Shifting Labor Relations

Transcription

1 Mastering Disruptive Change in Manufacturing Manufacturing executives today need to manage a patchwork of stakeholders and union representatives. Even more important than defensive measures is a collaborative labor relations strategy that instills workers with an entrepreneurial spirit. 1

2 Despite increasing automation, human labor remains one of the most important resources in any manufacturing operation. The hype around 3D printing and robotics may be taking up most of the airtime in manufacturing-related discussions, but there are plenty of reasons why management should start paying more attention to interactions with workers. One reason is that since the financial crisis, unions and workers representatives are back in the game. The years-long trend of declining unionization rates (especially in industrialized countries) has recently slowed, with some unions even increasing membership rates and gaining more political influence as a result. 1 In Europe, the effects of union-driven activity on German transportation systems in the past two years have been tremendous, with the cost of some strikes estimated at more than $40 million. 2 However, it is no longer enough to look only at developed countries. As globalization continues to play out and companies from all over the world set up operations abroad, often in low-wage countries, skilled labor has become scarce, management has become more international (and is often unfamiliar with local rules and customs), and workers rights are moving to the fore as labor laws are updated. Executives need to rethink their labor relations and communications strategies to address workers representatives on a global basis. Specialist unions are growing and starting to exercise their muscle, especially in some Asian countries where the creation of smaller unions has been partially prescribed by law. China is also a prime example of where Western-style labor demands have begun to take hold, requiring management teams to develop excellent labor relations capabilities. Among Chinese companies in the news is one of the world s largest original equipment manufacturers (OEMs), which originally made the headlines because of its strained labor environment but is now renowned for having a workers council. Additionally, the All-China Federation of Trade Unions (ACFTU), representing more than 280 million workers (or 20 percent of China s population), recently took part in strikes at a large retailer in China a previously rare occasion that further underlined the focus on workers rights in the Asian giant. Moreover, collective wage negotiations now affect almost 1.8 million businesses, spread across three-quarters of the mainland s provinces, autonomous regions, and municipalities. As all this plays out in the context of skilled labor shortages in many industrialized countries and significantly rising unit labor costs in both developed and low-cost countries, understanding and addressing the forces that drive fluid labor relationships will be just as crucial as thinking through the impact of technology shifts. 1 For a closer look at these trends in Germany, where the number of members of the German Trade Union Confederation (Deutscher Gewerkschaftsbund, or DGB) decreased by more than 40 percent between 1992 and 2012, see Lisa Schmid, Cologne Institute for Economic Research, Trendwende steht bevor, Gewerkschaftsspiegel 1 (2013): 1. 2 Source: Ernst August Ginten, Bundesweiter Streik kostet die Lufthansa Millionen, Die Welt, 22 April

3 Labor Costs Move Up After a period of flat to modest salary growth in the developed world, labor costs are starting to creep up again. According to the Economist Intelligence Unit (EIU), although German average real wages were almost level over the entire five-year period between 2005 and 2010, they began to rise in 2012 and are forecast to continue to do so through at least Meanwhile, the era of unlimited low-cost labor in the developing world seems to be drawing to an end: in China, for example, by 2018 average real wages will have tripled compared to 2005, according to EIU estimates. Some tactics traditionally employed to keep labor costs at bay, such as relying on temporary labor, will no longer be an option, as evolving legislation in many countries gradually removes the cost advantage of temporary labor. In Europe and North America, the share of temporary employment has been stable since 2000 as a result of the eroding cost differential. Even in emerging economies such as China, where 37 million temporary laborers were employed in 2011, labor law requires equal pay for equal work since Also, in the past some industries have tried to shift operations to non-unionized locations, often with at least short-lived success. However, the growing local coverage of unions and their increasingly international presence will make this strategy difficult to sustain in the future. In the U.S. manufacturing industry, unions are fighting to combat decreasing unionized manufacturing employment and campaigning hard to strengthen their presence across the country. Global manufacturing players will soon face global union counterparts, such as the International Transport Workers' Federation, which represents 4.5 million employees from more than 150 countries. A large global retailer is just one company that faced a situation in Latin America where European and local unions worked together to harmonize working conditions for employees across both continents. The May 2014 strike by fast-food workers against several operators in 30 countries is another example of globalizing labor relations. As a consequence, labor costs that are already increasing in low-cost countries may experience further upward pressure from unionization, making labor relations management even more important. Additional efficiency measures and increased automation could, of course, help manufacturing to maintain its competitive edge, but these tactics alone will not be sufficient. Executives need to rethink their labor relations strategy and get ready to address workers representatives on a global basis. Small Groups, Huge Impact The complexity of labor relations and interaction with unions will change too. A new, more fragmented union landscape is forming, with niche unions replacing the large, single-pointof-contact unions of the past. And these unions will increasingly be globally connected. Both of these movements represent a challenge to manufacturing executives and call for new thinking on how to handle labor relations. No matter how membership rates and the degree of unionization develop, specialized unions will increasingly pop up, and their activities will have significant influence on supply chains, most immediately in Europe. As a result, when labor relations are managed poorly, supply chain interruptions will become more likely than in the past. Even though niche unions typically represent only small parts of a workforce, they have the power to disrupt entire value chains, as other workers groups interact with and depend 2

4 on them. Taking the example of German air transportation (see sidebar: Up in the Air), there were more than 105 months of negotiations with niche unions between 2001 and 2011, with some of them lasting more than two years. The effect of different fragmented strikes during those years was immense. In some Asian countries, however, the outcome of the fragmented union landscape is not so clear. Examples such as Bangladesh, where legislation triggered the creation of small unions, show that this fragmentation has two competing effects: for employers it is more difficult to achieve agreements and to manage all the stakeholders in each of the unions, but at the same time, not all of those small unions have sufficient bargaining power to make a difference for their members. In the ready-made garment sector, 96 new trade unions were registered in 2013, bringing the total to 222. Different Groups, Different Demands Already today, different groups of employees have different concerns and demands, and keeping everyone happy poses a challenge. As the union environment becomes more fragmented, value chains more integrated, and operations more global, avoiding tensions will require additional attention. Expatriate managers, whose ranks now include not only executives from Western countries but also those from emerging industrial champions that are now going abroad, will find it especially challenging to manage workforces whose rules and customs are alien to them. Comprehensive risk assessment and monitoring is crucial, and executives should prepare to both mitigate the rise of labor conflicts and develop countermeasures in case tensions do escalate. Simply differentiating between the unionized and non-unionized workforce will no longer be sufficient. Tomorrow, it will be essential to further distinguish between small and large unions, which will add significant complexity to managing labor relations. Different groups of employees have varying appetites for grievances and, where in the past the more contentious subgroups would be somewhat mollified by more moderate members of the same union, these groups may now all be represented by different unions. Some of these niche unions may push Up in the Air Lufthansa, or any other airline for that matter, presents one of the best examples of the effects of fragmented unions. Even though Lufthansa faces no more strikes than other companies, their impact is far more visible. When 12,000 employees walked off the job in 2013, 150,000 travelers were grounded as most of Lufthansa s flights had to be canceled. The true challenge to Lufthansa, and airlines in general, is the broad stakeholder landscape. The two employee groups who, by their nature, are most critical for an airline s operation pilots and cabin crew are typically represented by different unions. They alone can already cause notable disruptions to an airline s operations and therefore have very high bargaining power. In addition, the representative organizations of employees who do not directly work for the airline but still impact their operations must also be considered: air traffic controllers, ground service crews, security personnel, and fire fighters, just to name a few. All of these groups have impacted, to varying degrees, Lufthansa s operations, directly or indirectly. They all have different-sized interest groups that nonetheless all need to be managed with the same care and attention. 3

5 for a level of concessions that companies have never seen before, but if executives give in to the demands of one union, however small, the pressure from the others to provide equal treatment to all unionized employees will certainly emerge. And, as mentioned earlier, global operations will add additional complexity, so companies will need to keep in mind that they ll be pushed to provide workers with the same rights no matter where they work or how they are organized. One thing is clear: uncertainty will increase for manufacturing executives. To manage this patchwork of stakeholders and union representatives, companies will require labor relations and communication strategies that are well thought-out and well executed. In addition, prudent executives will develop, jointly with their value chain partners, redundancies to minimize the disruptive impact of a potential labor conflict on their operations. Moving to the Next Level Although clear risk assessments, mitigation strategies, and contingency plans are important, true success in this new labor reality will require going beyond defensive measures to reach a different level in labor relations altogether. This level can only be achieved by working together with the workforce and their union representatives, using cooperation models to instill them with the entrepreneurial spirit. Some recent examples underline the benefits of such models. In Jordan, where factory unionization was low but laborers were striking often, employers were actually the ones to push for unions that could channel their workers demands. Although unionization initially triggered higher salaries, it also elicited a richer dialogue, made workforce behavior more predictable, and reduced the number of strikes, creating a much more favorable situation for all sides. Tomorrow, it will be essential to distinguish not just between unionized and non-unionized workforces, but also between small and large unions. By fully understanding workers needs and demands and showing the willingness to codevelop new solutions and concepts, companies can broaden the dialogue and counteract some of the threats of more aggressive niche unions. Having multidimensional talks around working hours, shift arrangements, or even compensation models can open up the spectrum of win-win solutions. Some companies have even implemented systems in which workers set their own wages obviously within certain agreed parameters, tied to business performance resulting in more aligned objectives, fewer grievances, competitive labor costs, and better overall performance. Companies and executives that are willing to develop these kinds of joint success stories stand a better chance of overcoming many of the looming issues on the labor relations horizon. When managed well, the upside potential of this more evolved level of labor relations can be tremendous, not only for internal operations, but also in terms of communications with external stakeholders and the stock market. In our annual Factory of the Year competition, A.T. Kearney has encountered several successful models of this type of collaboration. 4

6 Be Prepared It s becoming clearer every day that labor relations will change in many aspects. Since labor will, at least in the foreseeable future, remain a key input factor to manufacturing operations, workforce issues need to be addressed to avoid disruptive tensions. To be successful in a world where changing labor relations are the order of the day, companies need to understand the complete, global labor panorama and invest time and resources into constantly monitoring new developments. Remember that in this new labor world, a conflict that starts in faraway Guatemala could easily reach a company s factory gates in Europe and spark a political and social backlash at home before they know it. So in order not to be taken by surprise, companies have to step up their efforts to actively manage labor relations and develop effective mechanisms to prepare for and, ideally, avoid any potentially negative repercussions. They need to take a holistic perspective that not only addresses established local labor ties, but also focuses increasingly on developing international labor relations. We therefore recommend that forward-thinking manufacturing executives place four topics at the head of their agenda: Establish global labor relations strategies that address workers representatives in recently unionized areas. Conduct risk assessments and develop contingency plans jointly with all value chain partners to minimize potential disruptions. Craft and flawlessly execute creative labor relations and communication strategies that balance the different interests of the company s numerous employee stakeholder groups. Launch collaborative relationships with unions and workers representatives based on transparency and open dialogue, as they can open the spectrum of solutions and be a key to sustainable success. Executives need to rethink their interactions with all the players in the labor relations landscape and seek input from internal and external parties. Understanding the business opportunities and risks of labor relations needs to become a vital part of every company s global manufacturing strategy. Authors Bernd Schmidt, partner, Düsseldorf Patrick Van den Bossche, partner, Washington, D.C. patrick.van.den.bossche@atkearney.com Marc Lakner, principal, Berlin marc.lakner@atkearney.com Alexander Rathfelder, consultant, Frankfurt alexander.rathfelder@atkearney.com 5

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