Mexico’s Unions Gain Muscle With VW Strike

After 19 days on strike against Volkswagen, unionized workers have won a victory that goes beyond the paycheck.

The Volkswagen workers--the largest automotive union in Mexico--got a 14.7% increase in wages and benefits, more than double the rate of inflation.

The settlement reflected labor’s increasing muscle, which could grow with reforms that President Vicente Fox hopes to present to Congress in the next several months. But it also could create wage and inflation pressures and dim Mexico’s appeal to the automotive companies that have invested billions here over the last decade.

The big wage increase won by the 12,300-worker Volkswagen Union at the auto maker’s Puebla plant represents a benchmark that other unions will try to attain, analysts said.

“I think this will send a message to other unions in other industries that they can get more,” said Isabel Studer, an automotive industry analyst and author of an upcoming book about Ford Motor Co.’s global operations. “If I were an organizer, that’s what I’d be telling them.”

Such demands would ripple through the economy.

Economist Rogelio Ramirez de la O said Mexican industry is bracing for a “wage-push movement,” which he described as “the worst possible scenario” in terms of job growth during times of recession because employers, unable to raise prices, will instead reduce investment and hiring.

The settlement “shows management can’t get away with devaluing labor in manufacturing policies, that it cannot be sacrificed,” said Jose Luis Rodriguez, the VW union’s general director. Volkswagen initially had offered the union a 5% wage increase.

The terms annoyed Volkswagen to the point that officials announced Wednesday that the company was suspending plans to invest $1 billion in its Mexico facilities over the next five years. Unexpectedly higher labor costs will force VW management to reassess investing at other global manufacturing sites, such as Brazil and China, the company said.

“We decided during the strike to stop new investment programs until after the ordinary budget review, which starts next week, and we get a new go-ahead from headquarters,” VW spokesman Thomas Karig said.

Fox Administration Has Hands-Off Policy

Downplaying VW’s threats, Peter Greer, an analyst at management consulting firm A.T. Kearney Inc., said there is little chance Volkswagen will abandon or downsize its Mexican operation because of its importance in supplying the rich U.S. auto market.

Since VW closed its Pennsylvania assembly plant in 1989, the Puebla plant is its only North American manufacturing site, supplying 70% of Volkswagens sold in the United States.

“With Mexico’s new free trade agreements with the European Union and Brazil, it’s become an ace in the hole in terms of getting cheaper parts in what is otherwise a very limited supply capability in North America,” said Greer, who is based in Southfield, Mich.

The pay increase is similar to those given to Nissan Motor Co. workers and teacher unions this year. But it is significant in that the VW union is the largest in the auto industry, a sector whose workers represent more than 11% of total formal employment in Mexico. Auto company jobs and investments are coveted by any government as a driver of economic growth.

Perhaps just as remarkable as the strike settlement was that the Mexican government did not intervene as it has in the past, forcing workers back to the assembly lines on terms closer to management offers than to union demands, said Ilan Bizberg, a labor expert at the Colegio de Mexico.

Such intervention has been the rule in disputes involving key industries, a policy designed to keep a lid on inflation and satisfy foreign investors, on which Mexico has counted over the last several years for jobs and economic growth.

“The government has enormous power to enforce such an order, saying that anyone who doesn’t go to work the next day is fired,” Bizberg said. “They did it last year in the last Puebla strike, declaring it illegal because the strike started one minute after it was scheduled.”

But just as with the strike of Aeromexico flight attendants this year, Mexico’s new president stayed on the sidelines, leaving the two sides to come to an agreement, a tactic that played a crucial role in Volkswagen management’s decision to give in.

“We were surprised that the government did not intervene to settle the strike,” Karig said. “The concept from the new government is very different from the last governments we have had.”

Acute Shortage of Skilled Labor

The new pay package brings the average daily wage at the sprawling manufacturing complex to $27, the highest of any Mexican auto plant but still one-tenth of what union members earn in the United States, A.T. Kearney’s Greer said.

Labor expert Raul Trejo of the National Autonomous University in Mexico City cautioned against assuming that the VW union’s success could be duplicated by other unions, which by and large are less skilled and educated and have less power in the job market. Mexico has an acute shortage of skilled labor, Trejo and others have noted.

Alfredo Coutino, a macroeconomist at Ciemex-Wefa in Philadelphia, said Volkswagen’s threat to curtail Mexican investment doesn’t hold water because productivity gains justify the increases.

Trejo said VW could be “taking advantage of the situation” to cover for a previous decision to shift resources elsewhere.

The Fox labor reform package is expected to be another effort to encourage democratic participation in unions, some of which have been linked closely to the former ruling Institutional Revolutionary Party. Previous Presidents Ernesto Zedillo and Carlos Salinas each attempted labor reform on some scale, but the efforts went nowhere.

Despite the 6% drop in U.S. auto production through last month, Mexican manufacturing was holding its own through July, showing a 0.1% increase in output. Greer said that’s because manufacturers save an average of $1,000 to $2,000 per unit in Mexico, which makes it more attractive in tough times.

Volkswagen, which once dominated car production in Mexico, has been overtaken by General Motors Corp. with the easing of investment rules in the North American Free Trade Agreement.

Of the nearly 1.9 million vehicles made here last year, GM produced 444,670 units, while Volkswagen made 425,703. About 80% of VW’s output here is exported, and Mexico is the sole global supplier of the new Beetle.