Sunday, December 07, 2008

Toyota Started in 1936, Why No Legacy Costs?

WASHINGTON POST (2006) -- GM refuses to provide legacy costs for its 2005 vehicles. But by my estimate, they were $1,850 for health care, $700 for pensions. Total: $2,550. Numbers Toyota gave me indicate its U.S. health care costs stayed at about $200 a vehicle. And let's use the same, probably-too-high $50 for 401(k) costs.

GM's crippling financial burden and huge competitive disadvantage comes from its significant legacy costs: 4.61 retired members and surviving spouses (receiving pensions and health benefits) per active worker.


It's true that Toyota hasn't been burdened with the same legacy costs as GM in the U.S. because it hasn't operated here as long. But it's also true that Toyota Motor Corporation has been producing automobiles since 1936, so it's been around for more than 70 years; certainly enough time to be burdened with some legacy costs, at least in Japan. But if it does have any legacy costs in Japan, it apparently isn't being crippled and remains quite profitable.

What's the difference? Socialized medicine in Japan? No UAW in Japan? Comments welcome.

20 Comments:

At 12/07/2008 3:50 PM, Anonymous Anonymous said...

Japan has followed mercantilistic policies for decades. The state actually promotes and subsidizes big exporting companies in order to take over the world with their products. Foreign trade is perceived as the main engine of growth. Toyota enjoys low tax rates generous state hand outs, minimum health costs top notch college graduates and great support in Research and Development. Last but not least Japan's huge savings, falling wages and low interest rates enables huge capital investement and high productivity.

 
At 12/07/2008 3:58 PM, Blogger OBloodyHell said...

> What's the difference? Socialized medicine in Japan? No UAW in Japan? Comments welcome.

Ahhh, Unions?

Just a complete friggin' stab in the dark...

 
At 12/07/2008 4:09 PM, Blogger AB said...

A company in a country where health care and retirement pensions are primarily managed by social security will inevitably be at a very competitive advantage vs any US company. Initially the social taxes seem higher, but on the long term they are in fact lower than what GM ends up paying. The US model only works when companies do not last long enough to build a large legacy of former employees. If you want to create a company that will last 100 years, create it in a country with social security.

 
At 12/07/2008 4:24 PM, Blogger wcw said...

Anon, you addlepated idiot. Here's TM's last annual report. Get back to me when you find the low tax rates generous state hand outs, minimum health costs top notch college graduates and great support in Research and Development. You won't, trust me. Me, I am shocked I addressed you while avoiding phrases like "lackwit motherfucker."

OBH, TM's workforce is unionized in Japan and in most countries outside the US. Try to have a clue, or I'll call you out like I did Anon.

AB, the US health/retirement model is deeply broken, but if TM were a US company it would be doing just fine. That's because the people running TM have a clue. The people running GM are this century's Victorian aristicracy: inbred nitwits running their inheritance into the ground.

Full disclosure: I have in the past made good money on a short-GM/long-TM trade. No position in either now.

 
At 12/07/2008 4:25 PM, Blogger Walt G. said...

The Japanese have a different culture than Americans (in addition to national health care). They revere their elders who often move in with them in their old age. We tend to kick our elders to the curb when they get older. Does your granny live with you? Our elders have to take care of themselves. That’s where the legacy costs come from.

I was around when the U.S. automakers decided they wanted us to emulate the Japanese business practices in the early 1980s. When I asked when they were going to give us employee housing like the Japanese have, they laughed at me and said, "We don't plan on being that Japanese." When I asked when we would get lifetime guaranteed employment like the Japanese, they gave us the jobs bank. And you can see where that got us. It seems like someone is always laughing at me—I should have been a comedian.

 
At 12/07/2008 4:39 PM, Blogger Walt G. said...

We are really getting away from an economics’ discussion here. The difference between Japanese and American companies lies more in the political and social realm. American companies provided fringe benefits instead of wages because they were cheap to provide and employees loved them because they were not taxed. That’s simply how business operated after WW II. Just like the Social Security and Medicare system, that Ponzi scheme can only last so long. I think we are at that point now. If American auto companies and unions are stupid, they certainly have a lot of company.

 
At 12/07/2008 5:29 PM, Blogger MattYoung said...

Asian IQ is about 20 points higher than the American IQ.

 
At 12/07/2008 7:22 PM, Blogger the buggy professor said...

1) Japanese companies, not just Toyota, have been spared in their home-base country two huge costs that the Big-3 auto-makers (and other US corporations) pay for on their own:

* The Japanese National Health service picks up all health costs for retirees after two-years from the date they leave Toyota. That's a common practice in Japan, at least for the giant companies.

--- Until very recently, moreover, hard as it is to believe, virtually all Japanese employees must retire at 55 in that country. The exception was and remains for top-level executives. So there is scarcely any retiree health-costs for Toytoa . . . it's so low that it hardly shows up on Toyota's balance sheets in Japan;.

,,,,,,,,

* Toyota --- in common with the giant export-oriented companies in Japan --- pays retiree pensions, but generally they are not enough for the retirees to live on. . . and especially at age 56 or 57. And as a result, most Japanese retirees seek to extend their income by taking whatever low-pay or part-time work they can find.

--- There have been efforts to reform the Japanese pension-system, which consists both of employer-sponsored pensions and a complex social-security system of various tiers . . . all the more complex because it treats farmers, self-employed, and public servant retirees different from private-sector full-time employees, the more generous system.

......

2) The problems Japan faces in providing health and income-support for its population are, please note, the most pressing in the industrial world.

Its population is the fastest aging, and the country was and remains traditionally hostile to admitting foreign workers. With a shrinking birth rate, Japan thus is already confronting a serious decline in the active-worker/retiree ratio.

These problems, moreover, have been aggravated by the stagnation of the Japanese economy between 1991 and 2004 . . . with decent but much lower GDP growth since then until the country has, most likely, fallen into recession this year.


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3) Note as an aside here: similar problems will be facing all the European countries, East and West, not long afterwards --- though there have been increases (not enough) in immigration there. And social strife and right-wing populist-nationalist reactions to immigrants from the Middle East, South Central Asia, and Africa will likely limit or prevent any increase in immigration over the next few decades --- especially as the birth-rates of the immigrant populations are much higher than those of native-Europeans.

Of all the industrial countries right now, only the US population is at replacement levels. That, together with our traditional legal immigration policies make the problems of supporting an ever larger retiree-population less pressing on a time-frame and less likely to be acute for decades into the future . . . at any rate, on a comparative scale.

,,,,,,,,,,,,,,

4) Back to Toyota.

So far, recall, there have been two advantages then for a Japanese company like Toyota exist because of their retirement and health-systems in Japan itself:

(i) Until recently, early and compulsory retirement for almost all employees by age 55 (which reduces the high costs of senior job-holders)

(ii) And scarcely any of the health-costs for retirees that big US corporations like GM have traditionally undertaken. Note here though: As the population has aged, the Japanese government has tried to increase the mandatory age of retirement to 60 yearsand --- by 2013 or so – to 65 as a way of reducing the costs of social security and health-care


(iii) Add to this a third advantage nop: Japanese union are company unions, and essentially the union employees and heads identify with their fortunes with those of the company. (National unions exist only in the public sector, often socialist in political orientation.)

A few clarifying remarks rear up all at once here. Specifically:

----- Whether these company unions make for a happy Japanese workforce is another matter In particular, contrary to what most people think, Japanese workers in general have always been found in international survey carried out by the ILO to be among the most dissatisfied, and on several grounds --- including the huge pressures at the work-place, then too 12-13 hours of work (you don’t go home at 5:00 PM, but go out with your buddies to drink and learn to commingle, and don’t get home until 10:00 or 11:00 PM and get to work by 7:30 AM), and the lack of mobility until recently in moving from company to company.

---- Not least, lifetime employment covered and still does only about 30% of the workforce in the private sector. Most workers are poorly paid; most work for small supplier companies that are repeatedly pushed by their exclusive buying-corporation to keep cutting costs; and there is a large, floating pool --- mainly women --- who work part-time, usually for only a few days a month, and are discontented with their hours, their wages, and the gender-discrimination they suffer.


Traditionally and still today, Japan --- like all Asian countries --- discriminates systematically against women in the workplace and in public life.


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5) Despite these advantages, Toyota --- as increasingly is the case for all 6 or 7 of the giant auto- and electronics export-oriented corporations in Japan --- has depended more and more for its profits on its foreign operations and sales.

Something like only one-third of its profits come from its sales in the Japanese home market. Most come from abroad, and the US is the key here: sales by Toyota have contributed in the last few years to about one-third of the overall company profits too. (Toyota’s profits, of course, have been crashing through the floor this year too --- not least in the US market, but also in Europe and Asia.)

,,,,,,,,,,,,,,,,,,,,,,,,

6) GM and Ford, it's worth observing finally, have also been profitable mainly thanks to their foreign-market operations and sales. That was the case right through 2007.


,,,,,,,,,,,,,,,,,

Michael Gordon, AKA, the buggy professor

 
At 12/07/2008 8:40 PM, Blogger the buggy professor said...

It just occurred to me, fairly long after the previous comment I left here:

By 2015, about one out of three Japanese will be over 60. As a result, the government began pressing employers to raise the retirement age to 65, if need be by keeping older people on the pay roll part-time.

The existing social security system --- which kicked in at age 60 (with most Japanese having to retire at 55 and work until at least them part-time somewhere, usually at low pay) --- just can't support such growing numbers of retirees without doing something drastic.

--- Michael Gordon, AKA, the buggy professor

 
At 12/07/2008 9:13 PM, Anonymous Le Trbuchet said...

The difference is/was Dr. W Edward Deming, who was put in charge of rebuilding Japans economy by McArthur after his work was rejected by Ford.

 
At 12/07/2008 10:00 PM, Blogger save_the_rustbelt said...

In the US Toyota and Honda workers are seeing their 401(k) accounts evaporate, and having no defined benefit pension, they will likely have to work longer.

Problem is, auto workers tend to have multiple health problems by the late 50s, whether they can work until 65 or longer is in doubt.

So what happens when they get kicked to the curb?

Time will tell.

 
At 12/08/2008 5:48 AM, Blogger 1 said...

west coast whiner says: "The people running GM are this century's Victorian aristicracy: inbred nitwits running their inheritance into the ground"...

Hmmm, and you know their breeding habits how? Same place you learned to spell?

Just curious...

Thank you walt g for nailing a big portion of the problem: "They revere their elders who often move in with them in their old age. We tend to kick our elders to the curb when they get older. Does your granny live with you? Our elders have to take care of themselves. That’s where the legacy costs come from"...

This centuries old habit of having one's aging parents to look after is of course fraying at the edges and has been for a couple of decades but its still an economic force all its own...

walt g smacks another one: "When I asked when we would get lifetime guaranteed employment like the Japanese, they gave us the jobs bank"...

Yes indeed...

Hewitt Associates produced this history lesson (13 page pdf): Microhistory of Employee Benefits and Compensation 1794-2005

 
At 12/08/2008 11:07 AM, Anonymous Anonymous said...

The problem appears to be the peculiar US habit of having companies provide health care and pension benefits for workers and not funding these at the time the liabilities are incurred. GM is still paying for workers who retired years ago, those costs should have been accounted for way back when but were not making GM artificially look much more profitable then it really was if the cost of all benefits had been fully funded. Now GM is losing money not because of it's current workforce or situation but because all those unfunded liabilities have to be paid for.

In Europe, certainly in the Netherlands, pension and health benefits have to be paid into a trust fund at the time the liability is incurred so no deferral of massive costs like in the US to a time when the company can ill afford it.

 
At 12/08/2008 12:01 PM, Blogger the buggy professor said...

"Asian IQ is about 20 points higher than the American IQ." --- Matt Young

This claim is very wrong --- something of an assertive catastrophe.

.............

1) Asian IQ?

Do you mean Northeast Pacific (Japan, Taiwan, South Korea, and China --- the latter mainly north and coastal?) Or Southeast Asia like the Philippines, Indonesia, Vietnam, Thailand, or Burma? Or South-Central Asia like India and Pakistan? Or Central Asia like Afghanistan and the surrounding --stan countries?

………………………….

2) Presumably, given your markedly wrong claim about IQ, you mean the Northeast Asians (plus maybe tiny Singapore, which is overwhelmingly Chinese in ethnicity).

In that case, virtually all IQ studies across countries find that Northeast Asian average is --- compared to the US average (IQ tests are normed to make the average 100) --- about 4-5 points higher.

These average outcomes do vary slightly across Northeast Asian countries somewhat, these average outcomes, And China’s results are more difficult to verify, so Chinese populations in Taiwan, Hong-Kong, Maco, and Singapore often proxy these. (To clarify briefly: the PISA exams in several dozen countries administered to 15 year-olds --- which test scientific, math, and reading skills (done about every five years) --- do not cover CHina or India . . . roughly 40% of the world's population. The results of exams more or less parallel IQ results, though they do cover substantive knowledge learned and honed in educational establishments.)



…………………

3) Academic specialists in IQ are also interested in the distribution of outcomes around the average IQ (mean --- remember 100 in the US). That’s also true for Europeans in general, though some studies show a slightly higher IQ average for Finns,

What has recently turned out to be unexpected is that the distribution across countries --- industrial ones anyway --- is more or less the same around their average IQ as measured by standard-deviations . . . at any rate, across all countries where the IQ test results are considered more or less reliable. That has been a surprising result.


…………………………

4) The one group continually found world-wide to have the highest IQ --- somewhere between 107 and 115 (the latter a full standard deviation from the US average 100) --- are Jews of European heritage, known as Ashkenazi Jews. As a result of the strikingly high Ashkenazi Jewish IQ, Jews --- who are about ¼ of 1.0% of the world’s population have about 30% of all Nobel prizes.

Note though: Jews of Spanish and Mediterranean ethnic heritage are called Sephardic, and Jews who lived hundreds years or more in Arab countries or Iran are called Oriental Jews. Both groups in Israel turn out to have an IQ close .


...........

5) Those interested in the PISA results --- exams that deliberately test students for conceptual understanding --- might note that the Finns outscore the Asians, and the Dutch and Canadians and Swiss do very well too.

The US results have shown some minor improvements over the three exams given (starting in 1996), but are generally a little below average for all three parts of the exams. There are, however, noticeable differences across ethnic/racial groups within the US performance. Americans of European descent score above average on the three parts.

Click here for an analysis and very good links

…………………..

Michael Gordon, AKA, the buggy professor

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

Japan achieves lower healthcare costs by imposing fee and price controls. Japan also rations care much more aggressively than US insurers.

So, let's see, we can achieve competitiveness by freezing the fees of doctors and nurses and stifling the innovation of our medical equipment and pharmaceutical industries; industries in which we lead the world. Or, we can tell the unions that they must consider the competitive position of their employers when negotiating compensation.

Tough call. I'm going with telling the unions to get real.

 
At 12/08/2008 4:51 PM, Anonymous Iggy said...

Professor shows his ignornace. Toyota has a union.

 
At 12/08/2008 11:35 PM, Blogger 1 said...

Well iggy if Professor Mark is showing his ignorance with this posting, how come you are showing your own ignorance with this comment: "Professor shows his ignornace. Toyota has a union"?

Which Toyota has a union?

Toyota US?

Toyota Japan?

Toyota somewhere else?

Toyota US could have labor cost problems in the near future...

 
At 12/09/2008 12:33 AM, Blogger OBloodyHell said...

> OBH, TM's workforce is unionized in Japan and in most countries outside the US. Try to have a clue, or I'll call you out like I did Anon.

OK, I'll bite: they've got unions. Are they as dominant as the UAW is in negotiations with the Big 3?

What have salaries in those locations done when there is a downturn (which we both know has been the case in Japan for almost the entire time since 1990)?

Notee that I capitalized "Unions". I wasn't talking about any old union structure, but Big Unions, which are about as effective at their intended job as Big Business and Big Government, and just as smart to avoid. Bureacracies, on the whole, don't exist to perform their initial function. They exist to promote and collect power for bureaucrats, and thus almost never shrink excepting in severe crisis or a case of long, slow bleeding like the Rust Belt.

 
At 12/09/2008 10:41 PM, Blogger @sethstorm said...


Note that I capitalized "Unions". I wasn't talking about any old union structure, but Big Unions, which are about as effective at their intended job as Big Business and Big Government, and just as smart to avoid. Bureacracies, on the whole, don't exist to perform their initial function. They exist to promote and collect power for bureaucrats, and thus almost never shrink excepting in severe crisis or a case of long, slow bleeding like the Rust Belt.


...or accelerated by union-hostile government interference such as in the 1980's.

 
At 12/11/2008 3:05 AM, Anonymous mcdruid said...

Wow someone who knows what they are talking about. Thank you buggy professor, you show Professor Perry how it is supposed to be done.

To recap, Japan has National Health Care, which takes the health costs off the books (and, incidentally, reduces the total societal spending on health care).

Toyota Japan is also unionized. Pretty much the entire thing, if I remember aright, though their suppliers are not.

Thirdly, pensions are done differently in Japan and generally are structured differently so they do not hit the company's books in the same way.

Fourth, executives get paid less. A lot less.

 

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