Domestic Outsourcing in the Automotive Industry
Automotive firms have long relied on subcontractors in the production process (Whitford and Zeitlin 2004; Helper and Henderson 2014; Helper and Kreuger 2016). As in other industries, outsourcing has been a common cost-reduction measure in the U.S. auto sector. In recent decades, outsourcing in the auto industry has grown, and at the same time, the nature of employment relationship and the relationships between suppliers and lead firms in the sector have changed.
The “Big Three” U.S. auto firms—General Motors (GM), Ford, and Fiat/Chrysler—which once directly employed hundreds of thousands of well-paid, unionized workers in places like Detroit and Flint, Michigan, now directly employ far fewer workers and maintain large supplier networks in widely dispersed locations. These supplier networkers are increasingly made up of small firms, which, compared to large firms, generally pay less and are less innovative (Helper and Kreuger 2016).
Workers who remain employed at plants and other establishments owned by the Big Three are now often hired through contract companies, principally temporary help agencies, and thus are not employees of the auto firms. Parts suppliers to auto manufacturers make widespread use of temporary help workers as well. For example, as part of a major cost-cutting program in 2006, supplier Delphi Corporation hired more than 2,000 temporary workers to replace some of the estimated 12,600 workers taking offers to retire early or transfer to GM (Roberson 2006).
Temporary workers have also been an issue in recent strikes at GM, including the 2019 strike involving more than 48,000 workers. Temporary workers made up about 7 percent of GM’s workforce at the time of the strike (Boudette 2019). When the strike was settled, approximately 1,300 temporary workers received a path to becoming permanent employees (Fernández Campbell 2019; GM 2020).
Implications of Outsourcing for Workers
Often there are large discrepancies in the employment conditions of direct-hire employees and those of temporary help and other contract workers (Erickcek, Houseman, and Kalleberg 2003; Government Accountability Office 2015; Houseman, Kalleberg, and Erickcek 2003). When Delphi outsourced positions to temporary help agencies in 2006, for example, the temporary positions paid up to 50 percent less than the in-house positions at GM and Delphi (Roberson 2006). Additionally, temporary help workers have a higher incidence of injuries, which is generally ascribed to lack of training. In the triangulated employment arrangement between workers, contract company, and client firm, companies may be unclear on who is responsible for ensuring worker safety. As a result, temporary help workers may receive inadequate training and safety equipment (Government Accountability Office 2015).
Motivations for Outsourcing
A great deal of research demonstrates that contracting out reduces labor costs for lead firms. The evidence is also clear that U.S. firms engage in more of this “wage-driven” outsourcing than those from other countries. The relative strength of labor unions in the auto sector is one major motivation for companies to outsource. The outsourcing of production both across borders and to smaller, nonunion suppliers within the United States is viewed as a way to avoid the perceived high labor costs of union-based work, especially in the auto sector (Whitford and Zeitlin 2004).
Auto companies and their suppliers also often use temporary help agencies to screen workers for permanent positions with the company. During the probationary period, workers are employees of the temporary agency, and consequently their wages and benefits are typically lower than if they were employees of the auto company or supplier. Use of temporary agencies also can make it easier for the companies to reject workers, asking the temporary agency to provide other candidates (Erickson, Houseman, and Kalleberg 2003).
Additionally, parts suppliers that are not unionized may use temporary help agencies to screen out potential employees who are likely to sympathize with unions (Erickson, Houseman, and Kalleberg 2003). And, because they are not company employees, temporary help workers may not vote in union elections. When, for instance, the United Auto Workers sought to unionize a Nissan plant in Canton, Mississippi, in 2017, large numbers of temporary help workers were ineligible to vote in the union election, which likely contributed to the union losing its representation election (Minchin 2018).
As in other industries, vertical disintegration in the auto sector is driven by other motives, including a desire to focus on core competencies, contract with specialized suppliers, and foster innovation (Jacobides, MacDuffie, and Tae 2016, p. 1958). As Helper and Henderson (2014) discuss, firms such as GM rely on specialized subcontractors to supply their parts. Subcontracting work to these suppliers allows lead firms to significantly reduce labor costs while controlling production quality. Helper and Henderson, however, point out that the nature of the employment relationship between lead companies and their suppliers varies in important ways across companies. Toyota practices “relational contracting” with its parts suppliers, wherein it establishes long-term relationships with specialist firms and rarely changes suppliers solely in response to small price differences. This type of contracting, Helper and Henderson argue, fosters increased productivity and has been key to Toyota’s success in the auto industry. They contrast this relational contract approach with “transactional contracting,” as practiced by GM, and partially blame this approach for GM’s decline.
Case study research has documented tremendous growth in recent years in domestic outsourcing in the U.S. auto industry, both through subcontracting to supplier firms and to temporary help agencies and other contractors that supply workers to auto companies and parts suppliers. Evidence is scant on whether relational contracting practices have been growing, and while it seems plausible that workers would fare better when the contracting is relational rather than contractual, this has not been studied. Moreover, as with other industries, the lack of data collected on domestic outsourcing makes it difficult to track changes in its incidence.
Boudette, Neal E. 2019. “G.M. Workers Approve Contract and End U.A.W. Strike.” New York Times, October 25. https://www.nytimes.com/2019/10/25/business/gm-contract.html.
Erickcek, George A., Susan N. Houseman, and Arne L. Kalleberg. 2003. “The Effects of Temporary Services and Contracting Out on Low-Skilled Workers: Evidence from Auto Suppliers, Hospitals, and Public Schools.” In Low-Wage America: How Employers Are Reshaping Opportunity in the Workplace, Eileen Appelbaum, Annette Bernhardt, and Richard J. Murnane, eds. New York: Russell Sage Foundation, pp. 368–403.
Fernández Campbell, Alexia. 2019. “The GM Strike Has Officially Ended. Here’s What Workers Won and Lost.” Vox, October 25. https://www.vox.com/identities/2019/10/25/20930350/gm-workers-vote-end-strike.
General Motors (GM). “Wages, Profit Sharing Opportunity and Benefits Set to Rise for More Than 1,350 GM Hourly Employees.” Press release, January 15. https://media.gm.com/media/us/en/gm/news.detail.html/content/Pages/news/us/en/2020/jan/0115-employees.html.
Government Accountability Office. 2015. “Contingent Workforce: Size, Characteristics, Earnings, and Benefits.” GAO-15-168R, Washington, DC: Government Accountability Office. http://www.gao.gov/assets/670/669766.pdf.
Helper, Susan, and Rebecca Henderson. 2014. “Management Practices, Relational Contracts, and the Decline of General Motors.” Journal of Economic Perspectives 28(1): 49–72. https://www.aeaweb.org/articles?id=10.1257/jep.28.1.49
Helper, Susan, and Timothy Kreuger. 2016. “Supply Chains and Equitable Growth.” Washington, DC: Washington Center for Equitable Growth. http://equitablegrowth.org/report/supply-chains-and-equitable-growth/.
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Minchin, Timothy J. 2018. “Labor Rights Are Civil Rights: Inter-Racial Unionism and the Struggle to Unionize Nissan in Canton, Mississippi.” Labor History 59(6): 720–745. https://www.tandfonline.com/doi/abs/10.1080/0023656X.2018.1470213
Roberson, Jason. 2006. “Thousands Line Up for Delphi Jobs: Work Pays 50% Less with No Benefits.” Detroit Free Press, June 28, A:1.
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