times "It's a growing market - we have nothing to fight over." So at first contract negotiations went smoothly and costs of employee benefits stayed at a minimum. But little by little the UAW negotiated better benefits for its members. In 1943 GM allowed workers to purchase health insurance however GM did not incur any of the cost because workers put their money into a pool. Five years later the union successfully negotiated two powerful benefits. The first "an escalator clause" stipulated that GM give raises based on the cost of living. The second the "Improvement factor" rewarded workers for increasing efficiency. As a plant increased in efficiency and lowered costs as a result workers at the plant received raises. Then in 1950 GM agreed to pay 50 percent of all its workers health care premiums including worker's families and it also agreed to develop and pay for a pension plan. Three years later GM extended these benefits to its retired workers.

Business was still booming in 1959 when the UAW persuaded GM to guarantee worker's wages - even for those workers the company had laid off. Thus workers could be assured that they would receive no less than what GM had promised to pay them even during economic hardship. The UAW continued to push GM to further sweeten its benefits - per their original deal -- and in 1961 GM agreed to pay 100 percent of all health care premiums again for workers and their families. Three years later GM extended this benefit to its retirees.

GM's market share around that time peaked at 50.7 percent but in 1966 the same year that Alfred Sloan died. A little known company called Datsun exported a car to the United States marking the entry of the Japanese automakers in the US market. During this time Japan's influence was minimal and GM continued to agree to increase benefits to its workers. In 1970 for instance the UAW persuaded GM to provide full retirement benefits after 30 years of service. In addition GM agreed to extend health insurance benefits to cover mental and prenatal and postnatal conditions. As UAW negotiator Douglas Fraser recalls "We had a lot of arguments over mental health. I don't believe we had any arguments over full premiums."

From GM's standpoint the concessions it made over the years may be relatively minor when considered in isolation but their cumulative impact is now taking its toll. As the company has lost market share to increased competition from both domestic and foreign producers particularly Japanese producers more and more workers have retired leaving GM with huge expenses. GM anticipates health care costs to top $5.6 million in 2005 alone and it is estimated that GM's long term health liabilities are $77 billion. To fund its pension plans GM has long term liabilities of $89 billion -- a tremendous amount when one considers that GM's revenues in 2004 were $193 billion.

And costs continue to soar as baby boomers retire in droves leaving younger workers to support retirees and causing large discrepancies in the number of current and retired workers. GM now employees 150,000 people yet it funds health care for 1.1. million people. And because of the ever-increasing benefits packages that the UAW negotiated with GM over the years, GM's health care plan is far better than what the average US company provides. While average US citizens pay 32 percent of their medical costs GM workers and members of the UAW pay only 7 percent. In fact GM now spends more than double on health care than what it spends on steel to produce its automobiles. As one former GM investor quipped, "When you invest in GM, you are non-investing in a car company. You are investing in a money-management firm and an HMO."

All of these rising costs have caused GM considerable financial problems. Although some analysts suggest that GM should streamline operations, Thomas Kowaleski, a spokesman for GM, said, "We cannot be profitable at 20 percent market share because legacy costs won't go away." Even closing a plant is no longer under GM's discretion - the UAW must approve it. To make matters worse, even if GM halts production at a given plant, it still has to pay its workers 95 percent of their regular wages, even though GM's wages are 60 percent more than the industry average.

All in all, GM may have negotiated itself into a stranglehold with the UAW. But there are two sides to consider. On the one hand, offering great employee benefits is a goal that all organizations should have, as workers should receive the best treatment possible and companies want to attract the best workers possible. On the other hand, if the UAW continues to press GM for improvements, and GM concedes, the company may no longer exist to provide these benefits.

Respond to the following three questions in detail:

1. How would you characterize the type of conflict that exists between GM and the UAW using the various conflict handling interventions discussed in the course?
2. What type of power does the UAW hold over GM? How has this power influenced its ability to negotiate with GM?
3. Although benefits such a "guaranteed wage" likely are appealing to workers, how might such benefits affect employee motivation? How might they affect job satisfaction and organizational commitment? Could this be a case where management engages in the "folly of rewarding A while hoping for B?"

*Keep it to one to two paragraphs per question.