LLPOH – Case Study #1

I have been thinking about the following for some time now, as it speaks volumes about what is happening in the world at large.

On Jan. 1, Caterpillar locked out its 450 employees at its London, Ontario, locomotive manufacturing plant, after a short negotiation. Caterpillar was paying the London employees around $35 per hour in salaries and benefits, plus statutory costs. Caterpillar has a similar facility in Illinois, where the employees ear around $12 – $18 per hour. Caterpillar offered the Ontario workers $16.50 – take it or leave it – and put the lockout in place, and refused further negotiations. Caterpillar said that Ontario workers had to meet the costs of the competition – in this case, the plant costs in Illinois needed to be matched. I believe the Ontario plant was not losing money, but it wasn’t as profitable as the Illinois plant.

The Ontario workers immediately went to the picket lines, and said there is no way they would accept a 55% cut in pay. On February 3, Caterpillar advised them that they would be closing the plant. The plant closure is non-negotiable. Caterpillar has a history of non-negotiation and being willing to wait out lockouts for the long-term. In this case, they decided to move production to the low-cost Illinois facility.

This says a lot about what is happening in the world at large. Companies invariable go to the lowest cost source of viable production. That is rational. They also are becoming extremely adept at placing themselves in strong positions with regard to labor negotiations. One way they do this is by opening similar plants in various locations throughout the world, and then playing the costs of one facility off against the costs of another. In this case, the Illinois plant was the low-cost producer, and Caterpillar leveraged this against the workers in Canada, and by so doing increased its profits by around $17 million per year plus statutory costs. Additionally, Caterpillar dramatically improved its ability to negotiate future contracts with any other facility, as the consequences of failing to bend to the company’s will is now fully established.

Unions have long wielded the upper hand in heavy industry, as can be seen by the salary structure in Canada, where unions used their power to negotiate wages of $35 per hour, or $73k per year plus statutory costs. That is entirely unsustainable for unskilled workers in a global economy. When push came to shove, the union preferred that the workers lose their jobs rather than meet the market demands. That is not unusual, and I have seen it many times. They do not care for the individual worker. Rather, unions are prepared to let these 450 workers lose their jobs rather than risk the “contagion” of concessions spread to other facilities. Attempting to maintain non-competitive wages will ultimately lead to more and more plant closures. Unions generally make no effort to create a sustainable future for the company, but rather any short-term union advantage is levered for short-term gain at the expense of the future of the business. US auto companies are prime examples of this process, which have survived only as a result of government subsidies.

Further, western world workers have not come to grips with the reality of the world. Low-skilled workers have very little economic value in a global economy, and are readily replaced. The belief that low skilled workers can support a middle-class standard of living and then enjoy a comfortable retirement is erroneous, and is being shown so throughout the world. The world is full of low-skilled workers and the competition for that type of work is fierce around the globe. The desire for middle-class lifestyles and comfortable retirements as the fruit of low-skilled employment will be unfulfilled.

So, this is the situation. Companies act ruthlessly to maximize profits, and are totally prepared to set up situations so as to leverage their bargaining power and to minimize cost. Unions have behaved in a very short-sighted fashion when negotiating from positions of relative strength, but are now finding those negotiated wages and benefits unsustainable in the global economy. Further, they are unwilling to compete when faced with global opposition, as they believe granting concessions will become the norm. Rather, they prefer to let companies fail or close facilities, and hope to “kick-the-can-down-the-road, similar to how politicians do, hoping for some miracle to arrive before all the factories close. And workers fail to influence the decision-making, as they have not come to terms with the fact that low-skilled workers cannot achieve a middle class lifestyle in the modern economy.

I believe that companies are acting rationally and in the interests of the shareholders by maximizing profits and doing all possible to ensure the survival of the company. That said, it is unpalatable to see the extreme ruthlessness of these companies. It may be necessary, but there are human consequences. The consequences for the 450 Canadians will be severe and uncomfortable at best.

Unions are trying to maintain the status quo, and it is not working. Companies have, in general, learned how to combat the unions by spreading their production around geographically, and leveraging one facility against the other. The unions have not learned any lesson from over-playing their hands in the good times, and see their wages and conditions as hard-won and not to be relinquished no matter the human cost. That is a failed position, and is leading to their irrelevance and destruction.

And the people cannot overcome their mistaken belief that as Americans/Canadians/Europeans that they are entitled to a grand lifestyle, despite being small contributors economically. This leads them to catastrophic decisions, where they sacrifice everything as opposed to accepting the new reality.

It is a bad situation overall. It is what it is, and I do not see it changing. Rather, I see this type activity escalating. The middle-class is in dire trouble, and will largely disappear, I am afraid, to be replaced by a perpetually struggling lower-class. There will be a top 20% or so, composed of high-skilled people, who will do well, and the balance will struggle mightily. All the screaming in the world will not make low-skilled or semi-skilled workers a valuable commodity in the global marketplace. It is not what anyone would have hoped.