CAW’s short-term gain for long-term pain

Globe and Mail Report on Business
May 1, 2008

Derek DeCloet

Give Buzz Hargrove credit: Unlike a lot of union leaders, he doesn't waste time pining for the good old days. He's a realist. Maybe that's because he reads – even when it hurts, even when every single article seems to bear grim news.

Here's a recent story from the Detroit Free Press: 10 General Motors plants have been shut down because workers at a supplier of axles have been on strike since February. But GM can't be bothered to intervene in the dispute because the U.S. economy is so rotten, and inventories are so high, that it's got an excess of SUVs and pickups – which is also why the company just killed another shift and laid off 900 more people in Oshawa, Ont.

Here's a little item from the Seattle Post-Intelligencer: The mayor demands that all new taxis get at least 30 miles a gallon, adding Seattle to the list of cities that want to limit the use of fuel hogs like the Ford Crown Victoria, popular among cabbies. That would be the same car that's made by Mr. Hargrove's members in the Canadian Auto Workers in St. Thomas, Ont.

Is it any wonder Mr. Hargrove was anxious to make a quick deal? Bad economy + green momentum + high gas prices = big trouble for Canadian car plants. The CAW chief looked ahead to the summer and could see things only getting worse. So the union this week reached an agreement with Ford – nearly five months before the old contract expired, and minus all the usual huffing and bluffing in front of microphones.

Not long ago, Mr. Hargrove's job was to win bigger raises and fatter pensions. Now, he's trying to try to hang on to as much as he can. He seems to have done it at Ford, but at what price? “It could be a short-run victory and a terrifying loss in three years,” says auto economist Sean McAlinden. How terrifying? “A complete collapse of the 100-year-old traditional Canadian auto industry.”

That may sound alarmist, and it is. But Mr. McAlinden, the chief economist at the Center for Automotive Research in Ann Arbor, Mich., is not a wacko; he's considered an expert on labour and investment in the North American auto business. And while he thinks Mr. Hargrove's bargaining tactics were “brilliant,” they may turn out to be too clever by half.

The CAW went into the talks with the broad goal of avoiding the smackdown the auto makers delivered to the United Auto Workers last year. The UAW, trying to avoid more layoffs, agreed to concessions that knock $20 (U.S.) to $25 an hour off the price of labour, including lower wages for new workers.

No two-tier system for us, declared Mr. Hargrove, and his choice of Ford as a target was well planned. Ford could win the title of Most Destitute Auto Maker, despite some fierce competition. It expects to lose money for the third straight year in 2008. Its financial services unit barely broke even in the first quarter. More important, two of its better-selling vehicles are made in Oakville. It could ill afford a strike there.

So Ford gave and the union gave, and the result is labour peace without higher costs. New employees will take lower wages, but only for their first three years on the job. All told, Ford will pay about $67 (Canadian) for every hour worked by an active employee – not much more than the $60 for U.S. auto workers, says Jim Stanford, the CAW's chief economist. Since Canadian plants are a little bit more productive, call it a wash, at least as long as the loonie is around par with the U.S. buck.

Not so fast, Mr. McAlinden says. “Jim is sadly wrong,” he says. The CAW's math looks at the cost of active workers, not so-called legacy costs, like health care benefits for retirees, which the UAW agreed to essentially wipe from the auto makers' books. As for Canada's productivity advantage, it's largely a mirage, he says.

The real hit comes not now, but three years from now. By that point, thanks to the provisions in the UAW deal, the wage gap will have grown to $22 an hour, Mr. McAlinden calculates – which equals more than $1-billion in extra costs for the Detroit Three for producing in Canada. Who, he asks, would dare introduce a new model here? “Some of the mumbling around here is, ‘You got the deal, Buzz, but that's the last dime of investment you're ever going to see.'”

Maybe he's wrong. But the outcome rests on a factor beyond the CAW's control. The higher the dollar goes, the harder it will be for the union. Look at the history. In 2002, with the loonie at 62 cents, Mr. Hargrove got his members a raise. In 2005, with an 84-cent dollar, he accepted that job cuts were coming. In 2008, at parity, employment is still shrinking and the CAW must struggle to keep wage cuts off the table. By 2011, Mr. Hargrove may not seem like such a negotiating genius after all.