Labor Cost Is One of

Labor cost is one of the most complex and pressing issues in the automotive industry, including at General Motors. Labor cost is typically expressed in total labor cost per hour, which includes both salary and benefits. There are also legacy pension costs as well, which for some company contribute significantly to their total labor costs. As a consequence of the high labor cost structure in the industry, General Motors has placed significant focus on trying to find ways to reduce total labor cost.

Labor cost is a critical issue to General Motors in part because the automobile industry is generally a low-margin, high volume industry. This is particularly true of the segments in which GM operates. Thus, high labor costs can put a firm at a significant competitive disadvantage. For example, in 2006 GM signed a new contract with the United Auto Workers that will see their total hourly labor cost drop from $73.26 in 2006 to $62 in 2010. This compares with Toyota, which in 2008 had a total hourly labor cost of $48 (Perry/Associated Press, 2008).

The differential stems from a couple of major factors. The first is the cost of labor. The workers are General Motors are unionized, mainly by the United Auto Workers and the Canadian Auto Workers. The 2006 contract with the UAW, for example, gave workers an average wage of $29.78 (Ibid). The remainder of the costs are comprised of benefits to existing workers, pensions and health care for pensioners. The skyrocketing cost of health care, particularly in the United States, has contributed significantly to GM's per hour labor cost.

GM has approximately 522,000 retirees (Merx, 2009), dating from times when auto manufacturing was far less automated than it is today. Toyota did not begin manufacturing in the United States until the 1980s and therefore has relatively few retirees, and those retirees do not have the same generous union retirement benefits. Those union retirement and health benefits are referred to as "legacy" costs, since they are the legacy for the big three American firms but not for Asian manufacturers.

General Motors, having entered into bankruptcy earlier this year, used the occasion to restructure the entire firm, including labor costs. The company entered into new deals with both the CAW and the UAW in order to shed some of the legacy costs (Merx, 2009). The deal in the United States gave the union-run Retiree Health Care Trust a 17.5% stake in the post-bankruptcy version of GM and a warrant for another 2.5% stake in exchange for GM's $20 billion obligation to the trust.

In other words, GM has swapped out what was essentially a debt owed to the retirement trust for equity, reducing their burden by $20 billion (Associated Press, 2009). The company asserts that the deal will bring its total hourly labor costs in line with those of Toyota. Information with respect to GM's labor costs is highly transparent. The story is a major news item and the firm is up front with its cost structure, both in the media and on its website. The major decisions have already been taken.

The company needed to dramatically lower its costs, and by swapping out $20 billion of those obligations for equity, they were able to do so. Going forward, General Motors must keep these costs from escalating in future, in order to remain competitive with Toyota and other.