A battered UAW retreats to rethink its ‘Southern Strategy’

April 24, 2014, 11:27 PM UTC

The union’s decision to withdraw its petition for a new election at a Chattanooga VW plant could mean changes for auto manufacturing in the U.S.

Robots at the Volkswagen Chattanooga plant weld a 2012 VW Passat.

FORTUNE — The downward spiral of the United Auto Workers union gained new momentum this week with the decision to withdraw its petition for a do-over of its disputed election defeat at the Volkswagen AG plant in Chattanooga, Tenn.

By pulling back, the UAW acknowledged that its best hope of organizing foreign automakers in the southern U.S. was stalled, and perhaps halted. By expanding through the Sunbelt without the union, foreign automakers have undermined the structure of higher wages and more generous benefits the UAW has tried to impose on the Detroit-based industry.

VW workers voted in mid-February 712-626 against allowing the UAW to represent them. The UAW accused prominent Tennessee politicians of interfering with the election by saying they would oppose further government subsidies for the plant if it was organized.

MORE: A union-free VW could get the works council in Tennessee

The once powerful union, which has lost two-thirds of its membership since the late 1970s, undoubtedly will be looking for another way to gain a foothold at U.S. plants of companies including Toyota (TM), Honda (HMC), BMW, Nissan, and Mercedes. Unless it can, the Detroit-based automakers — General Motors (GM), Ford Motor (F) and Fiat Chrysler — will face ever more pressure to gain wage parity with their foreign competitors.

John Raudabaugh, a law professor at Ave Maria law school, said the UAW, after losing the election “wanted an easier path to its ultimate objective.”

“Had the UAW continued litigation [toward a new election] it would have been several years before the challenges to the subpoenas were resolved to then deal with the election objections,” he said.

The UAW realized that prolonged litigation put it in a difficult position.

VW has been weighing whether to expand the Chattanooga plant to build a new crossover vehicle or to award the project to a VW plant in Mexico. If VW now decides to expand operations in Tennessee, the decision will look like an endorsement of the workforce’s rejection of the UAW. Had the UAW continued litigating and the crossover was assigned to Mexico, no doubt workers would have blamed the union.

MORE: Why should UAW monopolize worker-management dialogue?

Volkswagen, meanwhile, will be looking for an avenue to create a workers’ council, as it has in almost all its factories around the world. The legalities governing such a body in the U.S. are restrictive under federal law, which were meant to prevent companies from creating their own unions created to bar international unions like the UAW.

“We welcome the decision by the UAW,” VW said in a statement. “It provides an important gesture for a constructive dialogue in Chattanooga.”

Of all the foreign automakers operating in the U.S., VW might have the most unrealized potential. It is a sales leader globally, very close on the heels of Toyota, with ambitions of passing its Japanese rival. But until it optimizes its U.S. manufacturing strategy, VW stands little chance of gaining ground across North America, the world’s most profitable automotive market.

The UAW vote was a major test. The next may be a resolution of VW’s lingering delay in bringing a new crossover vehicle to its U.S. retailers, who have been clamoring for one since the introduction of the new Passat sedan two years ago.