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GENERAL MOTORS' WORKER LAYOFFS.
Term Paper ID:21476
Essay Subject:
Need for plant closings in early 1990s, economics, effects, ethics, stakeholders, decision making process, unions, restructuring, alternatives.... More...
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Paper Abstract:
Need for plant closings in early 1990s, economics, effects, ethics, stakeholders, decision making process, unions, restructuring, alternatives.
Paper Introduction:
Introduction
During the early 1990s, General Motors, America’s largest auto manufacturer, was faced with the problem of how to cut costs in order to improve its productivity and maintain its share of the American car market. The company ultimately decided on closing several plants in the United States. The result was that thousand of GM workers lost their jobs, but the company was able to improve its financial performance. This research investigates the ethical dilemma that the company faced when making these decisions, why there is an ethical dilemma, factors that influenced the GM decision, the decision that was ultimately made and what could or should have been done differently.
What the Dilemma is About
The dilemma that GM faced was whether it should close its plants and lay off its wor
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Conlan, "R.Ph.s Worry GM Plant Closings Will CostCustomers, Stores," Drug Topics, 23 March 1992, 1 1. The improved financial picture is also likely to improve the company'srating with groups such as Standard & Poor's. The result was that thousand of GM workers lost their jobs, butthe company was able to improve its financial performance. As a result,auto workers and auto manufacturers have a symbiotic relationship in whichboth parties need the other. Scott. From this standpoint, closing those operations which are notprofitable makes the company more attractive to current and potentialcreditors. [vii]David Woodruff, "GM Can't Downshift Fast Enough," Business Week,3 December 1991, 37. Although it hurt a number of people by opting to close theplants, it ultimately hurt fewer than if it had kept the plants open andoperated at a loss until such time that even more drastic cuts werenecessary. If the company mustoffer bonds at higher rates, or borrow money at rates much higher than theprime, then they are taking additional liabilities that increase the costof doing business and ultimately hurt the company's long-term prospects forsurvival. "R.Ph.s Worry GM Plant Closings Will Cost Customers, Stores." Drug Topics, 23 March 1992, 1 1-1 2.Crisafulli, Patricia. "GM Can't Downshift Fast Enough." Business Week, 3 December 1991, 37.Woutat, Donald. This has a direct benefit to the company, butaccomplishes that benefit by offering customers lower prices on GMproducts. Unlike companies which operatein non-unionized environments, GM is not in a position to simply implementa wage freeze, or even a wage cut. Maintaining a high shareholder valueis also important in that the company must do so in order to cover its owninvestment. However, plant closings affect more than just those workerswho are directly employed by the factory. For these reasons, the decision of whether to close a single plant,let alone a series of plants, poses an ethical dilemma. The company cannot institutewage reductions without the approval of the union, or reduce work hourswithout union approval, or take other steps that might traditionally beused because the union contract governs most of the company's relationshipwith its employees. This would have giventhe communities the opportunity to lure other business to the area toreplace the departing GM, and would have given workers time to find otherpositions. Instead of leaving communitiesdevoid of one of their largest employers with increased burden on the localsocial services and high unemployment, the company could have participatedin helping these communities survive and even thrive in the company'sabsence. While this decreases the amount thatcreditors make in terms of interest rates, it makes the company a moreattractive investment for bonds and enhances its ability to continue tomeet its obligations. "If It's Monday, This Must Be Another Three-Day Weekend." Business First of Buffalo, 16 November 1992, 1, 24-25."Virtual Jobs in Motown." Economist, 26 March 1994, 76.Woodruff, David. This is because they feel that thetrust between employer and employee has been violated, and they are lesswilling to give "more" to the company than is absolutely necessary. Companies such as GM have a tremendous investment in their employees.Because of lucrative union contracts, American auto workers havetraditionally been paid more than their counterparts abroad, with theresult that while they have enjoyed a high standard of living, thecompanies for which they work, including GM, Ford and Chrysler, must endurehigh levels of payroll liability. In addition to the direct negative result on health,there is also the ancillary effect on the medical industry in the immediatecommunity which needs to be taken into account. GMis no different than most manufacturers in this regard. The company must also operate under the constraints of the variouscontracts it has with its labor unions, and that means that it simplycannot institute wage freezes or wage cuts that might retain jobs, althoughat lower rates. As a result, the company islikely to be able to raise additional capital at a lower cost than if itmaintained the inefficient plants. In the long-term, no company can simply become a charity for itsworkers, or even for the community in which it operates. Without employment, many workers will beleft without insurance, which will greatly affect their ability to obtainnecessary health care. If itis unable to offer its products at competitive prices, it can well losemarket share to other companies who have already brought their costs undercontrol. [v]"Virtual Jobs in Motown," Economist, 26 March 1994, 76. However, choosing oneor some of these options might have given the employees and the communitiesin which the company operates a better opportunity to adapt to the changingbusiness landscape which GM left behind. Suppliers to the plant alsosuffer when it closes, and the community at large suffers because a largenumber of consumers no longer have income which they are able to put backinto the community. As a result,the company must weigh the cost of running a plant or closing itcompletely. Housing prices drop as individuals seek to relocate insearch of other opportunities, and even transportation jobs, such as thoseassociated with railroads, can be affected.[i] There are otherramifications that also make this an ethical dilemma, including the effecton the former employees' health. Institutions,including large institutional investors, will also benefit from thisdevelopment. What the Dilemma is About The dilemma that GM faced was whether it should close its plants andlay off its workers in order to improve its financial position, or whetherit should continue to operate the plants, even at a short-term loss, andkeep the workers employed. These are not just individual stockholders,but also corporate directors, managers and institutions that turn tocompanies such as GM for pension investments. There are long-term problems with this since continuing to losemarket share hurts the company's ability to compete long-term, which couldresult in more plant closings. The impact on eachof these stakeholders must be taken into account and reconciled against thecompany's corporate mission and culture, and the environment in which itoperates. Some of the company's factories beganoperating on four-day work weeks, an option which yields savings in reducedoperating costs at the plant.[vi] A massive restructuring begun in 1991 resulted in layoffs of more than6 , employees, but the company was not expected to see the results ofthis restructuring until 1993 (because of the complex nature of the autoindustry and the magnitude of the changes that GM instituted).[vii] What Could Have Been Done Differently There are no hard and fast rules for how to cut costs. This researchinvestigates the ethical dilemma that the company faced when making thesedecisions, why there is an ethical dilemma, factors that influenced the GMdecision, the decision that was ultimately made and what could or shouldhave been done differently. The ramifications extend farbeyond just parts suppliers or paint vendors, but can include a wide groupof people who lose a significant portion of their business. [iii]Tom Brown, "Want to Rehire Your Ex-Workers?" Industry Week, 18July 1994, 18. This means that thecompany will realize a paper profit on holdings of its own stock, andindividuals will realize a profit on their holdings. Another option that could improve productivity is the retooling ofplants to take advantage of technological improvements in the automotiveindustry. Instead, it must renegotiate thecontract with the various unions, and do so in the environment of theconcessions that the union can exact from other auto makers. In considering these various stakeholders, the company must considerthe effect of its actions both in the short-term and the long-term, andwhat the best, or optimum decision will be for all involved. In the case of apublicly held company such as GM, the stakeholders include shareholders,employees, customers, creditors and vendors. In addition, unionrepresentatives are elected by the membership, and have a vested interestin protecting their own positions by giving in as little as possible to thecompany. In addition to closingplants and even laying off workers in plants that were not closed, thecompany eliminated bonuses for executives and took other cost cuttingmeasures, but still posted losses. With regard to customers, the decision to close plants means that thecompany will be able to compete effectively with companies who already havea lower cost structure, and so the company can possibly maintain or enlargeits market share. "GM Plan Certain to Force Cities to Fight for Plants." Los Angeles Times, 2 December 1991, A1, A8. Because the company has a large pension liability due to itsunion contracts, it must maintain a high return on its own investment tocover that liability; if the stock falls significantly, the company's owninvestments suffer and the pensioners covered by GM could suffer, as well. If the workers give concessions on number ofhours worked, or number of overtime hours worked, or number of employeesrequired to perform a certain task, then it will be difficult to regainthose concessions once the business situation improves. The company also couldhave worked with the cities in which it operates in order to gain taxincentives to stay in communities for a bit longer. There are costsassociated with closing plants; these costs include severance packages toemployees (usually negotiated as part of the union contract); costsassociated with having idle equipment; and costs associated with sellingthe plant. However, the company is different from other manufacturers in that itoperates in a highly unionized environment. Such a move, while preferable to wholesale plant closings,would still affect the employees of GM, but would allow them to both seekother employment and would possibly offer the company the necessary time toimprove the productivity of the factories. This is the rationale behind the company'sdecision. Unions are reluctant to give such concessions because once given, theyare difficult to regain. Manyworkers have been in the industry, and even with the same company, for manyyears, and the training that goes into developing an employee is notinexpensive, nor does it translate well to other industries. The last group of stakeholders to be considered are the vendors. That is the obvious dilemma that the companyencountered. [iv]"ADESA to Buy Former Century-Ciera Plant," Automotive News 16 May1994, 39. The Decision Process Used by General Motors It is not possible to know with certainty the exact decision processmade by General Motors, but based on the public record, it can be assumedthat the company chose to put the requirements of its shareholders,customers and creditors above those of its employees and vendors. There are other stakeholdersinvolved, particularly with a company as large as General Motors, and theseinclude the communities in which the company operates, and the industriesand businesses in those communities which do business with the hundreds andeven thousands of workers who are employed by GM. Some GM plants have been modernized along these lines, but withthe result that fewer employees are necessary than when the plants operatedat their former, lower efficiency, levels.[v] The plant closings must also be considered in light of other optionsthat GM put into effect during the same period. The land on which the plants were located can be sold with thefacilities and represents a significant inflow of cash to the company.[iv]At the same time, the company will realize savings by not operatinginefficient plants, and the financial position of the company will beimproved. Thousands of GM workers were putout of work as a result of these plant closings; unlike some of the layoffsof the 197 s, these workers will not be recalled, at least not to the sameplants that they left. This adversarial relationship can no longer survive in the era of theNorth American Free Trade Agreement (NAFTA) in which cars can be made inMexico and brought to the United States far cheaper than they can be madehere, and in a time when Japanese imports and Japanese-American jointventures are becoming more commonplace. There is a commitment between autoworker and auto manufacturer, however, that is difficult to break. Stakeholdersare those parties who have interests in the company. End Notes Bibliography"ADESA to Buy Former Century-Ciera Plant." Automotive News, 16 May 1994, 39.Brown, Tom. [ii] Why It Is a Dilemma The reason that GM faces a dilemma in this situation is that thecompany must balance the needs of its various stakeholders. Witha company as large as GM, the list of vendors is lengthy. Because of this, analysts are likely to view the decisionfavorably and help drive up the price of the GM stock. Given the environment in which the auto maker operates, including thelargely unionized workforce, the intense competition it faces, pressuresfrom stockholders on the board of directors (and management) to improveprofitability, and the aging of many of the company's plants, the decisionto shut down some plants can be supported. In thelong-term, such employees are likely to take their expertise elsewhere,including out of the industry if they can. "Virtually All US Railroads Will Feel Some Fallout From GM Plant Closings." Journal of Commerce and Commercial, 2 December 1991, 3B.Thomas, G. One of the other problems that must be taken into account is that if acompany closes a plant, then chooses to reopen it later or otherwise employthe same people it lays off, there is a lower level of morale and loyaltyamong workers the second time around. Even a singleplant can do business with hundreds of vendors, including not only thosedirectly related to car manufacturing, but also office supply vendors,computer vendors, janitorial services and temporary employment agencies.If the company closes a single plant, each of these vendors loses avaluable, and most likely, sizable customer. Because the auto industry is one of the most highly unionizedindustries in the country, the contracts sometimes preclude actions thatmight be available in a non-unionized environment. In cases suchas this, there is rarely one "best" answer; instead, there are alternativeswhich companies must consider and which may serve the needs of one or moregroups of stakeholders, but which rarely are able to address the needs ofall stakeholders adequately. The Decision Made General Motors opted to close a number of plants during the early andmid-199 s. Such an effort would have also avoided the situation of havingindividual cities battling for GM's presence.[viii] None of these options are guaranteed to have solved the problem ofplant closings; such closings are still likely given the company's need todownsize and the environment in which it operates. These included a plant in Framingham, Massachusetts; another inPanorama City, California; North Tarrytown, New York; Flint, Michigan andfive parts plants throughout the country. For example, wagereductions are often prohibited, as are shorter work days or work weeks.In this way, the company is somewhat restricted from applying other cost-cutting devices that can be implemented in other industries. Under this environment, GM could have approached its unions and soughtto form a closer alliance than currently exists. If the company is able tocontinue as a going concern at less than its current capacity, then fewnumbers of people suffer. If a company isto be a strong corporate citizen, it must also be strong financially. Reducing laboris an obvious and traditional method of cutting costs because laborrepresents one of the single largest costs to manufacturing companies. The plant closings were not done at one time; instead, the companyimplemented them over the course of several years. Union representatives have tounderstand, and generally do understand, that it is no longer feasible totake short-term benefit at the cost of long-term jobs and wages. As a result, the company has little choice but tonegotiate as favorable a contract as possible with the union and work outconcessions. Introduction During the early 199 s, General Motors, America's largest automanufacturer, was faced with the problem of how to cut costs in order toimprove its productivity and maintain its share of the American car market. The company ultimately decided on closing several plants in the UnitedStates. [ii]Michael F. This loss of expertise can bedevastating in the long-term to the company.[iii] The dilemma is less severe with regard to customers, but the companymust weigh the option of continuing to operate inefficient plants andhaving to charge higher prices as a result versus the option of operatingfewer plants, at higher productivity, and being able to charge lowerprices. Considering the interests of creditors means more than simply makingsure that the creditors receive their money on time, although that iscertainly a key aspect. [viii]Donald Woutat, "GM Plan Certain to Force Cities to Fight forPlants," Los Angeles Times, 2 December 1991, A1. ----------------------- [i]Patricia Crisafulli, "Virtually All US Railroads Will Feel SomeFallout from GM Plant Closings," Journal of Commerce and Commercial, 2 December 1991, 3B. Scott Thomas, "If It's Monday, This Must Be Another Three-DayWeekend," Business First of Buffalo, 16 November 1992, 1. Was the Decision Right? By maintaining strong relationships withcreditors, companies such as GM, which have large capital requirements, areable to raise capital at the most favorable terms. This is not entirely for the customers' benefit; GM competes in aglobal auto market and must face competition from around the world. [vi]G. By protecting the interestsof these stakeholders, the company is protecting the interests of a largepool of people, some of whom may not be aware that they are connected tothe company (such as those who invest in mutual funds, or those who haveinvestments handled by institutions). That it chose its shareholders is clear by the decision to closeplants. "Want to Rehire Your Ex-Workers?" Industry Week, 18 July 1994, 18.Conlan, Michael F. Because of the way GMdoes business, the company must also take labor unions into account; whilethese are ostensibly the employees, they are a different constituencieswith sometimes differing agendas from what individual employees might have. If the company puts the needs of its shareholders first, then it mustrun at the highest level of profitability in order to provide the highestreturn to its shareholders. This would have encouraged long-term loyalty to GM products,which would help the company in the long-run, and would also improve theoverall relationship of GM with other communities and employees as theywitness how these stakeholders were treated. Thisfinancial strength is important because if the company ultimately fails,then the most numbers of people are hurt.
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