Saturday, February 20, 2016

Layoffs at Carrier - 1987

Should we feel sorry for people who have priced themselves out of the labor market?  No.

Recently, the news reported that 1500 people are getting laid off from a plant in Indiana that makes furnaces for Carrier.   I was surprised that Carrier still had a plant in Indiana.   They used to have a main plant in Syracuse, and today it is a ghost town.   In the 1980's, a lot of production moved South to non-union plants and to Mexico.   And it was not hard to see why.

Over my lifetime, I have  had a chance to work in a number of places, from large corporations to small Mom-and-Pop shops.  And I have been a union worker (Teamster) as well as a salaried "management" employee.   So I have seen the labor market firsthand, from a number of angles.   A lot of academics have very strong opinions about the relationship between labor and management, but for them, it is mostly lofty theory, with no real-world experience.

My older brother, for example, embraced a lot of this Socialist/Communist claptrap wholeheartedly (and still does) but never worked a day in his life in a factory, other than short stints delivering the mail over Christmas at my Dad's ill-fated clutch plant (which was strangled by the classic American combination of strong unions and weak management).  He would regale me with his Communistic theories about "the workers" and parasitic management and how the "workers" should be given control of the means of production.

At the time, I was working in GM plant, and I told him that the "workers" would stomp his hippie ass into the ground if he ever tried to sell them on that crap.   What the "workers" wanted wasn't fairness or whatever, but the most they could get out of the company for the least amount of work, which if you think about it, is a rational goal for anyone - that is, if you really, really understand human nature as the way it is, and not the way you wish it would be.  People are greedy, even the self-proclaimed altruistic ones.

So in the union factories I worked in - both on the salary side and the union side - I saw the same thing.   Everyone was out for their own slice of the pie.   And often this meant that management would cave into union demands without much of a fight, as they wanted to preserve short-term profits and short-term share price, so they could get big raises and cash out their stock options.   As a result of this greed on all levels, many of these factories all of these factories are closed today.

And this seems to be a phenomenon that is limited to "American" companies - or at least unionized American companies.   As I noted in an earlier posting, nearly every carmaker in the world has a factory in three places:  Their home country, China, and the United States.   And for most carmakers, the US market is their bread-and-butter.  It represents a huge chunk of the profit center for the Japanese and the Germans.   And despite the repeated insolvencies of US automakers, all the "foreign" brands seem to have no trouble building cars, right here in America while making a nice profit on each car made.   Not only that, they actually export American-made cars, something the "big three" have failed to do - if they even bothered to try.

So clearly, something else is at work here other than "sending jobs overseas" as jobs are being sent here by foreign companies, and they are thriving with an American workforce.

A non-union American workforce.   And therein lies all the difference in the world.

Sure, they have unions overseas as well, but in places like Japan, the unions work with the company to improve productivity.   Here, they work against the company, by creating restrictive work rules, telling the company how many workers it has to hire, and of course demanding high wages and benefits - 2x to 3x the prevailing rates - and striking for months or even years if "demands" are not met.

Wages alone don't tell the whole story.  Restrictive work rules are a big hindrance to productivity.   The idea is to get as many warm bodies into the factory as possible.   The more employees are hired, the more union dues the union collects.  So we have weird agreements, such as the one at pre-bankruptcy GM which required the company to hire and pay people even if the plants were shut down.  As a result, the company would operate factories and sell cars at a loss as it was cheaper than closing down the plant and paying people to not work.

But beyond that were idiotic rules that required two to three times as many people as needed to do the same job that in a non-union plant would be done by one.   A forklift driver, for example, would have a defined "work zone" and could not cross imaginary lines dictated by the union.   To move a pallet of parts 20 yards would require two fork lift drivers, and if one was "on break" it could take a half-hour to an hour or more to move the parts, as I found out to my distress.   When I was able to persuade a driver to bend the rules just once, a union grievance was filed against both of us.

With that sort of nonsense going on, management sort of gives up.   Hey, if you can't manage the plant with your hands tied behind your back, you can at least make sure you have the first class cabin on the Titanic before it slips beneath the waves.   In a union plant, management gives up managing and turns instead to empire building and personal gain.   The "what's in it for me?" mentality is contagious.

One of my assignments while working for the Very Large Air Conditioning Company was to design a control circuit board for an above-ceiling water-source heat pump.   It was a device that would be used in hotels and offices to selectively heat or cool individual rooms, dumping the waste heat (or drawing it) from a water loop that ran throughout the building.    Sort of like an air handler.   Anyway, our target price on this thing was about $450 as I recall, and my circuit board was coming in at about $18, thanks to a requirement by marketing that we put a flame-proof "cover" on the board so that it would not appear to be "electronic" to the service people.

The theory was that service techs were technophobes, and whenever they worked on a unit with an electronic control board, they would immediately yank the board and send it back under warranty.  We would test these and find them to be in perfect working order.  It was that mid-1980's idiot mentality (still prevalent today among oldsters) that mechanical controls "from the good old days" were better than these "fancy-pants computer thingies" and they would just tear out the computer control first before doing a more traditional diagnosis.   For example, if the thing kicked off on "condensate pump failure" they would assume the computer "went haywire" and replace the computer, not realizing that the computer was actually being quite astute - the condensate pump had indeed failed.  Sometimes this tech shit actually works.   But I digress.

The deal was, as explained to me by a guy from accounting with something called a "spreadsheet" that their material cost was already over $400 and the labor cost to assemble the device was about $50 for one hour of union labor in the USA and this was in 1985.   To build it in Mexico, the labor cost would be about $10 an hour.   Now bear in mind that labor cost is far more than mere wages - there are employment taxes, benefits, insurance, and retirement plans - the last a huge unfunded liability in many companies.

So you can guess what happened.   The damn thing was built in Mexico.  If it wasn't, we would have lost money on each unit.   And there is no point in building something you are going to lose money on.

Now bear in mind that at the time, the labor rates at the Big Air Conditioning Factory were about 2-3 times the going rate for labor of this sort, on the "outside."   Indeed, the factory workers were making more money (and had better benefits) that I did for much of my tenure there as a salary employee.  Today, the Big Air Conditioning Factory is no more, although a few testing labs still remain.  Much of the production has shifted South to non-union plants, or to Mexico, for the simple reason that people simply won't pay $20,000 for an air conditioner.   Well, not if they have half a brain, anyway.

Is it management's fault the plant had to close?   Some would think so.  Some people actually believe that managers sit around all day figuring out how to be "mean" to the workers or how to "ship their jobs overseas".   But this really isn't the case.   And someone who is paying you 2-3 times the going rate for unskilled labor (and please, don't try to convince me that assembly line jobs or driving a forklift is "skilled labor" - any job that can be learned in an afternoon is unskilled) is not really being "mean" to you.

Closing a factory is a huge decision, and indeed the company has a lot of money invested in plant and materials.  Moving machines or buying new ones is horrendously expensive.   Building a new factory costs a lot of money.   If you are going overseas, the shipping costs are horrendous.   Things have to get pretty out-of-control before management says, "Fuck it, let's just close this nightmare down and start over somewhere else!"

So you have to ask yourself why management would take such extreme measures - and risk - in closing a factory and building a new one.   And chances are, if you want to know why they are doing it, you need to look in the mirror - or at the union card in your wallet.   All those "demands" and strikes over the years were not cost-free.  And now the bill has come due and you have to pay it.  And no, no one feels sorry for you at all.

Now, as an individual, there is not much you can do to avoid being laid off if you work in a union factory that is becoming more and more unprofitable.   You can work harder or work smarter, it doesn't matter.  The rest of your brain-dead fellow union employees will slack off and sabotage the assembly line out of sheer boredom, and yes I have seen this happen firsthand.  Nothing you can do will change things, because the organized-crime connected union organization will drag the whole place down over time.

What you can do is anticipate the obvious - no company or factory can stay in business with high wages and low productivity and low quality.   Competitors with lower wage costs will kill you in the marketplace.   The best thing YOU can do is to put money aside for the inevitable, and stop thinking of your job as something that will last the rest of your life - because it won't and it hasn't.   This has been going on since the 1970's and will keep going on, so long as the cancer of unionism remains (it has been in remission in recent years, but could quickly metastasize if this next generation of Bernie-lovers has their way, and it will be 1975 all over again - stagflation and a ruined economy).

We live in a competitive world, and some people are not happy with this.  They would rather live in a fantasy world where "everyone wins" no matter how hard or how little they try.   And maybe this attitude, which has been fostered in our primary schools for the last few decades is finally coming home to roost, as an entire generation - it seems - wants to shy away from competition and instead retreat into "safe spaces".

Perhaps this is an inevitable effect of population demographics, or the pendulum swinging too far in the other direction.   All I can say is, based on experience, it is not a sustainable model for an economy or a business.   Wealth without labor is not sustainable over the long haul.   And when something seems too easy or too-good-to-be-true, odds are it is because it probably is.