AICGS: ANALYSES : The DaimlerChrysler Labor Deal: Breakthrough or Firebreak?

On July 23, 2004, DaimlerChrysler reached an agreement with its enterprise works council to restructure compensation in its German facilities. The headline in the next day's Financial Times declared, "DaimlerChrysler Wins Workweek Fight with Unions." A deeper analysis of the agreement, however, reveals a far more complex picture. DaimlerChrysler was able to achieve - at least on paper - the principal objective of its chief executive officer, Jürgen Schrempp, namely, $500 million in annual savings. Nonetheless, the agreement was by no means one sided. The enterprise works council and the metalworkers' industrial union, IG Metall, secured a firing freeze until 2012, linked employee cuts to management pay concessions and, despite the Financial Times headline, successfully defended the thirty-five hour week and other working time arrangements. Moreover, the DaimlerChrysler deal has given organized labor an alternative model that it can deploy as a firebreak to channel future concessionary bargains away from expanding the workweek, such as the recent agreement covering two Siemens mobile phone plants.

This article has three parts. First, it examines the DaimlerChrysler deal in detail. Second, it assesses the strengths and weaknesses of the deal for labor and management. Third, it analyzes the significance of the DaimlerChrysler agreement for industrial relations in Germany.

The DaimlerChrysler Deal

The five-week public drama that culminated in the DaimlerChrysler labor deal began on June 18 when Mercedes head Jürgen Hubbert announced that he intended to obtain concessions from the DaimlerChrysler enterprise works council to "secure the competitiveness" of his division. In particular, Hubbert denounced what he referred to as "the Baden-Württemberg disease." The Baden-Württemberg framework agreement for working conditions in the metalworking sector, which dates back to the early 1970s, is unique in Germany. The generous contract guarantees employees a five-minute break for each hour of work and provides premium "night" pay for employees whose shift begins at noon. The collective agreements in the metalworking sector permit firms to renegotiate elements of its labor contracts with its works councils. The union and regional employers' association must approve any deal, however. Conditions have changed considerably over the past three decades, which have made the framework agreement a greater burden, and the timing was favorable to ask for concessions. Siemens was in the final stages of completing a deal with the works councils of two mobile phone plants that would expand the workweek from thirty-five to forty hours with no pay increase and cut benefits. Siemens management had threatened to move production to Hungary if it could not get an agreement that was to its liking.

Jürgen Schrempp placed a new spin on the DaimlerChrysler talks as they progressed. He stated that Mercedes had a $500 per car cost disadvantage vis-à-vis archrival BMW. To eliminate it, DaimlerChrysler needed $500 million in labor concessions. The plant works councils and metalworkers' union expressed their displeasure with DaimlerChrysler's demands by staging a series of work stoppages involving tens of thousands of employees throughout Germany, but they never refused to bargain. Union officials and works councilors stressed that above all else they would not tolerate undercutting the regionwide collective agreement (Flächentarifvertrag). Labor leaders were well aware that any agreement that expanded working time in the highly profitable Mercedes Car Group in a flagship company like DaimlerChrysler would produce a plethora of demands for similar concessions throughout the metalworking sector and the German economy. So, the place to build a firebreak was here.

The final agreement permitted both sides to claim victory. The enterprise and the works council agreed to grant DaimlerChrysler a $500 million reduction in its annual labor costs, but the bulk of the savings are not in the form of actual pay reductions and only materialize in 2007. DaimlerChrysler's 160,000 blue-collar line employees at German facilities will forego a scheduled supplemental pay adjustment of 2.79 percent in 2006. They will receive a one-year lump-sum payment instead. The adjustment was to be part of an existing agreement to eliminate the gap between blue and white-collar compensation. This concession, which accounts for the lion's share of the purported savings, amounts to far less than meets the eye. In practice, if the 2.79 percent adjustment had remained in place, IG Metall would have had to accept a more modest general wage increase in 2006, because employers would already be absorbing the supplemental increase for its blue-collar employees. That constraint is now gone, which will permit the union to push for more at the bargaining table. Furthermore, DaimlerChrysler still has a contractual obligation to close the pay gap between blue and white-collar employees. It will have to do so either by supplementing blue-collar pay or cutting white-collar pay for line employees (or some combination of the two) sooner or later.

The deal also permits increasing the working time of the twenty thousand employees in DaimlerChrysler's German research and development department from thirty-five to forty hours, but requires the company to obtain permission from the employee in question to proceed and to increase compensation in proportion with working time. A significant percentage of the employees in the R&D department had already been working forty hours. As a result, the agreement simply eliminates the overtime premium of 25 percent that such employees received for the final five hours of work, which amounts to an income reduction of 3.1 percent. DaimlerChrysler's 6,000 "service" employees (i.e., cafeteria workers, print-shop employees, etc.) take the biggest hit as a result of the new agreement, but not right away. As of July 1, 2007, their weekly working time expands from thirty-five to thirty-nine hours. At the same time, however, starting at age fifty-four, the service employees will have their working time gradually reduced to thirty-four point five hours per week by the time they reach sixty. An additional, innovative component of the Daimler Chrysler deal creates a temporary placement service within the company called "DC Works." This service gives DaimlerChrysler the flexibility to use employees whose jobs have been eliminated as temp workers. The agreement also altered Baden-Württemberg's famous five-minute break for each hour worked. The union agreed to cut the break in half if the company used the equivalent of the lost time to provide employees with additional vocational training. This change permitted DaimlerChrysler officials to claim that the firm had reduced the gap in working time between its facilities in Baden-Württemberg and the rest of Germany from seventy-two to forty-two hours.

In summary, DaimlerChrysler gained significant concessions in the July 23 agreement with its enterprise works council, but - in keeping with the pricing practices of the automobile sector - the actual value is substantially less than the $500 million sticker price, which only materializes in 2007.

Turning now to the other side of the table, what did the employee representatives get for their concessions? The works councilors and trade unionists beefed up job security, linked management concessions to their own and protected current working time arrangements. DaimlerChrysler granted its current 160,000 line workers guaranteed employment through December 31, 2011. Exchanging pay for job guarantees is not unheard of in Germany, but a seven and a half year firing freeze is unprecedented. Of course, attrition will preserve considerable leeway in adjusting personal to market conditions, but the company also pledged to maintain one third of the production of its C class automobiles and 100 percent of E class production in its Sindelfingen plant outside Stuttgart. DaimlerChrysler agreed to forego outsourcing the services provided by its six thousand service employees and to phase out existing service contracts with external firms. The company accepted a 10 percent curb on the salaries of the company's top three thousand managers in coming years. This pledge is vague enough to render it principally symbolic, but it establishes a precedent. It is also important to note what the employee representatives did not concede. Contractual arrangements regarding the thirty-five hour week and premium pay for employees on the noon shift remain unchanged.

A comparison of the DaimlerChrysler agreement with the recent Siemens accord for the Bocholt and Kamp-Lintfort mobile phone factories is instructive. The Siemens and DaimlerChrysler deals are by no means two of a kind. The cuts at Siemens are far deeper and shatter union taboos. They include an immediate effective average reduction in the hourly wage of 20 percent. Specifically, the agreement permits Siemens to increase working time from thirty-five to forty hours with no change in weekly pay. This represents a 12.5 percent reduction of hourly pay and reverses twenty years of weekly working time reductions. It also undercuts the regionwide collective bargaining agreement. Siemens obtained additional reductions in the Christmas bonus, vacation pay and shift premia that amount to 7.5 percent for the typical employee.

Why the difference? First, Siemens was in a far better structural position to extract more. The two mobile phone plants are small and peripheral. Siemens could therefore credibly threaten to shut them down and shift production elsewhere. Sindelfingen, in contrast, is DaimlerChrysler's flagship facility. Second, few companies in Germany have better organized and professional works councils than DaimlerChrysler, and DaimlerChrysler union members rank among the most experienced in the art of industrial action. Third, Siemens caught IG Metall off guard. The union learned from its experience with Siemens and was better prepared when DaimlerChrysler came calling for concessions.

The DaimlerChrysler Deal and German Industrial Relations

What does the DaimlerChrysler deal mean for German industrial relations? After the Siemens accord, talk of a widespread rollback to a forty hour workweek was rampant in Germany. The DaimlerChrysler deal has not quieted the drumbeat for labor concessions in Germany, but it does provide employee representatives with a firebreak that they will use to redirect pressures for working time expansion and a decentralization of collective bargaining toward concessions on future pay increases instead.

Will the firebreak work? In firms that resemble DaimlerChrysler, the new agreement should be quite influential. Volkswagen is slated to begin negotiating a new contract with IG Metall in mid September, and Opel management has expressed an interest in opening talks about cost cutting with its enterprise works council. The likely outcome in these automobile firms is agreements resembling the DaimlerChrysler deal. In cases that more closely resemble Siemens or in firms on the brink of bankruptcy, employee representatives may have a much harder time avoiding working time expansion. MAN, a metalworking and vehicle conglomerate currently experiencing hard times, has expressed interest in increasing the workweek, but the works council flatly rejected it. The outcome at MAN will be indicative of the utility of the DaimlerChrysler deal as a firebreak for organized labor.

To be sure, the applicability of the DaimlerChrysler deal is limited beyond manufacturing, where German organized labor is weak and workplaces are small. For example, the German employees of the Thomas Cooke travel agency just agreed to extend the workweek without an increase in pay. The Karstadt department store, which has expressed an interest in expanding the workweek for its employees from thirty-eight to forty-two hours, will also serve as a test case of the influence of the DaimlerChrysler deal. The DaimlerChrysler agreement will have little impact on the ongoing struggle within the public sector, particularly at the state and local levels, to expand working time.

The DaimlerChrysler case raises an additional dimension, which should not be overlooked, that illustrates the limits of restructuring the German economy through concessionary labor agreements. German trade unions are willing to negotiate special deals with multinational conglomerates to stave off outsourcing. They are far less open to making similar concessions to small and medium-sized enterprises. Besides, most small firms do not have the time, resources or leverage to cut special deals with unions. Moreover, the linkage of employee pay cuts to salary concessions by top management contained in the DaimlerChrysler deal will cause many small companies to hesitate before asking for givebacks. Thus, it comes as no surprise that Diether Klingelnberg, president of the influential metal-industry association, the Verband deutscher Maschinen- und Anlagebau (VDMA), has a dim assessment of the DaimlerChrysler deal. He complained, "When the large can do everything and the small nothing, I foresee then a wrong turn for Germany. This could lead to a two class society."

This analysis of the DaimlerChrysler deal shows that there is much less to the agreement than at first meets the eye. The actual savings for DaimlerChrysler are far smaller than advertised. The contents of the package redirect the drive for concessions away from working time expansion and are ill-suited to small and medium sized enterprises. The job guarantees add to the rigidity of the German labor market. The DaimlerChrysler deal is a skillfully constructed firebreak for organized labor, but it can only be seen as a disappointment for those wishing to increase German labor market flexibility, particularly by expanding working time.

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Professor Stephen Silvia is a political scientist at American University. He is also Director of Doctoral Studies at the School of International Service and Chair of American University's Europe Council, as well as a Board Member of the American Consortium on EU Studies. He is also a former AICGS/DaimlerChrysler-Fonds im Stifterverband für die Deutsche Wissenschaft Fellow.

This essay appeared in the July 29, 2004 AICGS Advisor.

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The views expressed in this article are those of the author(s) alone. They do not necessarily reflect the views of the American Institute for Contemporary German Studies.

The DaimlerChrysler Labor Deal Breakthrough or Firebreak?

The DaimlerChrysler Labor Deal
Breakthrough or Firebreak?