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Has anyone read a cogent explanation of why Cat did this? Is it really just vindictive union busting or is their some kind of rational explanation? Was this the plan all along, and the labour dispute just happen to fall at about the time they were going to close the thing anyway? Or is this really as irrational and emotional as it looks at first glance?

It's impossible to see this purely as an economic efficiency matter while the Buy America policy is levelled against Canadian operations like EMD-London. Canada should impose a similar policy on such items as will significantly impair US manufacturers where NAFTA lacunae exist. We have seen the disconcerting effect that exporting Canadian oil to China has on US politics, now we should demonstrate that Buy America is not a no-lose proposition either, and doing so during the next six months will garner the additional exposure of an election cycle. The policy should specify that any restrictions would automatically lapse when the American ones do.

Patrick: It's so hard to know what's going on when Caterpillar is so quiet. I do suspect they planned to move all along.

Mark: Oh yeah, there's a lot more going on here than economic efficiency. One is buy America policies. Another is millions of dollars of corporate welfare from the state of Indiana.

Patrick: maybe CAT/CAW values its reputation for not caving in.

Nick: CAW's position does make a lot more sense if you think about the situation as being a repeated game. Then again, the problem with game theory is you can get almost *anything* as an equilibrium in an infinitely repeated game.

Mike: "Another is millions of dollars of corporate welfare from the state of Indiana."

Is Cat moving to Indiana?

They have a plant in Muncie that is currently at 1/3rd Capacity. It's expected the jobs are going there.

Cat announced the closure less than *48* hours after that bill became law. I doubt it's a coincidence.

The other thing I'll add for fairly long period of time EMD London had been exporting a significant amount of production outside of North America. Sometimes you would see funny looking "foreign" locomotives being towed along the CN mainline to the port of Halifax. Most of this as I understood was going primarily to the EU and Indonesia neither of which Canada has preferential free trade agreement that would give Canadian made products better tariff treatment than MFN.

I agree totally that EMD was always an American company based in LaGrange. I do think the Buy America law is something the Federal government has totally dropped the ball on. I would also mention the EU has regulations governing the provision of "state aid" by member states to private companies perhaps a similar provision needs to be looked at in NAFTA.

No argument about the history of the London plant; I'm a train fan and knew the story. Caterpillar's competitor, GE Locomotives in Erie, PA has a test track with multiple track gauges and electric catenary for testing non-North American bound locomotives.

But demanding a 50% wage cut at a profitable plant is generally not supposed to be a viable business strategy. This episode should be studied by future commerce and labour studies students over the true meaning and usefulness of the concept of the "marginal product of labour".

"But demanding a 50% wage cut at a profitable plant is generally not supposed to be a viable business strategy. This episode should be studied by future commerce and labour studies students over the true meaning and usefulness of the concept of the "marginal product of labour"."

Only if you assume it was a good faith offer. And I don't know why you'd assume that.

APL != MPL

How bad was the final offer? All reports say that SOME workers' wages were to be cut by 50% -- any word on what percentage of workforce would have been cut so deeply? Were some classifications of workers untouched?

Not saying the offer should have been accepted, or that it was in any way fair. Think it is important to know if this is going to happen over and over again -- do other workers have to face lower wages for presumably lower skilled areas of work?

What good is a union if it prices you out of the market and leaves you unemployed. I wonder if in hindsight the workers would have taken the wage cuts knowing that being unemployed would be the alternative.

Anyway, they're about to find out what their value is really worth in the marketplace.

Mike, it was good seeing you on Friday. I appreciate your thoughtful analysis of this story.

The narrative from right-wing commentators like Kevin O’Leary and Andrew Coyne is that Caterpillar left because CAW wouldn’t settle for half a loaf.

As I said on Lang & O’Leary, my sense is that Caterpillar decided to close the London plant for a variety of reasons other than labour costs. Before the lock-out, CAW warned, “We believe Caterpillar is trying to provoke a labour dispute so they can pull out of this country.”

It seems that Caterpillar timed the closure to give some stick to the union (bolstering its tough reputation for negotiations elsewhere) and perhaps a carrot to Indiana Republicans for enacting “right to work” legislation.

However, a recent Muncie Free Press article raises some doubt about where Caterpillar will relocate the jobs from London:

[Caterpillar human resources representative Angie] Orcutt also made it clear those recent reports that a labor dispute and plant closing in London, Ontario, Canada with a Progress Rail subsidiary would create jobs locally was [sic] untrue. . . . Orcutt said only one Canadian worker was employed locally and none of that work was coming to Muncie. She later declined to discuss the plant closing.

Construction on the Muncie plant started immediately after the Caterpillar takeover of EMD, long before the passing of the recent union-busting law in Indiana, and apparently was due to "Buy American" policies on the part of American transit authorities and the availability of a large already-existing locomotive workshop and spur line there which could be refurbished and used for this purpose (note that Muncie was traditionally a railroad center with many train workshop facilities, many of which were abandoned at the end of the 20th century due to consolidation in the U.S. railroad industry, one of which was un-abandoned and completely refurbished to become EMD Muncie). There was never enough work for both the Muncie plant and the London plant and when the Muncie plant started shipping product in October the London plant, which is over 60 years old and needs significant work to bring it up to modern standards, was pretty much done for. I doubt there was ever a good faith offer to the union, the whole point was to let the union contract run out -- I understand that the union contract called for pretty hefty severance pay if the plant was shut down.

One thing which baffles me: Automobiles assembled in Canada count as "American" for purposes of "Buy American" mandates (something that occasionally confuses U.S. auto buyers who see "Made in USA" on a car label then notice it was assembled in Windsor or London, I have to carefully explain that the *legal* place of origin is different from the *geographical* place of origin). Why is the same not true for rail equipment assembled in Canada? I understand that Bombardier is having similar problems with U.S. transit authorities, which is why they have a plant in Plattsburgh, NY that has no purpose for existing other than to meet "buy American" requirements on the part of U.S. transit authorities. It would seem to me that the Harper government would be interested in negotiating similar treatment for Canadian rail equipment that exists for automobiles -- i.e., for the purpose of U.S. "Buy American" requirements, Canadian gear would satisfy them. Given that Bombardier is the largest supplier of rail cars to U.S. transit authorities this would seem to be a no-brainer. But apparently such a notion never passes through his dim little mind...

Correction: It was a Westinghouse power station transformer assembly plant abandoned in 1998 that Caterpillar purchased in June 2010 in order to convert to a railroad equipment assembly plant. The point remains that Caterpillar began construction on the plant well before the current union-busting law passed in Indiana, and the plant was located in this area due to its excellent rail network, access to large number of potential employees with railroad experience, proximity to suppliers, and availability of a facility eminently suitable for the purpose, rather than because of the union-busting law.

I see Oliver, in the Star, is going nuts and proposing that Canada impose a tariff on CAT products to "punish" them for closing the London plant. Apart from the dubious legality of such an approach, query why he thinks it makes sense to punish the Canadian oil and mining industries (I.e., big consumers of CAT products), and the workers in those industries, in a gesture that will do nothing to help the former CAT workers.

Sorry, it's OLIVE, in the Star: "http://www.thestar.com/business/article/1126643--olive-capitalism-s-ugly-face-in-london-ont?bn=1"

Good piece by the way, Mike.

Badtux: "One thing which baffles me: Automobiles assembled in Canada count as "American" for purposes of "Buy American" mandates"

The "Buy American" rules have different "US content" requirements for different products. Some products are "US made" if they have 60% US content (buses, for example) - many "Canadian-made" cars would meet that requirement.

I doubt this was a concession negotiated by the Harper government, so much as a concession by the American government to the reality that you can' buy a 100% "American-made" car anymore (and, keep in mind, at the time that "Buy American" was implemented the US government owned not one, but two, car companies that didn't produce 100% US-origin cars). I know the feds have lobbied for a general Canadian exemption, albeit with limited success, from "Buy American"(you don't think bombardier has a team of lobbyists working in Ottawa?). To the extent they haven't succeeded it's a function of the old rule of American politics - there are no votes in Canada.

So it sure looks like Cat intended to close the place all along. OK, fine. That happens. But why the duplicity? Why the disingenuous offer and going to all that extra effort for no other reason than to cause people pain. They could have just told the workers that the plant was closing and no offer would be made. And all this BS can't be to force the union into rejecting an offer so they can don't have to pay severance or whatever because making a bad faith offer (which it clearly was) seems like an invitation to an expensive and protracted lawsuit.

It's one thing for a business to be ruthless. They're pretty much designed to be. But it's another matter entirely when people go out of their way to be duplicitous and vicious. This affair says a lot about the kind of people who are running Cat. Personally, I'd be very, very wary of doing any kind of business with them. I'd always be wondering when they where going to try to screw me.

CAT always had a reputation for meanness.
In sociological terms, it is a Southern company. Peoria is on I-74,slightly to the north of I-70, a common but not absolute marker between the sociological North and South. They always have behaved like plantation owners. That's in their DNA.

One thing that is disappointing as I have mentioned before is this plant did have some success in selling locomotives outside of North America. I know after the EU deregulated freight rail service there was a big demand for locomotives from new non incumbent operators. According the wikipedia article I linked to below though EMD decided last year not to produce a new updated version and thus exited the European market. One issue with the locomotives was their operator comfort issues, supposedly they were quite noisy inside. Additionally they were designed to fit to narrower UK track gauge whereas many operators on the continent in the past few years were looking for a locomotive that could take advantage of wider continental gauge. EMD supposedly was considering this in their updated model but then decided to pull out of the EU market all together.

Wikipedia article

http://en.wikipedia.org/wiki/EMD_Class_66

The following is a link to a pdf with the offer to the union:

http://www.emcupdate.ca/wp-content/uploads/Employee-Letter-and-Summary-Dec-27-2011.pdf


My understanding is that the non-skilled trades were offered the deep cuts while other non-skilled were not as deep and that the skilled trades were offered cuts in the 15-18% range. Also there were many cuts to the benefits and other packages.

The media isn't so much in the business of informing the public any more, but shaping the public opinion by shoddy half reporting.

Thanks Dwayne. For a lot of people that looks like a pretty good compensation package, but I am unaware of its competitiveness in the area, or across the industry. And compensation is meaningless if the plan was to close the plant whatever the Union decided.

The West is looking for workers, the more the merrier!

If memory serves EMD did export locomotives to the UK, particularly after the British Rail was privatized and the entire rail freight operation sold to English, Welsh & Scottish Railway, owned by the North American Wisconcin Central. North American railroads have the experience and inclination to run competitive freight lines, something that was not encouraged in the UK under British Rail. WC went so far as to import EMD locomotives, known dedicated freight haulers that the UK didn't have anymore.

"CAT always had a reputation for meanness."

Indeed. If it wasn't for the fact that they also manage to produce darn good equipment, I don't know that they'd have any customers.

Regarding EMD and the European market, EMD got raped by first GM as GM wound down towards bankruptcy, then by the vulture capitalists who bought the shambles from GM then finished raping it the usual way (by running up debt to repay the vulture capitalists). My guess is that they simply didn't have the money, nor the production capacity, to tool up a new model for the European market in 2008, and what got confirmed in 2011 was the reality that the project had failed years before.

Cat is a bunch of vicious crackers, but they also have the money and apparently the desire to produce world-class locomotives, unlike GM which was busy going bankrupt and the vulture capitalists who just wanted to rape EMD for whatever they could suck out of it. Without Cat, EMD was on an inevitable road to bankruptcy because that's what vultures *do* to companies. So the writing was on the wall plain to see. It's just a shame that Cat had to do this in such a vicious and underhanded manner.

Determinant:

Now that memory serves me correctly after CN bought Wisconsin Central they actually owned English, Welsh, and Scottish for a few years. The freight rail sector in Europe historically has been a mess and it has been improving in the last ten years barely. One thing Canadian should proud of is even with the recent troubles at CP and some of CN's past (pre 1990s issues) Canada has one of the highest shares of freight rail in the world as transport method. The US freight rail sector is high competitive too but not so much on the north south corridors along I-95 and I-5. The east west geography of Canada makes freight rail much more competitive vs truck.

I used to work for GM Disel in their Bus manufacturing plant in Quebec and am upset by the short sighted union bashing that has come out of the plant closure by CAT. Everyone seems to be turning their attention to unionized higher paying jobs in envy and jealousy rather than looking at why unions were brought into play in the first place. It won't be much longer that there will be no middle class, no well paying jobs, etc. Then will unions be in vogue again as people change their focus to fighting for good, well paying, manufacturing jobs as opposed to minumum wage marginal jobs while we continue to ship our natural resources around the world. Buy American protectionism should be counteracted by taking our oil,refining it and letting the U.S. pay top dollar for it. If protectionism is now the American way, we should follow suit and give them a taste of their own medicine. Some said that boycotting CAT is not an option. Well compare that to buy American policies why not boycott all things CAT. I know that I will go out of my way not to buy their products!

David,

I think the problem is the mentality that "good, well paying, manufacturing" jobs are something you "fight for". They aren't,and never were. Modern industrial unions arose in the context of industries in which there was significant market power (monopolies, oligopolies, etc.). Unions didn't fight for "good, well paying, manufacturing" jobs, they fought for a share of monopoly/oligopoly rents earned by the manufacturing sector. In that context, they made sense. But those monopoly/oligopoly rents are gone. That's a good thing for people who aren't workers/investors in those industries. It's a bummer for workers and investors in those industries (ask former GM or Chrysler shareholders if the CAW or UAW are the only ones bearing the cost of that change). The problem is, it isn't clear that union leaderhip grasps that point (although, I would have thought that the CAW would have picked up on that fact, given the haircut they took at GM, Ford and Chrysler). If the union movement thinks it will remain relevant "fighting" for those monopoly rents, it's kidding itself.

As for taking "our" oil... as an aside, since when is it "our" oil? Unless your name is Elizabeth Windsor (in right of the Province of Alberta or Newfoundland) it's not "your" oil, nor is it mine. When it's in the ground, it belongs to the government of Alberta (or Newfoundland), and understandably, it might be understandably concerned about "our" using their oil as a barganing chip for the benefit of "us". When its out of the ground, it belongs to the person who boguht it. I noticed similar terminology with Cohn and Crane and the assorted other sock puppets in the Toronto Star with their references to "our" locomotive factory or "our" technology. If the company actually was "their" company, they could choose to pay their workers $32 an hour. On the other hand, if it was actually "their" company, they might not be so inclined to do so .

Where was I? Oh yeah, as for why we don't refine that oil here (actually, "we" - by which I mean Shell, Imperial Oil, Syncrude, Chevron, etc. - do, there are a number of enormous refineries accross Canada, but let's not get technical), I'd imagine for the same reason we don't grow oranges in Aberta - we could, but it's not economically worthwhile. I'm happy to be proven wrong on the point, though. Maybe the CAW should pool it's members savings and form its own oil company - I'd be happy to recommend some good corporate/securities lawyers to help them raise the few billion dollars or so neccesary to fund such a project.


Bob, that bears no resemblance to reality. The locomotive market in North America is stable and healthy. EMD was not in trouble nor did it face any new competition or erosion of its customer base.

CAT's actions had nothing to do with supply/demand. None.

It had everything to do with power and crass wage repression. The union should do everything in their power to hit CAT and hit it hard.

I understand you are a lawyer, thus you may not have much experience with large corporate affairs and the separation of labour from capital. The legal field depends on human capital far more than most. Try being at the raw end of a few corporate decisions that are not in your favour or the petty power games that get played on employees and it will change your attitude towards unions. It changed mine. The best place I ever worked for had a union.

Determinant: "I understand you are a lawyer, thus you may not have much experience with large corporate affairs and the separation of labour from capital."

Out of curiosity, who do you think CORPORATE lawyers work for? We're in the exact same position vis-a-vis our clients as the CAW is vis-a-vis big corporations - well, except it's a lot easier for our clients to dump us.
You're not a lawyer, so you have no way of knowing this, but we get the same pressures from our corporate clients to cut costs, to keep bills down, to give discounts. Sometimes we resist, and risk losing the client or not getting the bid, sometimes we cave. It didn't used to be like this, 40 years ago lawyers could, and did, get away with lousy service and outrageous bills. Not any more - although that's probably a good thing. Like CAW workers in London,we've been hit hard by the rise of the Canadian dollar (think the EMD decision has nothing to do with the rise of Canadian labour costs, in US dollar terms, of 40% over the last decade?). Those same US clients who didn't think twice about a C$100k bill a decade ago are now going through it with a fine tooth comb.

So spare me the blue-collar martyr routine. The CAW is dealing (badly) with the same pressures facing every other industry and business. Rather than "fighting" those pressures, they may want to think about how they adapt to them.

And Determinant, you may want to think about the point about the exchange rate. Nothing has changed in the North American locomotive market, you say. Hey, fine. But that's a problem when Canadian labour costs, in US dollar terms (which is what matters - EMD isn't pricing or selling those locomotives in Canadian dollars), have gone up 60% in 10 years (my math was off in my earlier post, it's been a 60% increase since 2002). Put it another way, the $16.50 an hour that CAT was (apparently) offering the EMD workers, that's about US$16.50 an hour these days. That's probably not far off, in US dollar terms, what EMD was paying its workers 10 years ago (when US$16.50 an hour would have been equivalent to a little over C$26 an hour). So really, nothing has changed?

Ironically, David Olive's solution of shutting down the oil sands might well be a good one. Sure, it'll impoverish Canada (and probably drive Alberta and Saskatchewan to separate), but it'll bring down the exchange rate and make Ontario manufacturing REALLY competitive. (Although, even then, given the state of the US economy, the days of the 60 cent dollar are probably gone for good. That's a fact that Canadian manufacturers, and their unions, have to adjust to.)

Bob:

Apples and oranges. As a lawyer you are self-employed, you have the ability to seek and compete for new clients. One client need not be so disastrous. This is the same with most fee or commission based businesses, my insurance career was the same. You have a different power position than the EMD workers.

Before you go off on them again, consider this opinion from the Glove & Mail's Report on Business.

http://www.theglobeandmail.com/report-on-business/top-business-stories/its-too-easy-to-kick-union-for-saying-no-to-caterpillar/article2331083/

Lastly, props to Mike Moffat. I was watching CPAC at lunch at it was Member's Statements before Question Period. He was cited in the House by a Conservative member from London for his explanations in the media about EMD.

Congratulations Mike, your name is now in Hansard.

"Apples and oranges. As a lawyer you are self-employed, you have the ability to seek and compete for new clients. One client need not be so disastrous. This is the same with most fee or commission based businesses, my insurance career was the same. You have a different power position than the EMD workers."

You're right, lawyers are in a different position than unionized workers. They can be hired and fired at will, they have overhead that they have to pay whether they're working or not (you lose 10% of your business, guess what, that's not 10% of your income), and they can lose money (I'm willing to bet that some of the partners took more than 50% "pay" cuts a few years ago when the markets crashed - heck, in the US, partners had to make additional equity contributions to keep their firms afloat). A different position, sure, but not a self-evidently less vulnerable one.

As for kicking the union, Babad misses the point. Sure, it's fine to say that a 45% pay cut is extreme, but as I noted above, given the rise of the dollar (and wage increases over the past decade) that more or less leaves EMD back where it was a decade ago in terms of competitiveness. Is asking EMD workers to take a paycut any more extreme than asking EMD to pay labour costs than are 60% (or more) higher, likely permanently so, than they were a decade ago? Did that none-too-subtle point escape the notice of the CAW? (How could it? Back in the glory days of the 60 cent dollar, the CAW had no qualms about relying on the low dollar to attract investment here. What did they think would happen if the dollar went up?). I understand why the CAW thinks that EMD should have to eat that exchange rate change. I also understand why EMD thinks it shouldn't. Neither position strikes me as much less "extreme" than the other.

In any event, what makes the CAW position baffling is that the CAW BELIEVED that EMD wanted to move the jobs to the US. It's one thing to think the company is bluffing about moving to the US as a negotiating tactic and to hold your line. If you're wrong well, bummer, but at least there was an upside to that gamble. Whether or not that's a good gamble, at least you can respect the risk.

It makes no sense to take that gamble if you don't think EMD was bluffing (actually, I suppose that isn't true, there might be some game whereby the EMD forces lower wages in order to drive down severance when they lay off all the workers - although in that case, I'd expect they'd be opening themselves up to a hefty lawsuit). In this case, the CAW was fighting a battle that even it didn't think it could win. That's crazy. They weren't fighting to protect "good paying" jobs - those jobs were gone, and they knew it - they were fighting to lose the "ok paying" jobs. Hard to respect that. Certainly, I can understand why some of Canada's 1.5 million unemployed, who are living with 100% pay cuts, might wonder about about the sanity of the CAW and its members.

I realize that it's unfair to pick on Toronto Star columnists on these points, because it's the functional equivalent of hunting Bambi with a machine gun, but the latest piece by Thomas Walkom takes the cake.

http://www.thestar.com/mobile/NEWS/article/1128113

So we have the closing of a factory that makes locomotives for the global market. A factory whose largest potential Canadian customers are rail companies whose primarily businesses are (and I note, always have been) moving goods for export to the global market. And the problem? Too much globalization. Thanks for coming out, Thomas.

Globalization has its winners and losers, no doubt about it. But the same people who are complaining about the closing were strangely quiet when EMD moved production to the (then low-wage, in US dollar terms) London plant in the 1990s. That kind of undermines their credibility now.

"You're right, lawyers are in a different position than unionized workers. They can be hired and fired at will, they have overhead that they have to pay whether they're working or not (you lose 10% of your business, guess what, that's not 10% of your income), and they can lose money (I'm willing to bet that some of the partners took more than 50% "pay" cuts a few years ago when the markets crashed - heck, in the US, partners had to make additional equity contributions to keep their firms afloat). A different position, sure, but not a self-evidently less vulnerable one."

Actually it is self-evidently different. You are a businessman, you are responsible for your own equity, which as a lawyer is contained to a great extent in your education, your own employees and you are free to seek multiple clients. You control the means of work. You also reap the gains of your increased activity. Your control means less vulnerability, that you feel vulnerable can be ascribed your your own decisions far more than an employee's vulnerability can.

Employees do not have such control. You are advocating the position that Keynes rebuked 80 years ago as "monetary policy by trade union." It was bad policy then, it's bad policy now.

Somehow it is self-evident that labour is to suffer while capital doesn't? Sorry, that's not self-evident either and labour unions exist to rectify that power imbalance.

Good thread. Good posts by Bob Smith.

Has not the Canadian dollar appreciated by roughly 50% since the early days of the FTA? I find it curious that many assume the vicious cracker sub-culture of CAT is the primary reason why CAT closed the shop and chased corporate welfare south of the border.

Economists are socialized to see economic agents as maximizers but when it comes to policy so many of us think in terms of satisficing behaviour. Curious.

Note to MM: You don't need infinite horizon game theory models to study this issue. The ability to say just about anything with infinite horizon models, or any game theory models, applies to virtually all economic models treated to some intelligent ad hoc modifications. In this case, a simple non-cooperative Brander-Spence model of profit shifting is probably a reasonably good framework to get the ball rolling.


And in passing and on a very partisan note: I understand why farmers in Ontario vote Conservative. When I get crappy mileage in my older vehicle, I know that Ontario farmers are getting rich.

But the rest of you? Huh? Why are you voting for an Old Testament-style leader based in Alberta to run the country? Is it the Canadian version of the self-loathing Resource Curse that afflicts people in Ontario? Perhaps a lot of people in Ontario now depend on capital income that can come from anywhere.

Speaking for myself: I'm not surprised they closed it. What surprised me is the way they went about it. It just didn't make sense to me. Why all the BS when "No contract will be offered because we're closing it down" would suffice?

westlope:"Has not the Canadian dollar appreciated by roughly 50% since the early days of the FTA?"
A lot of other companies used to higher C$ to buy new equipment abroad. CAT chose not to.

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