## Monday, December 08, 2008

### Harbour Report:\$606 Per Vehicle Cost Difference

The chart above (click to enlarge) is from the 2008 Harbour Report on automotive manufacturing productivity, showing the \$606 per vehicle labor cost advantage for Toyota vs. the Detroit 3 in 2007, because of the average hourly labor rate of \$75 for the Detroit 3 compared to the Toyota hourly rate of \$47. Looking forward, Harbour predicts a labor rate of \$54 per hour by 2011 for the Detroit 3, and only a \$97 per vehicle cost disadvantage per vehicle.

At 12/08/2008 10:08 AM,  Anonymous said...

The following article in the Detroit Free Press http://www.freep.com/apps/pbcs.dll/article?AID=2008812050400 states:

"The oft-cited \$70-an-hour wage and benefit figure for UAW workers inaccurately adds benefits that millions of retirees get to the pay of current workers, but divides the total only by current employees. That's like assuming you get your parents' retirement and Social Security benefits in addition to your own income.

Hourly pay for assembly line workers tops out around \$28; benefits add about \$14. New hires at the Detroit Three get \$14 an hour. There's no pension or health care when they retire, but benefits raise their total hourly compensation to \$29 while they're working. UAW wages are now comparable with Toyota workers, according to a Free Press analysis."

Since a number of posts involve this \$70 per hour figure, what are your thoughts about the logic in the Free Press article?

At 12/08/2008 10:37 AM,  Anonymous said...

Anonymous: It’s not logic; it’s methodology.

Don’t confuse wages, compensation, and labor costs. They are three distinct costs. Wages = \$\$ per hour paid to the employee; compensation = \$\$ paid to the employee per hour + benefits convertible to cash such as the active employee’s health care, retirement . . . ; Labor cost = an estimated amount of total money necessary to pay for labor using a defined unit of measurement. Labor costs include legacy costs, workman’s comp, the employer’s part of SS and other amount of \$\$ that do not end up in the active worker’s paycheck. Labor costs can change when units of production changes even if compensation is held constant. Although a portion of labor costs do not end up in worker’s pockets, they are important to make informed business decisions. Companies use revenue – costs to determine if they make a profit, so everything must be allocated to a cost/burden center.

At 12/08/2008 11:50 AM,  Marko said...

I am guessing this is an under estimate, since it doesn't factor in that some estimates say Detroit has 40% more workers than needed for the current production level because of agreements with unions in the past. Also, think of poor producing workers that can't be terminated for cause.

At 12/08/2008 2:57 PM,  Anonymous said...

If I were to buy a Toyota/Honda 4 dr sedan today, I would pay at least \$2000 more than a similar Ford or Chev. So if the big 3 brings down the cost (and presumably the price) by \$600, the Toyota/Hondas will be priced only \$1400 more than Detroit sedans.

At 12/08/2008 3:54 PM,  Anonymous said...

...and yet, up till the recent troubles started, toyota & honda could sell *all the camrys and accords they could make* at \$22,000, while poor detroit - saddled with those high labor costs - *couldn't give away saturns and pontiacs* at \$19,000. why is that? is it the unions' fault somehow?? why is it that "the unions" are at fault for detroit's miserable CARS, but they didn't get the credit for detroit's (until recently) hot-selling TRUCKS and SUV's?

one more time, slow learner: the unions aren't the problem. the unions build each and every GM/Big 3 pile o' crap **exactly as management designed them.** they build them to management-mandated tolerances and specifications; they use management-mandated tools and processes; the crappy plastic interiors and poorly-fitting sheetmetal the Big 3 is infamous for comes from....management. if management suspects a car coming off the line is unacceptable, they have the power to not sell it, and fix the problems.

and yet they don't; and haven't in the last 40 years.

Big 3 management - and their sycophantic cheerleaders/apologists in the blogosphere - blaming their problems on "the unions" is very much like the captain and officers of the Titanic blaming their sinking ship on the cooks and porters.

At 12/08/2008 7:56 PM,  the buggy professor said...

1)According to a GM public statement today:

'... Still, GM acknowledged that while the economy is hurting the car company, it has made missteps it only has itself to blame.

“At times we violated your trust by letting our quality fall below industry standards and our designs become lackluster,” wrote GM. “We have proliferated our brands and dealer network to the point where we lost adequate focus on our core U.S. market.” What’s more GM said it wrongly focused on pick-ups and SUVs over other brands and as a result “paid dearly.”

‘Indeed last week GM reported that sales fell 41% in the month of November.

‘According to GM, the Detroit, Michigan car maker has overcome its “quality gap,” its newest designs are getting accolades and nearly all of its new products are cars or crossovers instead of pick ups and SUVs’"

…..

2) So is the difference in sales and popularity between the Asian auto firms (and in the luxury categories German firms) and GM, Ford, and Chrysler a cost-gap or quality-gap?

.....,...

3) Here at J.D. Powers --- which ranks along with Consumer Reports as the most reliable vehicle-rating firms --- you’ll find 17 categories of vehicles: small, mid-size, large cars, premium vehicles of various sorts (Lexus etc), SUVs, vans etc.

http://www.jdpower.com/autos/ratings/quality-ratings-by-category

...

The overall ranking for quality in each category --- which is based on 9 criteria --- shows GM winning only two first-place ones: the Malibu (mid-size car) and Grand Prix (large car, with few competitors and only one foreign: Nissan Maxima). Ford wins a couple like the Lincoln Navigator for large premium multi-use vehicles (SUVs) and . . . well, I forget. And oddly Chrysler wins one for the Dodge Durango.

……,,,,,,

4) For the overall quality rating at J.D. Powers go here: http://www.jdpower.com/autos/ratings/quality-ratings-by-brand .

Generally, as you can see, Toyota, Honda, Lexus and Infiniti do much better with Mercedes and BMW and Lincoln and Buick doing decently ---but otherwise it’s not encouraging for Detroit-3 vehicles overall. (More to the point, a lot of theirs do OK, but a fair number do poorly as well.)

….....

5) Consumer Reports turns out to be generally even more favorable to the Asian manufacturers --- it ranks Subura and some Hyundai and Nissan vehicles highly (like the Nissan Murano SUV) --- and generally isn’t Mercedes as J.D. Powers (with a couple of exceptions), but slightly more favorable than J.D. Powers for two BMW vehicles. It has a very mixed set of ratings for Audi and Volkswagen and Volvo, but strongly recommends two Saab ( a surprise).

....

What is surprising is the fairly large number of Ford vehicles (including Lincoln and Mercury) that CR recommends: including several strongly so.

Go here http://www.consumerreports.org/cro/cars/types/sedans/recommended-vehicles.htm”> here if you have an online subscription to it. Only the Chevrolet Malibu is recommended of all GM vehicles. Chrysler has none.

......

6) Which is better and more reliable --- J.D. Powers or CR?

A problem in answering is that neither company will make its methodology public. J.D. Powers is known to use a sample survey of all US car-buyers, whereas CR restricts its findings to the two million subscribers --- among the 6 million total subscribers --- who answer their yearly survey. From that standpoint, J.D. Powers is likely to be more reliable.

.

That said, neither company will make know clearly the statistical distribution around the average finding for each brand or category of vehicle: you get a range of stars (J.D. Powers) or CR with an overall numerical rating (in each category), but with no clear information about what these means in terms, say, of the distribution that separates 1st ranked SUV from 10th rank. Is it a standard deviation, a half a deviation, or two standard deviations?

……....

Michael Gordon, AKA, the buggy professor

P.S. Prof Gordon, for what it’s worth, has a 2006 Acura MDX and finds it superior to the BMW or Merdeces or Audi equivalents he’s rented --- though the Nissan Murano (20-30% cheaper) turns out to be a very good vehicle both in his and CR’s estimation. His wife drives a 2001 Chrysler Town and Country and loves it.

It has 77,000 miles and --- aside from normal servicing --- she has not paid more than \$600 or so for a couple of parts that turned bad. It hasn’t a rattle even on the rough roads where we live in the steep hills above downtown Santa Barbara, and though I wouldn’t rank it highly at all in handling, it seems safe enough.

At 12/08/2008 10:05 PM,  Sean said...

This blog is so interesting.

It tells us one of the most important truth of this world: "the arse decides the head", no matter you are CEOs of big 3 or professors in UMich.

Thanks for Walt's more accurate explanation of terms.

Whatever, I will not buy big 3's cars until their products are as reliable as their German/Japanese competitors.

At 12/08/2008 11:16 PM,  Plamen said...

Ditto, Walt G., good explanation.

At 12/09/2008 10:32 AM,  Marko said...

Anon 2:57 said "one more time, slow learner: the unions aren't the problem."

Well, that is because you are assuming the only cost of the union is the labor cause (well explained by Walt). There are other, very significant costs imposed by labor here. For example, the unions insisted on denying the ability to flex manufacture, meaning that the big three are forced by the union contract (meaning the federal government) to produce one car per factory, instead of several cars per factory. This is intended to increase the number of workers required, and it succeeds. Plus, think of all the additional non-labor overhead forced on the automakers by having extra factories they don't need! No wonder they cut corners on quality. They just can't afford to make better cars!

That is just one effect, if you learn more about how union works, you will discover others. Like the economic effects of not being able to discipline workers for poor performance or attendance, and the adversarial attitude between labor and management in aggressive union shops. If you underestimate these costs, you might think "unions are not that bad". You would be wrong.

I am not a slow learning, I have just had to deal with these issues on both sides - an experience you might not have had.

At 12/09/2008 1:19 PM,  Anonymous said...

My only disappointment with the blog entries on Carpe Diem related to the auto industry is the laser focus. Lots of posts on how expensive the labor is, but little in the way of analysis in terms what it causes (outside of assertions). By that I mean, given the identified variables: labor, labor costs, design, marketing, management, ect..., what is the effect of each? Does one stand out over another? Given the focus here, it would seem that Union capitulation is the only thing necessary for the domestics survival. Is that true?

For example, if it costs GM \$600 more to manufacture a vehicle, but they sell it for \$1200 less than their competitor, is it the labor costs that are driving the difficulties now? An alternative explanation might be a business plan that focuses on low end value (aka. cheep cars), thereby forgoing a market premium that would result for a better product. That might not detract from a labor cost effect, but identifying one without discussing the other seems inadequate. I assumed I'd more of that analysis at this blog given the expertise; perhaps there is more to come?

At 12/09/2008 3:30 PM,  Marko said...

Good point. I don't know if unions are the main or only problem with GM, I am just pointing out that unions are bad for business. I would also argue they are bad for the public, since they give incentives to go into jobs that probably are unsustainable at their current labor rate. That applies in across all industries, since by definition the point of private sector unions is to increase the labor costs for business above the market amount.

At 12/09/2008 4:13 PM,  Anonymous said...

Marko said: "... since by definition the point of private sector unions is to increase the labor costs for business above the market amount."

It could be argued unions set the market rate. A lot of workers at Toyota (and other places) should be thanking the UAW for their above market wages. Toyota pays a premium to their employees to keep them from voting a union in. Although other places cannot, or will not, match union pay, they pay higher wages in areas with a strong union influence. I'll leave that to others to decide whether that is a good thing or not.

Marko, poor workers do get fired, and unions cannot do anything about it. You just can't save some people from themselves not matter how hard you try.

As for attendance problems, UAW/GM has a very strict attendance policy in the 2007 agreement for those who do not strictly follow corrective measures after five sick days in one year. It's a zero tolerance disciplinary procedure, which was pushed/demanded by those who come to work everyday and are adversely affected by no-shows (UAW workers). We have support systems in place for divorce, money problems, gambling, sick children and spouses, and drinking and drugs. Those who do not use successfully use the services are summarily discharged, and they ALL must pass a random series of urine and/or hair drug tests if they receive a negotiated re-employment offer (even they were not fired for drinking or drugs).

At 12/09/2008 4:23 PM,  Anonymous said...

Let's repeat - the Big Three are not in an auto industry, they are a health-pension-trust to pay union benefits that has an automotive business on the sideline.

Now, let's do it slowly for our liberal friends, the by-product of government education and lack of critical thinking, making cars is not the primary goal of GM, Ford, Chrysler...

Go B. Millhouse Obama (Socialist-Il), go, go, go...
and bailout your union thug bosses on the expense of the taxpayers and the future generation. :)

At 12/10/2008 10:37 AM,  Marko said...

Walt,

I agree that government regulation of prices affects the market. In this case, the government regulation is the NLRA, which permits unions to blackmail companies into giving higher than market wages and employee more people than they otherwise would. Of course this skews market prices for non-union labor! Doesn't mean it is a good thing to do. I am against any kind of government price controls, including for labor.

At 12/10/2008 10:42 AM,  Marko said...

Walt,

Regarding poor performing employees getting fired, I have seen companies lose labor arbitrations and be forced to return employees who were seen on video stealing, let alone poor performance. Labor contracts often mean that the company is forced to give up their discretion to fire poor employees to the discretion of a labor arbitrator, who may not have company bottom line as their goal. Having the bottom line as the goal is good - that is what ultimately keeps business in business, and greats jobs in the long run. Why would a company fire good employees? Don't need a contract for that!

I also know of companies where there are union shops, and non-union shops, and the pay and benefits are comparable. The only difference is that management at the union shops are afraid to fire poor performing, or stealing, or racist employees because they are often forced to hire them back by an arbitrator that is, well, arbitrary. Wow, isn't that great! That helps people!

At 12/10/2008 11:00 AM,  Anonymous said...

Marko,

I've seen the results of cases that went to arbitration/impartial umpire. If you assume the arbitrator is neutral, the merits of the case decide who wins. It is NOT the arbitrator’s job to have the company's interests in mind. The case is supposed to be decided on factual evidence and precedent. If that’s not so, what would you use? Don't hang a management loss in arbitration on the union because they did not do their homework.

If management is afraid, or does not know how, to fire poor workers without creating a strong enough paper trail that will hold up in arbitration, it's time to replace those managers. Poor workers seem to have an inherent way of getting fired and staying fired. Maybe that’s what makes them poor workers :)

At 12/10/2008 11:17 AM,  Anonymous said...

Marko,

As an aside, theft is against the law in every state. All management has to do to win arbitration in a theft case is to press charges, and show the arrest and conviction of the employee for stealing. Let me take a wild-ass guess about the case you stated: management could not do that. If there was not enough evidence or guts to charge the employee, what grounds did they have to fire the employee? If the arbitrator is neutral, as they are supposed to be, that equals a legitimate employee/union win with backpay for an unfair discharge.

At 12/10/2008 11:22 AM,  Marko said...

Walt, I guess you should not have to prove a case of theft beyond a reasonable doubt just to terminate an employee.

A vast majority of U.S. workers do not have these kinds of draconian protections and are "at will." Seems to work pretty well. Why do we need the government enforcing "for cause" rules on a handful of workers?

At 12/10/2008 11:51 AM,  Anonymous said...

Marko,

Yes, some employees, not as many as you think, can be let go for no reason whatsoever. However, you better not fire even an "at will" employee for theft that you can't prove well enough, or care enough, to press charges. At will employees can win those cases in court.

Smart managers do not make dumb mistakes that cost their companies money. Employees can be fired for cause or without cause depending on the circumstances, but they cannot be fired for the wrong reasons.

At 12/11/2008 6:01 PM,  Anonymous said...

I would like to see someone factor into the non-union costs the amount of money the governments are losing due to the tax breaks and incentives they give to the non-union manufacturers. I know it is not popular to include social costs as a factor these days, but it is still relevant.

At 12/17/2008 6:33 PM,  BadTux said...

If you fire me as a "thief" and have no proof, you better not tell anybody that this is why you fired me, or I'm going to sue your butt for slander. I don't take kindly to being called a thief.

That out of the way, the question is: Do unions pump up the number of workers in GM's plants compared to Toyota's non-union plants? The answer, from the Harbour Report, is *NO*. GM, for example, put 22.19 man-hours of assembly labor into each car last year (this is dividing total cars produced in their factories by total man-hours paid to workers in their factories). Toyota, on the other hand, put 22.36 man-hours of assembly labor into each car. In other words, GM's plants were run more efficiently than Toyota's plants on a man-hours-per-car basis. See the graph on page 8 of the above-named report.

In short, saying that unions "bloat up the workforce" does not appear to be true for GM at least. The UAW is well aware that they must be competitive with the US-made "imports" and no longer does that kind of nonsense.