Volkswagen's Tennessee Gambit: Who's Afraid of the Big, Bad Union?

I have long been a strong advocate of foreign investment in the United States, and have argued against discriminatory tax rules, short-sighted security restrictions, or other government measures that discourage foreign companies. Now Volkswagen, the German carmaker, has given me one more reason to like foreign investors; the company could play a role in changing what has become a self-destructive anti-union ideology that permeates too much of American business and political culture.

A little background. Volkswagen is betting big time on the United States. The company three years ago invested $1 billion in a new plant in Chattanooga, Tennessee that employs nearly 3,200 local workers to make the Passat for American buyers. Over the next five years, it plans to invest another $7 billion in North America, with the goal of selling a million vehicles a year in the United States by 2018.

Companies like Volkswagen have raised hopes that the United States could see a significant manufacturing revival. While foreign direct investment (FDI) growth remains too weak, nearly half of it is in manufacturing, in sectors like pharmaceuticals, electrical equipment, and cars. About 17 percent of the U.S. manufacturing workforce is employed by foreign-owned companies. Wages at foreign-owned companies are about 30 percent higher than the U.S. average, likely because that investment is concentrated in better-paying manufacturing jobs. The Obama administration has recognized the importance of FDI--the “Select USA” summit hosted in Washington last fall was the highest level effort in U.S. history to attract more of this sort of investment.

Some of that investment growth, especially in the auto sectors, has taken place in southern states where generally lower wages and an anti-union culture are attractive to many companies. In the 30 years since Toyota and Honda started building cars in the United States, not a single foreign automaker has been unionized. That may change this week. The United Autoworkers Union (UAW) has launched a drive to unionize VW’s Chattanooga plant. And to the surprise and horror of many local politicians, the company has encouraged the union. The vote at the plant begins today and ends Friday.

Volkswagen is in a difficult position. Its German factories are all unionized, represented by the powerful IG Metall union, and it would be awkward at least for the company to actively oppose unions in the United States. More importantly, VW would like to establish in the factory a German-style “works council,” which are cooperative arrangements between management and employees designed to promote efficient operations and a happy staff--not exactly radical ideas. The council helps the company to plan staffing and set working conditions; the company generally shares with the council details of its finances, so that employees better understand the competitive pressures that management is facing. The works councils were very helpful in allowing German companies to avoid big layoffs during the financial crisis, for example, agreeing instead to spread shorter hours across the workforce. The works councils do not bargain directly on issues like wages and benefits the way a union can. But under the peculariaties of U.S. labor law, the only way to establish such a works council is if the employees are first unionized.

"Our works councils are key to our success and productivity. It is a business model that helped to make Volkswagen the second-largest car company in the world," said Frank Fischer, chairman and CEO of Volkswagen Chattanooga. So, while remaining formally neutral during the UAW drive (which is precisely what companies are supposed to do under U.S. labor law), VW has been supportive of the idea.

That stance has enraged some politicians. Senator Bob Corker (R-TN) has warned that the union would hurt the city and state and discourage future investment. Governor Bill Haslam has spoken out against the union, and several state politicians have threatened to withhold any future tax or other incentives for VW to expand in the state. And that threat is coming exactly when VW is poised to make a decision on whether to expand its Tennessee plant to build a new midsized SUV, or locate the production in Mexico instead.

The big question, of course, is whether the UAW will hurt Volkswagen, which is already falling short of its North American sales targets, and perhaps discourage other companies from investing in the state. There is a history to be sure, in which the generous labor contracts and inflexible work rules negotiated between the UAW and the Big Three U.S. automakers played a role in pricing those companies out of the market in the 1970s and 1980s, opening the door for import competition. But that is ancient history at this point; over the past 20 years, the UAW--which is just a fraction of its former size--and the other big industrial unions have made one concession after another to try to save American manufacturing jobs. Ford, Chrysler and General Motors are now earning record profits, and sharing some of it with their unionized workforce.  Arthur Wheaton, a professor at Cornell University's School of Industrial and Labor Relations, told USA Today, "Volkswagen considers their works councils their strategic competitive advantage.” The company should at the least be able to test that theory in Tennessee.

Other companies may see things differently. And workers at other foreign auto plants in the south may well decide, as they have in the past, that they have no need for the union. But the employees at VW should be free to make their own decision. If the local politicians would take a deep breath, they might actually discover that a little unionization is good for the company, good for its workforce, and good for the state.