Old World, New Labor Lessons

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Barbara Christopher
Industrial and Systems Engineering
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General Motors recently waded into battle with its workers in Europe, specifically
in Germany-a struggle that, on the surface, looks much like the "life-or-death" battle
between VW and its German workforce. The differences between these two companies'
approaches highlight the differences between the European and U.S business
environments. At the heart of these differences is the fact that companies
in Europe are more formally and deeply integrated into the social fabric of
their countries. As a consequence, they view labor more as a fixed cost than
do their United States counterparts.

But European labor relations are now evolving in response to two major influences.
One is European integration. The other is increased wage competition not only
from China and India but also from such new European Union (EU) member countries
as Poland and Slovenia and EU candidates Romania and Bulgaria. In the European
auto industry, Japanese imports are mounting competition of the sort experienced
in the United States in the 1980s and 1990s.

Businesses in the United States may learn some lessons from watching Europeans
address these changes. But both Europe and the United States already agree
that the buzzword of the day is "collaboration," the sharing of risks and returns
with supply chain partners. It only makes sense, then, to collaborate with
your closest and most important business partner: your workforce.

One way to collaborate is to improve workforce morale and productivity by
lifting some of the employment risk from workers' shoulders. How businesses
approach this collaboration may hold the key to success. GM and VW's current
struggles with their European workforces offer an excellent illustration.

GM to Cut Jobs

GM employs 63,000 people and operates 11 plants in 8 countries in Europe, including
multiple Opel plants in Germany, a Saab plant in Sweden, and a Vauxhall plant
in the United Kingdom. These operations have posted losses each year since
1999, and GM's share of the European auto market has dropped a full percentage
point to 9.2% since 2001. This past October, GM announced that it would cut
12,000 jobs over the next two years-nearly 20% of its European workforce-with
most of the cuts coming in Germany in 2005.

Opel Workers Fight Layoffs. Workers at the oldest Opel plant in Bochum,
Germany, the likely target for more than a third of these cuts, walked off
the job demanding that the company rule out compulsory layoffs. Despite the
urgings of Opel management, union leaders, and local and national politicians,
these workers continued their strike for six days until members of the works
council convinced them to return to the job.

Restructuring: Battling for Worker Buy-In. But getting the Opel workers
back on the job doesn't mean that GM's labor challenges are over. Under German
law, the company must come to an agreement with Opel workers before it can
implement its cost-cutting plan. Klaus Franz, head of the general works council
at Opel, stated, "We have two major targets-the first is no plant closures,
the second is no forced redundancies."

Franz proposed three directions for further discussions. First, he indicated
that GM management would need to participate in the belt tightening. Any savings
plan would have to include executive pay cuts of "much more" than the benchmark
10% that Mercedes-Benz executives agreed to in a resolution with their workforce
back in July.

Second, Franz noted that while the workforce at Opel's main Rüsselsheim
facility had fallen to 5,600 from 18,000 workers over the past 15 years, the
size of GM Europe's managerial workforce has gone "in a different direction" over
the same period. To facilitate reductions in management, he proposed that the
company revise its European restructuring, which had brought its three European
operations under one regional manager based in Zürich-outside the European
Union. Franz proposed that GM substitute the newly created "European Corporation" or "Société Européene" structure
and operate out of Brussels instead of Zürich.

Third, Franz observed that becoming a European company would significantly
simplify GM's legal structure. It could combine its 100 legal European entities
under one set of rules and a unified management and reporting system. This
structure would also allow European labor unions to negotiate directly with
GM management in Detroit.

VW to Reduce Labor Costs

VW employs more than 320,000 people worldwide, 176,000 of them in Germany.
Discounting by competitors and the strength of the Euro slashed VW's operating
profits by 47%, from 4.7 billion Euros in 2002 to about 2.5 billion Euros
in 2003, and its share price has fallen 21% this year. Consequently, the
company has stated the goal of reducing labor costs by 30% over the next
7 years.

A Different Labor Relations Model. In contrast to GM, VW's shareholder
structure dictates a distinctly different approach to labor relations. The
state of Lower Saxony, where VW is headquartered, holds 18.2% of Volkswagen
ordinary share stock and controls two seats on the company's supervisory board.
In fact, Gerhardt Schroeder, the German Chancellor, was a member of the VW
supervisory board when he was governor of the region. It's as if George W.
Bush and Jennifer Granholm, the Governor of Michigan, held seats on GM's board
and controlled 20% of the company's shares.

As inconceivable as that scenario would be in the United States, it is not
unusual in Europe. (And that helps explain why the German press felt justified
in leveling what I consider a ridiculous charge: that the GM shift of jobs
from Germany to Poland was politically motivated because of the two countries'
different responses to the war in Iraq.) The German system reserves half of
the supervisory board seats for union representatives, so management is aware
of the realities of downsizing in Germany and knows very well that workers
must agree to any restructuring plans.

Long-Term, Collaborative Change. In contrast to GM, VW's goals are
long-term and include no explicit statement about job cuts. Given its roots
in the European system, the company recognizes that it will have to collaborate
with its employees to determine just how it will realize the necessary savings.

Accordingly, although VW is no stranger to reductions in labor costs, these
reductions have typically come in the form of concessions on wages and hours
rather than layoffs. For example, after a $1.3 billion loss in 1993, the company
and the union agreed to forego planned raises in exchange for cutting back
to a four-day workweek, a move that reduced wages by 20% over the contract
period.

Leveraging Wage Differences. In dealing with unions, VW has also been
able to leverage the stark differences between the 30 Euros/hour (nearly $40/hour)
average wage for autoworkers in Germany and the 6 Euros/hour the company pays
its workers in Slovakia. In 2000, VW announced that its upscale sport-utility
vehicle, the Touareg, would be built in Bratislava, Slovakia. VW personnel
chief Peter Hartz observed, "For every car VW makes, the plants have to apply
to get the assignment. If Wolfsburg [Germany] wants to get a new model, it
must make an offer" that is competitive with VW plants in Spain, Mexico, Slovakia,
and elsewhere.

VW's Toran, a compact minivan, offers another example. To win production of
that vehicle for the VW plant in Wolfsburg, union representatives offered flexibility
in working hours and a commitment to repair defects in vehicles off the assembly
line with unpaid hours.

The Outlook for European Workers

Things are changing rapidly for the Europeans in several significant ways.
For one thing, Europe's expansion eastward has added to the European Union
10 countries with significantly lower labor costs. For another, the emergence
of China and India as sources of inexpensive goods and destinations for manufacturing
and service jobs is having a significant impact. In fact, imports from China
have grown significantly faster in old Europe than in the United States in
recent years. In addition,

These pressures (and others) mean that whatever the results of the GM and
VW negotiations with their workforces, labor in Europe faces challenges that
are likely to bring dramatic changes in the coming years.

Old Europe No Longer the Center. The new European Union members and
candidate countries have shifted the center of Europe eastward-not only geographically
and demographically but also economically. The GDP growth in Poland, the Czech
Republic, and Hungary was close to 3% in 2003 compared with 0.7% in Western
Europe. The eastward shift is philosophical as well. As Eastern Europe rebuilds
its labor market structure, it appears that it will more closely resemble the
Anglo-American structure than the European model.

High Wages or Plenty of Work? As VW's situation illustrates, wage differences
are a powerful lever for gaining concessions from labor leaders. France offers
another good example. The country's transport union negotiated more restrictive
hours of service rules for their workers than those imposed from Brussels.
This agreement applies only to French companies, however, and it proved to
be the "last straw," the one that drove many French transport operators to
relocate to places like the Czech Republic or Romania, where driver wages are
significantly lower. As a result, France lost about 15% of its trucking industry.

Losing Traditional Protections. In Western Europe, integration is untangling
the political involvements that have protected European laborers in the past.
The European Commission has taken Germany to court over the 44-year-old "Volkswagen
law," which gives Lower Saxony undue control over the carmaker by allowing
it to use its two seats on the supervisory board to block many company decisions.

At the same time, larger European companies are now listing on U.S. stock
exchanges, which means that they must reveal their margins and profitability
to shareholders quarterly. So such tactics as layoffs of workers in other countries
to compensate for falling revenues in Europe will be harder to justify or disguise.

Facing Growing Threats from Asia. The auto industry is also facing
increasingly serious threats from Asian competition. Although Asian carmakers
command only 17.4% of the European auto market compared with their 25% share
in the United States, they are gaining share rapidly. September sales figures,
for example, showed that while total European auto sales declined slightly,
Toyota sales in Europe increased 2.3%, and Honda, Hyundai, and Mazda posted
gains of 12% to 30%. Europeans are just beginning to feel the pain of Asian
competition because European Union trade policies had kept the Japanese car
makers out with a complex quota system. That system was dropped at the end
of 1999.

Along with the other changes we've looked at, this Asian competition has brought
tougher times for European Union workers. Lehman Equity strategists note a
3% reduction in total payroll costs for publicly traded companies across Europe.
And the transformation is just beginning. VW currently employs nearly 30% more
people than Toyota worldwide even though it produces 10% fewer vehicles. That
kind of labor expense just won't survive in the global marketplace.

Lessons for U.S. Employers

European employment structures are distinctly different from those in the United
States, and they will remain so. Still, in an international environment,
we can't ignore what is happening there. Although it would be presumptuous
to judge GM's strategy from this distance, the company's recent tussle with
its European workers will probably speed VW on its path to labor reductions
and certainly created enmity within GM. Strong medicine may be needed to
fix the profitability problems in Europe, but recreating the confrontational
labor-management relationships typical in the United States-antithetical
to principles of lean business structures and kaizen (the Japanese philosophy
of advocating continuous improvement in both personal and professional life)-is
not the right prescription.

Instead, collaborative relationships with employees may prove the most effective
and profitable. For example, in 1998, Frank Russell Co. discovered that investing
in the public companies on Fortune's list of the 100 best companies to work
for and then reinvesting in the new list each year, earned 10.6% annually compared
with the S&P 500's 5.7% annual return over the same period.

Perhaps the Old World can offer some new lessons on how to profitably collaborate
with your closest supply chain partner: your workforce.

Additional Information

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H. Milton Stewart School of Industrial and Systems Engineering (ISYE)

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Status
  • Created By: Barbara Christopher
  • Workflow Status: Published
  • Created On: Dec 1, 2004 - 8:00pm
  • Last Updated: Oct 7, 2016 - 11:06pm