Oracle at Delphi

WASHINGTON — WASHINGTON -- The recent strike at two Delphi auto-part factories in Dayton, Ohio, was ostensibly not about wages, but about out-sourcing -- General Motors' buying parts from the Robert Bosch company in Charleston, South Carolina, rather than from Delphi, which it owns. And its resolution was widely interpreted as a draw between management and labor.

But the truth about the strike is grimmer than this might suggest. It proved that the single greatest factor pushing down American workers' wages is not technology, as most economists insist, but the inability of workers, divided by region and sometimes nation, to resist employer pressure to reduce costs by cutting wages and benefits. In that long-term war, the workers are not simply losing, they're being decimated.


Since the early '80s, out-sourcing has become the craze among American firms. Sometimes, companies out-source their work because they believe a smaller, focused firm can do it more efficiently. (In the early '80s, IBM hired tiny Microsoft to write an operating system for its personal computers.) But most often, companies simply out-source to companies that pay their employees less. Unionized firms out-source from non-union suppliers with lower costs.

Pushing wages down


Out-sourcing has reversed the positive trend in American wages. The growth of unions from the late '30s through the late '60s pushed the wage structure upward. Firms that wanted to avoid unions were still forced to pay comparable wages and benefits to head off organizing drives. Out-sourcing moves the wage structure downward. The non-union suppliers compete with each other to drive down costs, exerting pressure on the unionized workers to accept wage and benefit reductions.

Once an industry becomes predominantly non-union (auto parts, once 65 percent union, is now 20 percent unionized), the downward pressures become brutal. In Ypsilanti, Michigan, the British investment firm JLL is threatening to shut down a unionized parts plant it purchased if its workers don't accept TC 64 percent cut in wages.

The Big Three American auto companies used to make almost all their own parts, but Ford and Chrysler failed to reopen many of the parts factories they closed during the recession of the early '80s. By 1986, Chrysler was buying 85 percent of its parts from lower-wage, non-unionized suppliers and Ford 50 percent. That gave them a significant cost advantage over General Motors, which continued to make 65 percent of its own parts, and it set GM on a furious dash to increase its out-sourcing.

Some of the new parts suppliers are foreign-owned companies that began migrating to the U.S. in the '70s to avoid exchange-rate instability, but were later drawn by lower costs of production. By 1990, for instance, German factory workers were being paid on the average 50 percent more than American workers.

European and Japanese companies set up most of their facilities in the upper Southeast, from Southern Ohio down through Kentucky and Tennessee and across to the Carolinas. Most of these states had strong right-to-work laws that discouraged unionization. As Douglas Woodward, a business professor at the University of South Carolina, puts it, "You hear a lot from German companies about South Carolina being right-to-work."

Robert Bosch arrived in South Carolina in 1975, but significantly expanded its facilities in the mid-'80s. It is unionized in Germany and pays an average $41 an hour in wages and benefits. According to Automotive News, Bosch pays nonunion workers in Charleston $13.15 an hour in wages, plus $3.68 in benefits. Workers are liable annually for $2,000 in medical expenses.

By contrast, GM workers make $18.58 an hour in wages and enjoy benefits worth another $16 an hour. These include comprehensive health care and a full pension after 30 years. That's almost twice the labor cost. Even in the capital-intensive brake industry, that gives Bosch an overwhelming advantage and creates enormous pressure on GM and other car companies to out-source.

The unions can resist, as they did in Dayton, but if they don't eventually accede to wage cuts or out-sourcing, they'll imperil the car companies themselves and lose even more jobs.


The usual remedies

Can anything be done? The usual remedies -- worker retraining, corporate good citizenship -- either won't work or are irrelevant, and what could work is unlikely to occur soon.

First, the UAW could organize the non-union plants. That would reduce the downward pressure on wages, but it would be extremely difficult to do. While Bosch workers make much less than Delphi workers in Dayton, they make more than most factory workers in South Carolina, where the average wage is $10.22 an hour. Firms like Bosch would shut down before they would accept wages and benefits commensurate to those at Delphi. To succeed, the UAW would have to seek more modest wage and benefit increases, but since unions generally agree to a set contract across companies, this would jeopardize its existing higher-wage arrangements with firms like Delphi.

Second, the unions and the labor movement could seek help from the federal government. The unions and the Big Three have backed national health insurance because it would remove one of the advantages non-unionized firms enjoy. But during the first two years of the Clinton administration, they learned that it is almost impossible to win public and congressional support for this kind of ambitious reform. Ditto for the repeal of the Taft-Hartley law, which allows states to pass right-to-work laws.

Even if unions could organize companies like Bosch, and even if government defrayed the cost of benefits, the unions would still face pressures within the new global economy. According to last November's Journal of Business Strategy, "To survive, U.S. industry must continue to out-source work to more proficient, lower-cost locations. 'Delocalization' strategies are essential as the pool of skilled labor deepens around the world."

Like other American companies, auto firms now purchase from suppliers in Latin America and in newly industrialized Asian countries, where wages are much lower (an average of $2.61 an hour in Mexico) and strikes non-existent. There are remedies for foreign out-sourcing, too -- domestic-content legislation, social tariffs -- but they are as likely to be adopted as national health insurance.


The lesson of the Delphi strike is an unhappy one for American workers. Resistance can hold off job loss temporarily, but short of a transformation in public support for unions and for government, workers will find it nearly impossible to resist pressures to cut wages and benefits. That truth is beginning to sink in. It can only fuel the discontent that neither Bill Clinton nor Bob Dole is capable of addressing.

John Judis is a senior editor of The New Republic, in which this article first appeared.

Pub Date: 4/03/96