Over 20 years ago, I dated a girl whose father owned a medium-sized juice company. This man did everything possible for his employees including lending them money for house down payments, yet local union representatives unilaterally decided his employees weren't being treated fairly. In the end, workers realized the man who had run the business successfully for more than 30 years knew more about employee relations than the union reps, and the move to unionize died a quiet death.
Today, the same kind of misinformation is out there, and investors should think twice about making bets on companies with a significant number of unionized employees. The risks, in my opinion, are just too great. (Read more about the pros and cons of unions in Unions: Do They Help Or Hurt Workers?)
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Who Can You Trust?
Current negotiations between Chrysler and the Canadian Auto Workers (CAW) are tense. Chrysler insists a $20-an-hour cut to its labor costs is critical to plants staying open north of the border. CAW President Ken Lewenza doesn't agree. He maintains that labor represents only 7% of the total cost of making a car, and that Chrysler's real problems lie elsewhere. While Chrysler does have a laundry list of concerns, he is being quite loose with the facts, and I'll explain by using General Motors (NYSE:GM) as an example since all of the big three U.S. automakers have relatively similar cost structures.
In 2008, GM's automotive cost of sales was $149.7 billion, approximately $2 billion more than its automotive sales. Of those costs, $50.1 billion are structural, which are defined as "...expenses that do not generally vary with production and are recorded in both automotive cost of sales and selling, general and administrative expense. Such costs include manufacturing labor, pension and OPEB costs, engineering expense and marketing-related costs." About $12 billion of the structural costs are SG&A expenses and likely relate to the head office. This leaves $38.1 billion for automotive cost of sales.
If the CAW's 7% figure is to be believed, then labor costs should amount to $10.5 billion (7% of $149.7 billion), which is only 20% of GM's total structural costs. I find that very hard to swallow. According to Tony Faria, co-director at the University of Windsor's automotive research center, Honda's (NYSE:HMC) and Toyota's (NYSE:TM) labor cost (including pensions and benefits) is $30 lower than Chrysler's $76.14 an hour. Someone's stretching the truth, and I doubt it's the professor.
Sucking And Blowing
Just over 16 million Americans are union members, accounting for 12.4% of employed and salaried workers. According to the Department of Labor, the average weekly earnings of a unionized employee is nearly $200 more than a non-unionized one. Organized labor believes that new legislation such as the Employee Free Choice Act (EFCA) will give workers a better opportunity to join the union movement. Opponents feel it's nothing more than pressure tactics on non-unionized employees. Frankly if you take out the public sector, unions are practically irrelevant, representing just 7.8% of the private sector workforce.
More concerning is the influence unions have through their pension funds. A study done by New YorkUniversity professor Ashwini Agarwal found that AFL-CIO (the central federation of labor unions in the U.S.) affiliated pension fund assets total $100 billion, with 46% invested in domestic equities (as of September 30, 2006). In 2006, union-related funds were responsible for 295 out of 699 shareholder proposals. It also found that AFL-CIO funds became much less combative when the union no longer represented a company's employees.
I'd think twice about investing in a company unduly influenced by union-sponsored shareholder activism. Further, if you have a union pension, take a closer look at the investments. You can bet they're playing retired workers against the current workers in a sophisticated game of chicken. Don't let it happen.
Unions increasingly find themselves in a conflict of interest today. In my opinion, you should avoid union-run shops at all costs. If you must, I'd consider the State Street IAM fund (SIAMX), where 80% of holdings are companies represented by the International Association of Machinists and Aerospace Workers. (Read Don't Judge An Index Fund By Its Cover to learn how these funds do not always match index returns.)
State Street IAM Fund (SIAMX) Top 5 Holdings
|Exxon Mobil (NYSE:XOM)||4.99%|
|Johnson & Johnson (NYSE:JNJ)||2.11%|
|Procter & Gamble (NYSE:PG)||2.07%|
|Data as of 03/31/2009|
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