Reference no: EM131670012

Qusetion: LABOR CONFLICT COMES TO A HEAD AT AAM

The standoff between American Axle & Manufacturing (AAM) and the United Auto Workers (UAW) is emblematic of the seismic changes shaking up the U.S. automotive industry and much of the manufacturing sector in general. Labor agreements from years past left companies at a competitive disadvantage in an increasingly global economy where workers in many other countries made far less money than U.S. workers. In addition to this structural change in the labor market, the deteriorating U.S. economy was putting a traumatic squeeze on auto sales. AAM hoped to address the situation by convincing the UAW to agree to lower salaries for new hires and to a buyout program for existing workers, with the idea that the company could pay some current employees to leave and then hire new employees at half the old wages. Unwilling to make the compromises AAM demanded, the 3,650 UAW workers at fi ve AAM plants in Michigan and New York went on strike against the company in late February 2008. Within a week, the shutdown at AAM began to affect production at General Motors (GM) because AAM was the sole supplier of axles for GM's light trucks and sport utility vehicles made in North America. Before long, more than 42,000 GM employees were idle, and the strike eventually cost GM nearly $2 billion at a time when the giant automaker was itself struggling to survive. The slowdown also rippled back to other GM suppliers, who had to reduce production as well.

The UAW had reached historic agreements with the three major automakers the year before, and union-management relations in the industry had been on a relatively positive trend as a result. The situation was far different in the negotiations to end the strike at AAM. Dauch threatened to close the fi ve plants if the union wouldn't budge. "We have the fl exibility to source all of our business to other locations around the world, and we have the right to do so," he said. "We will not be forced into bankruptcy in order to reach a market-competitive cost structure in the United States. If we cannot compete for new contracts in the U.S., there will be no work in the original plants." With manufacturing plants in Mexico, Brazil, England, Scotland, Poland, and China and plans to add facilities in Thailand and India, AAM certainly had other options and opportunities to pursue. UAW president Ron Gettelfi nger, who has since retired, accused the company of trying to dictate terms rather than negotiating and said that AAM "wants to take us to the cleaners." He added, "A line has been drawn in the sand, and that is where we are." In the midst of the wrangling, the union fi led an unfair labor practices complaint, accusing AAM of withholding information.

Then AAM began advertising for new workers, claiming it wanted to be ready to bring on new employees in case existing employees would agree to buyouts and early retirement packages. The union responded to the ads by accusing the company of trying to hire scabs to replace strikers. Further rubbing salt into union wounds, a month into the strike, AAM gave Dauch a 9.6 percent raise and $4 million worth of stock and stock options. After nearly three months, negotiations fi nally produced an agreement the rank-and-fi le were willing to vote for. AAM got the lower wages it wanted, but victory came with a cost. To reduce headcount, the fi rm offered the choice of a $140,000 severance payment to leave outright or $55,000 to retire early. For those who stayed, it agreed to "buydowns" that gave employees close to $100,000 each over a three-year period to help them adjust to lower wages. The concessions cost the company $400 to $450 million-but allowed it to save $300 million in wage and benefi t costs every year going forward. GM played a key role in the process, chipping in $215 million to help fund the payments to AAM employees.

The agreement ended the strike, but it didn't end the challenges. As the automotive market continued to crumble through the steep recession of 2007-2009, AAM's fi nancial picture worsened as revenues dropped 29 percent in 2009 alone. Ongoing efforts to reduce its reliance on GM (which itself went into bankruptcy) by going after contracts with other automakers eventually bore fruit, though, and AAM was profi table again in 2010 and 2011. However, the Detroit story does not have a happy ending. With demand for the light truck axles produced at one of the Detroit facilities declining and cost pressures mounting, the company again asked for wage concessions. When talks with the UAW failed to produce an agreement the second time around, AAM announced that it would close the Detroit complex when the new labor contract expired in February 2012. Soon after, it announced the closure of its Cheektowaga, New York, plant as well. Not surprisingly, the two sides have different opinions about the outcome. UAW vice president Cindy Estrada said union members had "found dramatic cost savings to make the Detroit plant competitive, and instead of assigning enough work to keep the facility open and profi table, AAM is running from Detroit." She said the company had been shifting work to Mexico in preparation for shutting down the Detroit facility. AAM's Christopher Son, meanwhile, said it was "a matter of being market competitive and achieving an appropriate cost structure. This facility was lacking in that and this is the unfortunate outcome."

1. If you were a procurement manager at an automaker, how might a strike at AAM affect your long-term thinking?

2. What effect did Richard Dauch's public statements and actions likely have on negotiations?

3. Can wages in the U.S. auto industry ever return to their historical highs? Why or why not?