Why GM Digs In Heels on Cost

The General Motors strike has escalated into a battle that could help define the future of America's largest industrial company - and is reinforcing a lesson for automakers worldwide.

One big reason GM has taken a tough line on the walkout: The auto industry is heading into a period of brutal global competition and consolidation that could halve the number of world car firms in the next few decades.

Being big won't be good enough. Only the efficient will prosper - and unless GM shaves costs and boosts labor productivity, it may not be among them.

The planned merger between Chrysler and Daimler-Benz has given GM executives a rude glimpse of the competition that looms ahead. After years of buying labor peace, they may feel they now have no choice but to fight to streamline personnel. GM's position may illustrate why, even after seven golden years of economic expansion, American companies feel a need to control - if not curtail - labor costs.

"Lean and mean" is not a phrase that's been associated with GM in the past. It's a company that sometimes seems to have as many of its own brands as there are baseball teams in the American League.

"GM is very large. They don't necessarily need to absorb anybody else," says Sam Fiorani, an auto analyst with Standard & Poor's DRI. "What they need to do is consolidate themselves."

Until recently GM executives had reason to think they were cruising smoothly toward the 21st century. Profits are strong this year, and some company brands now have popular new models. The firm had gone almost a year without a strike.

Then in early June came war. Workers at a GM plant in Flint, Mich., walked off the job. The stoppage spread to a nearby factory. Lack of parts spread through GM's whole system.

At time of writing, 122,000 GM workers are idle, and virtually the entire corporation's production is shut down.

To the United Auto Workers, the strike is about credibility - or rather, GM's lack thereof. The company was supposed to invest $300 million in Flint to upgrade factories and save jobs, say union officials, but it hasn't.

To GM, the strike is about efficiency. A quota system allows some Flint workers to get paid for eight hours after putting in only four, say company executives.

If the walkout is not settled soon - and at time of writing, that did not appear likely - it could stretch on all summer, said UAW officials in Las Vegas this week.

Some analysts say the UAW didn't make a conscious decision to take on GM. Instead, they say, GM appeared to be going after the union. "For the UAW, they have authorized two local strikes, though they're aware of the national implications," says Harley Shaiken, a labor professor at the University of California, Berkeley. "For GM it's, 'We're going to make a stand here, and show the union what the future looks like.' "

And from the GM executive suite, the view might not look too good. The world auto industry will soon be able to produce some 18 million more cars than consumers are likely to buy, and a shakeout appears inevitable.

Industry analysts estimate that today's 40 auto firms will be cut to 20 in the next century. Some go so far as to say that each global region, such as North America or Western Europe, will have only two major firms.

Mr. Fiorani of DRI does not go that far. But he does think Asia may see the merger or demise of weaker firms such as Samsung.

GM is probably too big to land in deep trouble. But it faces the possibility that arch rival Ford could surpass it in terms of profit, and maybe market share.

Market analysts point out that Ford's pretax profit per vehicle is now almost $1,000, far more than GM's. When it comes to productivity, Ford makes about 33 cars per year, per worker, in the United States. The comparable figure for GM is about 27.5

Chrysler's merger with Daimler-Benz holds out the promise of as much as a $3 billion reduction in company costs. And the new Chrysler/Mercedes will have strong models in the most profitable markets: trucks, sport utility vehicles, and luxury cars.

GM has been getting better. But it's not moving fast enough, judge some. GM management "has not been adept at adjusting to change," says Leo Troy, a labor professor at Rutgers University.

Some analysts say GM must slash 30,000 jobs to become as lean as its rivals. But such cuts could be counterproductive.

"There's little question that GM needs to become more competitive," says Mr. Shaiken. "But for that to happen, it needs to work with the UAW rather than against it."