We are, I believe, at a significant inflection point in the United States labor market, and therefore I believe the entire supply chain.
As most of you are probably at least generally aware, Delphi, the $30 billion auto parts company that was once an arm of GM but then spun off as a separate, publicly traded company in 1999, filed for bankruptcy protection last autumn. It did so under the leadership of new CEO Steve Miller, who is a tough cookie, to put it mildly. He has been public and blunt about the uncompetitive cost position Delphi finds itself in.
Since then, there has been an interesting public and private dance between Delphi, General Motors, and the United Auto Workers Union. To make a long story short, GM is involved not only because Delphi remains a major supplier, but because the already ailing OEM might be on the hook for some of Delphi’s “legacy” pension and healthcare costs if Delphi can’t pay them. Delphi is also seeking major price increases from GM for what it says are money-losing contractual agreements.
Last week, the other shoe dropped. Delphi filed part of its re-organization recommendations to the bankruptcy court. These included a call to cancel at current prices $5 billion in parts contracts with GM, close many U.S and European manufacturing plants, and for the court to throw out the current union contract. Currently, the highest paid workers get over $27.00 an hour and many more dollars in benefits. Miller is proposing that by 2007 the top wage would be only $16.50 per hour, with significant reduction in net benefit expenses as well.
So here is my thesis: either Delphi will succeed in this move, which will really be the beginning of the end of high manufacturing wages that are not governed really by the supply and demand for labor; or, this will start a real political and economic backlash that could likely end in protectionist moves in Washington.
Either path has significant supply chain management ramifications.
While obviously there has been great concern over “offshoring” and the supposed loss of U.S. jobs overseas, the reality is that the concern has been unable to generate any popular or political critical mass. While there is evidence that pressure from overseas sources has kept manufacturing wage growth in the U.S low compared to our history since the Depression, usually the most noticeable impact has been on the jobs themselves. The plant closes or it doesn’t.
This is different. The auto industry still has such a substantial impact on the country’s psyche and economy, with huge concentrations of employees in many locations, that this won’t get “lost in the news.” Besides shuttering more than 20 plants, Delphi is asking for almost a 50% reduction is total wages. That’s a big number – unprecedented, really.
If Delphi is ultimately successful, I believe it will signal the end of manufacturing and union wages really being much above that would be set by supply and demand. Because the auto industry really defined the top of the union position on the way up, if it is hammered back like this, there will be a similar long shadow across other industries and companies on the way down. We may look back on the last half of the 20th century as a unique period really in history in which non-skilled labor was able to command such a premium over the wages it would gain from pure market forces. Think about that. In all of history, this has really only been the case meaningfully for about 50 years.
As a result, over time, especially as labor costs in China continue to rise, the marginal benefit of offshoring there will diminish. The benefits of automation over time will marginally shrink as wage pressure really slows, at least if you were a high wage payer.
On the other hand….the UAW is quite likely to strike rather than except this Delphi haircut, with potentially devastating effects for Delphi and GM, which itself could slide into bankruptcy from the resulting parts shortage.
In addition, the Delphi move could trigger protectionist legislation in Washington. The potential for such legislation has long been percolating under the surface, increasingly stoked not only by the unions and like-minded politicians, but nightly diatribes by the CNN’s Lou Dobbs and others.
I just returned from the always excellent Supply Chain Executive Forum at The Logistics Institute at Georgia Tech, and Dr. John Langley’s gathering of Supply Chain executives heard a number of presenters reference potential U.S. protectionism generally as perhaps the major threat to the growth of the global supply chain, apart from any of the fallout I think could happen from Delphi.
The upshot – the goods you are sourcing from China and perhaps other spots now could get a lot more expensive.
In either of my scenarios, the rate of growth of offshoring slows, but just how that happens and the type of SCM impact vary dramatically with each path. And continuing what has been a strong theme lately in this SCDigest pages, we’d suggest really looking at multiple scenarios in your supply chain strategy and network design (see Building A Flexible Supply Chain Network, a placing a strong premium on building in supply chain agility.
Do you believe the Delphi labor issue can be a real inflection point in the direction of manufacturing wages and protectionism? Why or why not? What do you believe is the likely outcome of all this? Let us know your thoughts.