Tuesday, January 11, 2011

Dr Marchionne’s Vietnam War

[SEE POSTCRIPT/UPDATE, POSTED BELOW AS A COMMENT]

In 1968, at the height of the Tet offensive, I argued with US sociologist Edward Shils (1910-1995) at Cambridge about the uselessness, wickedness and immorality of the Vietnam war. Shils shut me up curtly by saying that the US were in Vietnam simply “because they can”, and there was nothing more to be said. And so they could, of course: the US had the troops, the military hardware, the financial resources to do it, and they could get away with it, wanting to get away with it (at the time). Which of course did not imply that the war was in the US' best interests, that it was justifiable, or that the US would win it in the end. Shils lived long enough to see the inglorious débacle of the US last exit by helicopter from the roof of the US Embassy in Saigon.

In 2010 FIAT's Sergio Marchionne adopted an antagonistic industrial relations strategy towards his employees, first at the Pomigliano d’Arco plant in Southern Italy and then at the Mirafiori plant in Turin. Either FIAT employees accepted greater internal flexibility, duration and intensity of work or FIAT would invest an alleged €20bn elsewhere, notably in Serbia and in Canada. At Pomigliano a workers' referendum endorsed the deal but the overwhelming majority of over 60% was judged insufficient by Marchionne. At the Turin Mirafiori plant on 29 December FIAT signed an agreementwith all unions (Fim, Uilm e Fimsic) except with the traditionally more militant FIOM metalworkers. Now a referendum has been called on 13-14 January, and FIOM has called a general strike for 28 January inviting not only metalworkers but all "social opposition forces" from students to movements opposing water privatisation.

Marchionne’s attitude is reminiscent of Shils’ views on the Vietnam War: FIAT is fighting the metalworkers’ Trade Union FIOM “because it can”. Globalisation has dramatically increased labour markets competition in the world: labour migrations and production de-localisation are the more spectacular forms of such intensified competition, but trade liberalisation is its most important quantitative manifestation. Even if existing factories stayed for ever where they are, new production would naturally follow the logic of global comparative advantage. This is what has reduced the average share of wages in GDP in advanced countries from 65% to 55% in 1980-2005 (IMF World Economic Outlook June 2007), a trend that has continued to date except for a small rise in wage shares in 2009 due to the temporary fall of profits in the recession. This is what allows FIAT to give such a blunt ultimatum to its workers: take it or leave it, don’t even think you can negotiate anything else.

The former communist leader Piero Fassino – now candidate as mayor of Turin, FIAT’s headquarters – has stated that were he a FIAT employee he would support the proposed deal and vote Yes in the coming referendum. Other Democratic Party politicians have dissented: Marchionne has already succeeded in splitting not only the Unions but also the main Opposition party. (See Antonio Lettieri, "La sinistra ai piedi di Marchionne", Il Manifesto, 8-01-2011).

One’s vote in such a referendum is not necessarily a reflection of one’s politics, but of family circumstances and wealth. Were I a FIAT employee, faced with the brutal alternative between unemployment and a worsening of my labour conditions I too might well vote Yes in the referendum. Which does not imply that the deal is in FIAT’s best interests, indeed that it is necessarily superior to other deals reachable after negotiation, or that its political/social implications are desirable, especially in the long run.

Some aspects of the proposed deal are very disquieting. The proposal has not been discussed beforehand, even within those Unions that have supported it. Such referendums, overriding union leadership, are unprecedented so that there are no set rules: at Pomigliano a yes vote of over 60% was regarded as insufficient for FIAT to go ahead with investment; at Mirafiori Marchionne demands only “over 51%”. An unintended consequence of existing Italian legislation involves FIOM members losing the right to union representation unless FIOM signs the deal. This could be rectified easily by either government decree or by an additional provision in the agreement with FIAT, before the referendum takes place, but neither Italy’s weak, absentee and corrupt government nor FIAT have taken the initiative, in spite of protestations by several unions and politicians and not just by FIOM. The threat of losing union representation poses additional and improper pressure on FIOM members. The deal marks the end of collective bargaining – which is, among other things, an integral part of the European Social Model – and marks the re-emergence of enterprise-level bargaining outside medium and small size firms. FIAT has had to leave the Confederation of Italian Industries in order to replace the standing collective contract, but metalworkers could also be moved to the new contract in other enterprises that followed FIAT’s example.

A major problem is that FIAT’s so-called “Fabbrica Italia” project does not really guarantee FIAT’s employees anything at all. The €20bn investment “envisaged” – with an unspecified time-horizon – exists only in the vaguest and most nebulous industrial plan not worth the paper on which it is not written. So far only €1,3bn have been “planned”, only another €700mn have been identified at the very outset.

The new contract would be signed with a New Company, a joint venture with Chrysler. As is always the case with multinational companies, including joint ventures, the distribution of profits between FIAT and Chrysler would depend on transfer prices of components between the two partners. The criteria for such distribution has not been remotely faced by the parties, or even raised by the Unions.

The greater flexibility, the acceleration and prolongation of worktime involved in the deal seem too minor to really impact FIAT’s global competitiveness but represents merely a net worsening of working conditions. They are 1) a shortening of 10 minutes per day in work pauses (three 10’ pauses instead of two 15’ and one 10’ pauses) compensated by €0.1877 per worked hour or roughly €45 per month; 2) the postponement of the 30 minutes meal break to the end of the shift; 3) loss of illness allowance for period of “anomalous absenteeism” to be assessed case by case by a joint committee; 4) up to 18 8-hour shifts over six working days; 5) up to 120 hours overtime work without having to negotiate with the Unions, plus another 80 hours with union agreement; 6) in case of strikes or other breaches of contract FIAT would not be liable to honour union permits and payments.

Would such greater internal flexibility, prolongation and intensification of work solve FIAT’s problems and miraculously restore competitiveness in a sector affected by world-wide supply over-capacity and demand recession? (see a letter endorsed by 146 Italian economists on the subject, on the Sbilanciamoci website. )

Fact 1. In 2009 FIAT produced 650 thousand cars in Italy, barely a third of those produced in 1990, compared to a planned 2mn and to the stability and growth of quantities produced in the major European countries. The stated intention of more than doubling output seems over-optimistic.

Fact 2. FIAT spends on productive investments, and on Research & Development, shares of turnover significantly lower than those of its main European competitors, and it is not active in the development of low environmental impact alternatives. European competitors of FIAT, like Volkswagen, have responded to crisis by reducing working hours while protecting wages and employment.

Fact 3. While in 2004-2008 FIAT recovered from a very serious crisis and developed a few models, in the last two years FIAT has not introduced any new models; its market share in Europe has fallen to 6.7%, the largest drop in car output shares in Europe in 2010.

Fact 4. In 2010 Fiat shares rose 90%, beating all competitors, also following the recent split of Fiat Industrial from the rest of the company involved in car production. In the third quarter of 2010 FIAT was first in the Italian stock exchange in terms of shareholder value, with a 33% return on capital.

Fact 5. In spite of the rhetoric of FIAT depicted as an enterprise “capable to walk in the market on its own legs”, from the end of the 1980s and the early 2000s FIAT has enjoyed public subsidies of the order of €500mn per year. Perhaps FIAT should have been given subsidies to deal with the crisis by the Italian government, or at least Marchionne should have asked.

Fact 6. Over the last ten years FIAT global employment in car production has fallen from 74 thousand to 54 thousand units, of which only 22,000 are in Italian factories. Employees have average skill levels lower than those of FIAT’s competitors, and among the lowest wages in the sector in Europe.

Fact 7. In 2004-2009 Dr Marchionne earned €36.6mn euro, including the accumulation of his golden handshake, i.e. €6.3mn a year. Plus 4million free shares, worth 69.8mn on 7 January 2011, which will have appreciated further already since then. This brings his yearly income to €38.8 mn a year (See Massimo Mucchetti, "Marchionne e lo stipendio del dipendente FIAT", Corriere della Sera, 9 January 2011), which corresponds to 1,037 times the average yearly cost of Italian metalworkers' labour over the same period. Not that this matters for the plausibility of FIAT’s industrial policy stance but certainly not an irrelevant consideration in providing a perspective for the average FIAT metalworker, whether or not she is a FIOM member.

[SEE POSTCRIPT/UPDATE POSTED BELOW AS A COMMENT]

18 comments:

Marco said...

Marchionne, Cambronne.

Lucy said...

"This brings his yearly income to €38.8 mn a year". He is said to have two PhDs, though. And they say education does not pay?

D. Mario Nuti said...

You are right, it does rhyme, Marco.

Education, Lucy, is neither necessary nor sufficient to earn large incomes. Entrepreneurs - apart from imagination and drive - need a fur-lined stomach and the right dose of short-sightedness.

enrico said...

sempre un piacere leggere le tue analisi, Mario: speriamo che questo accordo sia veramente il vietnam di una classe imprenditoriale e politica di zombie

D. Mario Nuti said...

Thanks, Enrico. It turns out that the connection between Fiat and Vietnam has a distinguished precedent. In 1973 a famous producer, Ettore Scola, made a 16mm film entitled “Trevico-Torino: Viaggio nel Fiat-Nam” presenting a militant view of the difficult condition of workers that emigrated from southern Italy to Turin to work in FIAT. Scola did it for the PCI company Unitelefilm, in collaboration with Diego Novelli (later to become mayor of Turin), mostly with amateur actors except for the protagonists. See http://it.wikipedia.org/wiki/Trevico-Torino_-_Viaggio_nel_Fiat-Nam. I am not sure, though, that this is a good omen.

Giovanni said...

You must be aware that, when the Italian national football team played in the World Cup, the Pomigliano plant recorded a 40% absenteeism rate - duly covered by medical certifications.

D. Mario Nuti said...

An absenteeism rate of 40 per cent? You do not quote your source; it is bound to be an exaggeration.

In any case, there are standard checks to detect and deter absenteism. If there is such large and predictable incidence of absenteeism, the company could pre-dispose a medical team for the instant check of illness certifications, instead of imposing generalised punitive penalties on all absences.

D.Mario Nuti said...

Postscript

The results of the 13-14 January referendum imposed by Fiat at the Mirafiori factory, on the agreement signed by four Unions except FIOM-CGIL (that represents the majority of metalworkers at the national level), have become known last night.

Out of the 5,100 workers at Mirafiori, 96.4 per cent voted in the referendum. The agreement was approved by 54 percent of voters. However, the majority of blue-collar workers voted against the agreement, while the 450 white-collar, including middle management, voted YES almost unanimously, tipping the final result in favor of the Fiat-Chrysler Group.

A worker interviewed before the vote, asked about the content of the agreement signed by the majority of the Unions, replied: "It's crap" but added quickly, about his voting intentions: "I have family and children. I am going to vote against my conscience [contro-coscienza]: I will vote YES”.

All is for the best, then. Investment and employment - if Marchionne will deliver - are safe. Taking into account direct and indirect effects, we are talking of something like 1% of Italian GDP. Accomodating Unions and politicians have been chastised and are warned. FIOM expected at most 30 per cent NO-votes, their credibility and negotiating power comes out well out of the ordeal.

Ms Ramusso, the recently appointed head of the General Confederation of Italian Labour, already this morning is holding talks about new rules to implement article 39 of the Italian constitutions guaranteeing trades unions representation in all enterprises.

It is now Marchionne's turn, to show that FIAT can and will deliver.

Ted said...

Does FIAT actually have €20bn to invest? And if not, where would Marchionne find that kind of money or even begin to look for it?

chilosi said...

I don't see what Vietnam has to do with Marchionne. Things are much more simple: there is no reason at all for Fiat to invest in Italy if the expected returns to its investments are lower than elsewhere, and to carry on with its Italian production if instead of profits it will make losses. Italy has seen since the seventies a progressive disappearance of big firms, those that continued to carry on (such as the IRI firms where the state had a controlling majority) were for a sustained span of time relying on state subsidies to cover their losses, contributing to more than half the huge public debt that is burdening the Italian economy. And such a system of systematic loss making cannot carry on for ever. After all it was Prodi's left wing government that put an end to it, closing down IRI (but still Alitalia's deficit was running, the second Prodi government tried to get rid of it, but did not succeed because of trade union militancy that enjoyed the populist support of the Right). One of the main reasons why big firms in Italy tend to make big losses is probably the system of militant industrial relations that Marchionne is trying to break, together with the excessive protection of employee rights (statuto dei lavoratori) which encourages shirking. I don't know whether he will ultimately succeed, but he is brave to try. As to Marchionne's earnings, part of it, I understand, depends on Fiat overall economic results. Moreover here too there is an issue of outside option: how much would Marchionne earn were he to abandon Fiat and find a top managerial employment somewhere else? And would another manager with a different managerial style be able to ensure Fiat survival, as Marchionne has been able to do under very difficult circumstances?
As to the Vietnam war, it was immoral, I agree, as always wars of aggression are, but it was started by the North willing to export by force Communism to the South. And after so many destructions and human losses, in the end it is the South that has won. Vietnam nowadays is Communist only by name, and has become another version of the traditional South-East Asian model of an authoritarian political regime successfully running a mixed capitalist economy.

D. Mario Nuti said...

Alberto, I am not the first to have made a connection between FIAT and Vietnam: see the above reference to Scola's Fiat-Nam.

Marchionne is not a moderniser, nor a globaliser. He is an opportunist who has turned a current cyclical and structural bargaining advantage into what he perceives as an established and consolidated bargaining supremacy vis-à-vis his employees. He is probably wrong (as you are wrong: South Vietnam did not win, the Vietnamese people won independence and the Americans lost).

You favour Union-bashing, but you do not have to be a militant worker to take a different view. For instance, Italian industrialist Carlo De Benedetti, Honorary President of CIR (Compagnie Industriali Riunite) said that Marchionne's rescue of Fiat does not mean that the industrial relations model envisaged by him for Mirafiori is the winning model. "I do not believe - he said - that that model is the most desirable for the larger part of enterprises in our country" (today's Corriere della Sera).

It is no accident that Chrysler's workers can constrain Marchionne as shareholders through their pension funds; that many of his competitors are more successful sharing profits with employees and giving them seats in the company's supervisory board (Mitbestimmung).

D. Mario Nuti said...

"Does FIAT actually have €20bn to invest?" Good question, Ted. On 3 January Marchionne replied to such a question saying that it was "offensive".

The first billion will be put up by FIAT and by Chrysler, in proportion to respective production volumes. The rest is spread over 2011-2014 in an unspecified time pattern. One should add the cost of FIAT's announced increase in its Chrysler shareholding stake to 60% before the end of 2011.

Now Marchionne will have to explain his industrial "plan" in much greater detail.

His record in keeping promises is not outstanding.

On 26 March 2010 he told FIAT shareholders that "In 2010 investment programmes in all sections would go back to the usual levels, with an increase of 30%-35% with respect to 2009". In the first 9 months investment rose only by 7.3%.

In the summer of 2010 Marchionne announced that FAS (Fabbrica Automobili Serbia) – FIAT’s joint company with 33% participation of the Serbian government - would have built the new “mono-volume” LO previously due at Mirafiori. A €1bn investment would be financed by FIAT (350mn), the rest being provided by the Serbian government and the EIB. The old factory has been refurbished at the expenses of the Serbian government but production was postponed indefinitely due to the global crisis. FIAT machinery still has to be delivered.

chilosi said...

I don't know whether the Marchionne cure will be able to re-establish Fiat profitability in Italy. But the two basic questions I put in my comment remained unanswered by your reply: 1) why should Fiat invest in Italy if the rate or return is negative or even lower than elsewhere? 2) why should Fiat continue to produce in Italy if instead of making profits its Italian activities bring about losses?
Another unanswered point is the circumstance that in Italy the environment (normative, social, political) is adverse to large industry, which has gradually disappeared. Of the large firms that survive the majority are in service areas where they take advantage of normative privileges, exploitation of natural monopolies and corruptive relationships with political power (such as being awarded frequency bands for almost nothing, or being able to take advantage of administrative pricing such as in energy or motorways). You are rightly mentioning Germany. But in Germany class struggle and Marxism were shelved long ago at Bad-Godesberg, co-determination was introduced by law and wage moderation has been a constant feature, maintaining competitiveness together with monetary stability, of which the primary beneficiaries have been the workers, who have much better wages and working conditions than in Italy. In Italy, where industrial relations have been much more militant, and important sections of the political Left were much more radical than the German Social Democracy, starting with the end of the sixties a steady wage push incompatible with maintenance of competitiveness did result in periodic devaluations at the times of the Lira, and in a large underground economy that persists today, where workers have no rights.

As for Vietnam, it was a tragedy that in Vietnam the nationalist and the communist struggle became mixed up, thanks to Western and American mistakes and incompetence, and to the incompetence and catholic extremism of the Diem regime. In South Korea and Taiwan, where a capitalist mixed economy was established, the initially authoritarian regimes gave way to prosperous democracies. Hopefully this is the path that Vietnam is actually pursuing, even if there are no examples of communist single-party dictatorships gradually evolving towards multiparty liberal democracies. But there are some reasons for hope.

D. Mario Nuti said...

Alberto, your questions:

1) None, but I do not believe that the proposed deterioration of working conditions will made the difference between FIAT's success and failure. Greater guarantees of investment and employment prospects should have been demanded and offered, plus some participation in profit of the kind that Marchionne suggested only yesterday AFTER the vote (why not BEFORE?).

2) Because there should be better ways of raising profitability than a counterproductive confrontation in industrial relations. Such as investment, innovation, new models. Marchionne is not a moderniser but a throwback from the 1950s.

chilosi said...

"participation in profit of the kind that Marchionne suggested only yesterday AFTER the vote (why not BEFORE?)"

May be Marchionne's was a provocation, hoping for a NO majority vote that would allow him to close down the unprofitable Mirafiori plant without too much of a political hassle... Now that it proved unsuccessful he is trying to do the best of what he can. By the way, participation to profits will be relevant only if there will be profits! Moreover accounting in Italian firms is notoriously heavily manipulated and falsehood in accounting is not even an offense anymore. This allows to hide profits for tax avoidance purposes without much risk. Moreover to be credible profit sharing requires some degree of trust, since it is the management that produces the accounts, and there is an obvious moral hazard. It is different with German large firms where employees' representatives make half of the supervisory board.

D. Mario Nuti said...

Devilish thought...
But then, in the immortal words of Giulio Andreotti, "You sin in thinking bad about people; but, often, you guess right".

Monk said...

Did Marchionne's endorsement by Berlusconi make any difference, either way?

D. Mario Nuti said...

Berlusconi actually said that, if the Mirafiori employees voted against the proposed deal, FIAT would do well to leave Italy. A peculiarly destructive form of industrial policy, worse than not having one.

Difficult to assess the impact of this statement. Judging from the international reputation of the senile satyr acting like Italy's premier, I would say that it was counterproductive.

See http://www.youtube.com/watch?v=4adsftWSfW8&NR=1
http://www.youtube.com/watch?v=MCkKeqh70Ak