MORE FROM JERRY FLINT
Guest Editorial From Forbes.com
By Jerry Flint
11.16.04
Volkswagen and its German union
recently signed an agreement that guarantees job preservation
in western Germany until the year 2011. In exchange, the union
agreed to a 28-month wage freeze.
Well, it isn't quite a freeze because
VW will give its workers about €1,000 ($1,250) for signing
the contract, but that's better than promising raises of 3% to
4% per year until 2011.
After a good run of several years,
Volkswagen is again facing many challenges. In its latest
reporting quarter, which ended in September, VW earned $76
million compared to a profit of $213 million in the same
quarter in 2003. VW has fallen behind the competition in
bringing new models to market--especially in the U.S.--and high
labor costs also put it at a disadvantage, even against other
German carmakers. Hence, the new labor agreement with VW's
German union.
Years ago, General Motors
began making pledges to keep plants open in its
contract with the United Auto Workers union. GM isn't alone, as
Ford Motor and DaimlerChrysler have similar union deals.
GM already has so many retired or
laid-off workers that it figures it can't afford to pay people
not to work. So, GM does everything it can to keep its
factories running, but can't do this without cutting prices on
most of its vehicles through thousands of dollars of
incentives. The company makes little or no profit on its cars
and declining profits on trucks.
In order to afford these incentives,
GM has skimped on things like the fit, finish and quality of
its vehicle interiors and in designing and building better
components. To save money on product costs, many GM models have
four-speed automatic transmissions, while rivals have gone to
five or even six speeds, as old engines are cheaper to use than
new ones. And, GM moved to make stability control systems
standard on its high volume sport utility vehicles (SUVs) only
after others such as Ford, Honda Motor and Hyundai began making
them standard on their big sellers.
I think that this is a self-defeating
strategy. As its competitors keep improving their vehicles and
making them more desirable, it puts more pressure on GM to
offer even bigger incentives just to keep the factories
running. Not only does this approach destroy the eventual
resale value of vehicles, but dealers are starting to openly
complain that flooding the market with unwanted cars is hurting
their business.
What's more, the union concessions
tend to be exaggerated and never save as much money as
predicted. As the former labor writer for The New
York Times, I write this with confidence.
Management is gaining some ground in
this struggle, but it has been hard to resist union demands in
both the U.S. and Germany. If the company says no, the
''establishment''--the press and politicians--denounce the
managers as rich selfish fat cats denying the struggling
employees their due. If there is a strike, the establishment
vilifies the employer.
What's to be done?
In Volkswagen's case, I would say it
needs more attractive designs--designs so good that Europeans
are willing to pay more for VW's vehicles. The newest VW Golf
is a better car than the old one, but the higher price has hurt
sales. It's probably impossible to build a truly low priced car
in Germany because of the high cost of labor.
VW needs a new car to replace the
Golf, one for which Europeans are willing to pay a premium.
And, it needs more success with its higher-priced vehicles,
like Audis, which are also built in Germany. That's just what
Audi is attempting to do with its
new A6--take a bigger bite out of Mercedes and
BMW. For America, Audi needs SUVs. They are coming, but
not until 2006.
GM needs to design and build cars and
trucks that Americans are willing to buy without fat sales
incentives. As a start, I think GM needs to clean house and
reduce its variety of products. With fewer platforms and
models, more money and talent can be spent on improving the
remaining vehicles.
For example, GM sells five different
Chevrolet passenger cars--the tiny Aveo; the subcompact
Cobalt (replacing the Cavalier); two Malibus (the newer model
and the old model, now called the Chevy Classic, for fleets or
just cheap deals); and the Impala/Monte Carlo. The Aveo is a
Korean import and costs little, but the car is a distraction.
The old Malibu is built just to keep the factory running and is
also a distraction. I think Chevy would be better off with just
three or three core lines of passenger cars. Remember, the car
business is still sagging and it is the trucks--the SUVs,
pickups and even minivans--with growth potential.
GM's designs must get more
adventurous. The company needs to push the envelope far more
than it did with a car like the just launched Buick
LaCrosse. GM also needs to bring its engineering up to date.
I think GM is moving in the right
direction, but it needs to move faster. The company needs many
more vehicles that are as good in their market segments as the
new and Cadillac CTS
.
