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Corporate Media Imposes Huge Costs on Workers


Anyone following the Canadian media’s coverage of the auto crisis must be familiar with the term "legacy costs" – the auto companies’ term for what they pay retired workers (basically pensions and benefits).

Nicholas Van Praet, in an article for the Financial Post, described legacy costs as "crippling" to GM Canada.[1] According to the CAW (the Canadian Autoworkers Union) all labor costs account for roughly 7% of the cost of a vehicle. However, articles like Van Praet’s, and even some statements by the CAW, had me questioning if this 7% figure included legacy costs. According to Jim Stanford, the CAW’s economist, the figure does include legacy costs. [2] I contacted both Stanford and Sam Gindin, a former advisor to the CAW. Both agreed that legacy costs were roughly 2% of all costs.

After I read Van Preat’s article, I wrote to him asking if he knew what percentage of GM Canada’s total costs were legacy costs. He replied a week later saying

"The number is available but I would have to go digging."

Obviously, a journalist should know this before writing that retirees are a "crippling" burden. I told Van Praet about the answers I had received from the CAW. He suggested that I contact GM and also auto analyst Dennis Desrosiers (more about him below) for a "different perspective" – and insisted that legacy costs were "crippling". He followed up with another email and attached a study. He explained.

"Please see the attachment. It’s a study done last summer by the economist at the Center for Automotive Research in Michigan. Page13. He estimates retired health costs at GM alone were worth 28% of every vehicle produced as recently as 2006. Recent VEBA agreements will change that. This is not an insignificant issue. It is hurting the company." [3]

As advised, I looked at page 13. It stated that retiree health costs in the US were $950 per vehicle. Two things stood out immediately. First, if you very conservatively assume that vehicles cost $20,000 in the US then $950 is under 5% of the cost – nowhere near 28%. Second, Canada has a nationalized health care system which drastically reduces health care costs for employers. The study basically confirmed that legacy costs in Canada must be very far from "crippling". I pointed all this out to Van Preat and he replied again:

"The argument is that Canadian health care allowed unionized workers to pad their contracts with rich benefits and wages that the companies went along with. That happened for years. Now as the number of retirees grows and the number of active workers shrinks, it’s a problem. If you want to think otherwise or underestimate how serious this is, go right ahead."

The claim that legacy costs are "crippling" seems to be a religious dogma in some journalistic circles. It calls to mind other lies that the corporate press relentlessly peddled. [4] However, Derek Delocet, of the Toronto Globe and Mail, replied to me about legacy costs more reasonably.

Decloet had written an article entitled "GM had a gun to the CAW’s head – and missed" (March 10). As may be guessed from the title, he argued that GM should have won much bigger concessions from workers after the latest round of bargaining. He didn’t dispute that all labor costs were about 7% of total costs but explained his perspective as follows.

"I’ve give you a few reasons why labour costs matter. The first is that while they may be a small percentage of the sticker price, labour is one of the costs they can control; many others they don’t. Steel, energy and certain other major inputs cost what they cost. Other major upfront costs — plants and equipment, design/engineering for new models, etc. — must be spent without knowing how many cars will be sold to cover those costs. (Also, remember that the auto companies don’t get the sticker price — there’s a dealer markup — so labour as a % of automakers’ revenue is slightly higher than the numbers you cite.)

The second reason is that auto manufacturing is a high-revenue, low margin business. Let’s take GM as an example. Forget the past couple of years and go back to 2006, the last year in which it was profitable on an operating basis (i.e. profit excluding interest costs, taxes, and restructuring charges). It had $204-billion (US) in revenue and $4.6-billion in operating profit. That’s 2.2% and that’s pretty typical. So if you can cut your costs even by 2%, it can have a sizable impact on profitability. And what needs to happen over the long run is that these companies earn enough money to cover their cost of capital — which will allow them to bring in money from private investors (thus not be reliant on the government for funding).

But the reason that legacy costs matter a lot is that they are not variable to revenues. Suppose you are the CEO of GM Canada. You have pension and healthcare obligations to roughly 30,000 retirees. Say that costs $25,000 a year each (I’m just guessing here but that seems realistic). You produced 570,000 vehicles in Canada in 2008 (including CAMI near Woodstock).

30,000 people times $25,000 = $750-million divided by 570,000 vehicles equals $1,315 in legacy costs per vehicle.

But the auto market in the U.S. — where the vast majority of Canadian-made vehicles are sold — is ~35% smaller than it used to be. So let’s say production drops to 400,000 vehicles. Costs of active laborers should drop — there are fewer of them working fewer hours. But the pensions of GM workers remain the same, right?

$750-million divided by 400,000 = $1,875 in legacy costs per vehicle

Some food for thought for you. Thank you for writing.

best regards
Derek"

I replied to Derek Decloet that day:

"Mr. Decloet:

Thanks for the thoughtful reply.

Once it is acknowledged that legacy costs (and labor costs) are such a small percentage of total costs (2% and 7% respectively), it becomes hard to argue that public debate and government policy need to revolve around the question of "how much must autoworkers give up?"

You say "labour is one of the costs they [the companies] can control". The problem is that 93% (non labor costs) is a huge percentage. If you assume that only 20 of those 93 percentage points accounts for costs the companies can significantly impact then there is no excuse for hammering workers – especially retirees. For example, bring that 20% down to 18% and you’ve covered legacy costs.

Another point is the one Sam Gindin made to me about legacy costs:

‘GM doesn’t pay them all out of pocket. there is a fund and when the returns do well they might not have to put much in per year – nowhere near the total cost in the example (eg in the US, GM’s pension fund was over funded between 2003 and the present recession)’[5]

You say that small percentages matter in the auto industry because it is ‘high revenue, low margin’. In that case, an analysis of executive and managerial pay is certainly called for. Do you know how much more executives at the Big 3 make than their rivals, or how much reducing that gap would impact total costs?"

This exchange with Decloet neglected much larger issues, but, before addressing them, let’s keep within the constraints imposed by the corporate press – namely that retirees must show that they are not a drain on profits and not the other way around. Auto companies in Canada, including the ones now complaining about their "crippling legacy costs", have reaped billions of dollars in profits. GM Canada made $31.75 billion in profits in the 1972-2007 period according to a study by Jim Stanford which was released April 13. [6] The study observed

"Today’s retired autoworkers are the ones who produced the value-added that underwrote the strong and consistent profits which the auto industry captured through the last several decades.".

Decloet’s article was wrong to say that GM had a gun to the CAW’s head. The gun, to use his analogy, is actually being held by the Canadian government. The Canadian government is holding up $4 billion in emergency loans to the auto companies and openly insisting on much larger concessions from workers. Months earlier, the government quickly bought up $12 billion in mortgage debt from Canadian banks, pledged to buy up to $75 billion, and agreed to guarantee $200 billion of bank debt. Canadian banks have also received an unknown percentage of the hundreds of billions that the US financial industry has been given.[7]

All these handouts to Canadian banks (who brag about being profitable) were prompted by a crisis that was not caused by workers. It was caused by the bursting of an 8 trillion dollar housing bubble in the US and exacerbated by decades of financial deregulation – policies that primarily benefited elite investors.[8]

So what really motivates this relentless assault on auto workers and the vicious targeting of retirees in response to a crisis they did not create? It obviously can’t be a reluctance to give away tax payer money or concern about the long term viability of auto companies because of wages and pensions.

Dennis Desrosiers, (the auto analyst recommended by Financial Post reporter Nicholas Van Preat) provided an explanation in one of his anti-worker rants:

"Assembly labour is 7-8 percent of the price of a vehicle but this excludes benefits, pink and white collar compensation, and labour costs within the parts sector, raw material sector, distribution of vehicle and retailing of vehicles. Labour is between 40 and 50 percent of the price of a vehicle and everyone benchmarks their wages off of union wages."[9]

Desrosiers is wrong about benefits, and unionized non-assembly workers are a tiny fraction of all autoworkers. However, Desrosiers is correct that any supplier incorporates it’s own labor costs into the price of what it sells to the automakers. The last part of his statement is also correct and bears repeating

"…everyone benchmarks their wages off of union wages."

Unions raise the bar for all other workers – everyone from the nonunion supervisors on the shop floor to the nonunion workers at plants whose owners are pressured to keep the union out. However, this line of argument is rarely seen in the corporate press. It’s smarter to stick to the script that retired autoworkers are "crippling" the auto companies with "legacy costs". Why mention that attacking unionized autoworkers is a way to attack all workers? That’s not a connection the corporate press wants readers to make.

Sam Gindin, writing from a pro-worker perspective, elaborated on this point:

"…concessions lower expectations, undercut arguments for why others should join a union, and risk the erosion of worker confidence in collective action" [10]

All wonderful things from the corporate perspective. From that perspective (which is shared by the government and the media) it makes sense to go after unionized autoworkers even if their wages and benefits were 1% or 0.005% of all costs. It’s also smart to ensure that any criticism the public hears of the CAW comes exclusively from the right. Corporate pundits, with varying degrees of hostility, shake their heads at the CAW’s presumed intransigence. Hence, the media’s lies about "crippling legacy costs" facilitate much bigger lies of omission.

Sam Gindin has proposed that we wrench control of industrial policy away from the discredited corporate elite. The economic and environmental crises could both be addressed through massive public investment in environmentally sustainable production. Idled plants should be expropriated for this project and used to provide jobs for the unemployed. He asks "what better time to launch such a project than now, in the face of having to overcome both the immediate economic crisis and the looming environmental crisis?" In other words, the government should be forced to bail out workers and their communities – not necessarily their employers.

This isn’t what the CAW is demanding. One of the CAW’s conditions for renegotiating contracts was the "development of a comprehensive and viable National Auto Strategy, on the basis of recommendations from the Canadian Automotive Partnership Council (CAPC), which addresses the industry’s challenges including one-way trade imbalances between North America and the rest of the world." [11]

The CAPC is a lobby group dominated by the industry’s despised CEOs.[12] While the corporate press rails at the CAW for being too radical, the reality is quite the opposite. Consequently, a massive defeat looms for all Canadian workers.

SUGGESTED ACTION

Write polite, non-abusive letters to

The Toronto Globe & Mail [email protected]
Derek Decloet [email protected]

Nicholas Van Praet [email protected]

Copy all emails to [email protected]

NOTES
[1] A Toronto Sun editorial of April 12 stated "The biggest problem, ‘legacy’ or pension costs, is daunting."
In another article
http://www2.canada.com/business/fp/ford+ne…html?id=1462343
("Ford needs its own deal with the union — urgently", April 3) Nicholas Van Praet cited an anonymous source at Ford Canada who said that 15,000 vehicles must be sold each year (roughly 400 million dollars) to cover legacy costs for roughly 12000 retirees. According to Jim Stanford this is several times what Ford pays each year in legacy costs. The figures provided by the anonymous source from Ford were also cited by the Montreal Gazette (Ford Canada aims to slash legacy costs, source says; April 4)
[2]
http://www.caw.ca/assets/pdf/Stanford_for_CIC_Feb09.pdf
[3]
http://auto21.ca/uploads/2008_Conference/O…NDEN_040608.pdf
[4] For example: Saddam Hussein possessed weapons of mass destruction; Saddam Hussein kicked UN weapons inspectors out of Iraq in 1998; The US social security system is bankrupt; Hugo Chavez is a dictator;…..

[5] According to Sam Gindin, between 2003 and 2007 there were a number of years when GM put almost nothing into the pension plan.
[6] http://www.caw.ca/en/7310.htm
[7] RITA TRICHUR; The Toronto Star; November 7, 2008 Friday "PM pledges more aid for banks; Meets financial executives, says conditions easing in credit markets but ‘significant concerns’ remain"

The Toronto Star; December 19, 2008 "Flaherty tells banks to step up; Finance minister urges them to ‘reciprocate’ Ottawa’s measures to encourage lending"

Financial Post: Eoin Callan; March 28, 2009; "BMO caught up in AIG bailout probe; Could lead to U. S. attempts to claw back funds"

[8]http://www.paecon.net/PAEReview/issue46/Baker46.pdf
[9] This quote was forwarded to me by Nicholas Van Praet.
[10] ZNet; Sam Gindin Auto Alternatives; http://www.zcomm.org/znet/viewArticle/21133
[11] CAW Big Three Master Bargaining Committees Joint Meeting
January 29, 2009;
http://www.caw.ca/en/5429.htm
[12]http://www.capcinfo.ca/english/members-membres.html

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