Wednesday, November 19, 2008

The Other Side of the Bailout Story: HONDA

On Monday, Honda celebrated the opening of its $550-million, nonunion plant in Greensburg, Indiana, capable of producing 200,000 vehicles annually, highlighting the contrast between the healthy Asian automaker and its ailing domestic rivals.

And even though the starting hourly wage at the plant is $18.41, or roughly $10 less than an average Detroit Three worker, demand for these jobs was off the charts. When Honda announced it was hiring 900 employees, 33,000 people applied. Honda eventually plans to employ about 2,000 at the plant, which started production in October.

Honda's Greensburg plant will give the company a competitive advantage compared with many of the Detroit Three's aging plants and higher labor rates, said Gary Chaison, a professor of industrial relations at Clark University in Massachusetts.

"The Honda plant is the other side of the bailout story," Chaison said. "These are companies which are still expanding and which have lower cost structures. They are also facing the world financial crisis, but they are in much better shape."


At 11/19/2008 10:03 AM, Blogger NWI Connect said...

Good to hear this side of the story. I love my Honda ;)

At 11/19/2008 10:14 AM, Blogger Adam Jochum said...

Where does Honda get the parts it needs to assemble it's cars here in the U.S.? Answer: from American parts suppliers. What happens to Honda's sources if American manufacturers no longer purchase from those suppliers? Answer: they become prohibitively expensive or simply go away. If most parts are produced outside the U.S., are they still considered American-made? Answer: No, and therefore are subject to tariff, making them even more expensive. So, American manufacturers make it possible for foreign manufacturers to produce cars here.

At 11/19/2008 10:27 AM, Anonymous Anonymous said...

adam jochum,

They are not foreign anymore. They will face the new challenge and adapt to their supply chain.

Are we going to bailout Social Security, or pensions and benefits promised to public workers that are mostly unfunded? The “flawed business model” so popularly attributed to the Formerly Big Three is emblematic of how U.S. private and public entities historically conducted business using a “pay as you go” approach. It was the “American” way; not an automobile company invention.

Although many companies and governmental units have lately switched from defined-benefit systems to defined-contribution systems where the financial responsibilities of pensions and health care are transferred to the employees, what does the future hold for those who are already retired? Do we just throw those retirees to the wolves? This is a difficult and widespread problem that will touch everyone’s lives.

Obviously, other fundamental differences separate Honda and GM in how they run their businesses, but legacy costs between relatively new companies and one-hundred-year-old companies are not comparable. The problem has been recognized and solved through the introduction of the VEBA in the UAW/GM contract of 2007. Going forward, new workers will have very restrictive pension and health care benefits during their working and retired years that can compete with the new companies. To say that the UAW and GM have not dealt with the problem is completely untrue.

I support my union; however, I don’t always agree or understand our leaders’ decisions. In all fairness to them (there’s that word!), they have much more information than I do. In my opinion, though, to ask the public for a loan, with our public image, without further change, is wrong.

We can’t ignore the fact that negotiations mean that you have to give up something if you want to get something. We also can’t ignore the fact that people respond to incentives. That means that damn jobs bank should be gone—yesterday—as a show of good faith. It’s an albatross we can afford. In addition, I think we have to be much more open to change to compete not just in the U.S., but globally. This will take a huge effort on both the union’s and the management’s side—win or lose—we are one. We can’t always live in the past, we can’t always be comfortable, and we can’t always do what we want.

At 11/19/2008 10:33 AM, Blogger daltonsbriefs said...

Adam, I'm not following your supply-demand theory. If GM, Ford and Chrysler are buying less and less parts ... isn't that making American manufacturers product more efficiently and reduce prices?

At 11/19/2008 11:11 AM, Blogger Marko said...

Suppliers will not likely all "go away". More likely, Honda will purchase them, or they will consolidate or they will work something out. Why do we care? It is PRIVATE industry, that is their problem, isn't it?

Labor monopolies are damaging this country. Remember, the main point of a union (at least in private companies) is to limit the supply of labor, thus raising the cost. Why the heck does the our government support that?

At 11/19/2008 11:21 AM, Blogger the buggy professor said...

1) Walt G: As usual, you've given us an informative, well-written analysis from the perspective of a union representative, who simultaneously works, it seems, as an intermediary with management. Thank you.


2) Those who, in another post left today by Mark, are criticizing the UAW and unions generally for maintaining higher-than-sustainable wages seem to be on target --- with one exception: it takes management to connive with union leadership and agree to these unsustainable wages, along with pension and health-benefits.

Essentially, we had both sides at GM, Ford, and Chrysler logrolling one another at the expense of their long-term viability.


3) Note, as a twist, that the European auto-industry in France, Germany, and Italy --- not sure about Sweden's (partly foreign-owned as is the case of certain auto-manufacturing firms in these other countries) --- are in similar difficulties, thanks to the global economic crisis that has been emerging.

Opel, a GM-owned firm, is particularly hard-hit, and the German government is openly and publicly divided on its urging financial help of some sort to stay in business . . . with 100,000 workers jobs at stake.

• Here's a good link to the wider debate, on the regional level (eurozone-15 countries, part of the wider EU), that represents the views of the current head of the eurozone, the German foreign minister, and others:

click here

And here’s a link to a report today that shows how the German finance minister --- opposed to a bail-out deal for Opel and other German auto firms --- is at odds with the economics minister and presumably the foreign minister. click here


4) So here’s a puzzle for others: if the US and European auto industries are in big financial trouble, what explains the better solvency of Japanese and South Korean auto firms?


I myself know little about Hyundai or Kia (its offshoot), except that in the past all export-oriented Korean firms were heavily subsidized with financial aid and tariff and non-tariff protection. In the Japanese case, the unions --- as is common in big Japanese firms --- are the creations by the firms’ management. And, compared to average Japanese wages, those working in the export-oriented auto, electronics, and other firms had much higher wages and benefits ---- and yet they seem much more adaptive and innovative, not to mention financially solvent . . . or so it appears. (Incidentally, Korean productivity levels in autos are inferior still to Japan’s despite lower wages.)


5) A key question promots itself here:

If unions are responsible for the US auto industry’s troubles because of unsustainably higher wages and benefits, how come the firm-created unions in Japan --- which also received much higher wages and benefits than the average Japanese worker --- haven’t had the same harmful impact on the viability of Japanese auto-firms? Or is it that management has been far more astute and, simultaneously --- possibly --- worked better with union leadership in Japan to the mutual benefit of both . . . which means keeping wages and benefits more in line with the long-term profits of these firms?


5) It would help if, in answering, some knowledgeable person who knows something about the auto industry in general --- or, more helpfully too, the industries in Japan and South Korea --- could give us some concrete, evidence-based analysis here.


Michael Gordon, AKA, the buggy professor

At 11/19/2008 12:32 PM, Anonymous Anonymous said...

the buggy professor,

Unions or no unions--it doesn't matter. You have to give the customer what they want, when they want it, and at a price they want to pay. And they have to be able to get a loan to pay for it. Few car customers pay cash. The cost for each vehicle comes down as more are produced, including labor cost, and everyone is happy. Wage premiums can be overcome with efficiency OR effectiveness.

You can't forget the customers’ desires. Sadly, as of this moment, our customer is Congress. Asking for money is a monumental occasion that calls for a monumental announcement of change. That’s what the customer wants, and they have made their expectations perfectly clear. A union/management announcement in front of a national audience and Congress of a new era of cooperation would have been a public relations’ bonanza. Once again, it looks like we failed to seize an opportunity to thrive.

At 11/19/2008 4:02 PM, Blogger bob wright said...

According to today's IBD, the combined market capitalization of the Big Three is about $7B.

For that paltry sum, the UAW-ran VEBA could purchase the companies in toto and run them as they see fit.

The old: put your money where your mouth is.

Heck, for half that amount they could buy a controlling interst and get seats on the board.

[Obviously, Ford would be different with the Class B shares].

At 11/19/2008 4:32 PM, Blogger sethstorm said...

Honda can start talking when it can build in more performance per dollar (fuel efficiency ignored). I've yet to see them use a 6cyl in the Civic, an 8cyl in any *car*, or offer anything but a compact for under $20000 filled with shoddy electronics to distract from the engine.

Less "boy racers"/"tuners" and more affordable muscle would put transplants on my list. Otherwise, Detroit has my undivided attention. Detroit builds the muscle in, transplant imports require exotic and expensive means to catch up in that regard.

They are not foreign anymore. They will face the new challenge and adapt to their supply chain.

Perhaps it's time to close the loophole that the transplants used in the last 23+ years. Consider them as full-fledged imports.

At 11/19/2008 5:09 PM, Blogger the buggy professor said...

"According to today's IBD, the combined market capitalization of the Big Three is about $7B. For that paltry sum, the UAW-ran VEBA could purchase the companies in toto and run them as they see fit." --- Bob Wright

Well, that's a stimulating tip, Bob --- and one that UAW should consider.


2) The trouble is, Ford has something like $160 billion of debt, and a big negative worth of book value. And GM owes $60 billion and has a negative net worth of $56 billion. Heaven knows what Chyrsler's condition is.

So whoever buys the Big-3 will still face two immediate financial problems: $25 billion to tide them over until . . . well, the Big-3 execs say until January 2009, though it could be the next Y-2 Millennium Scare in 991 years. And then what do you do to turn enough profits to roll over the debt that these firms are up to their necks in? Which still leaves the question open --- what do you do to ensure that the entrenched management, which has been making bad decisions of a cumulative self-destructive sort, will be replaced by more competent and far-sighted men and women?


In the end, after all, it’s management that makes the decisions about wages, benefits, production, marketing, and customer-service, not to mention how to operate on a global scale. You can criticize unions all you want --- the UAW deserves it --- but it’s the top executives and their oversight boards (so-called) who call the shots, no? And that includes not just these inner-firm decisions, but in dealing with efforts by Congress and others even in the last decades to cooperate in raising average gas-mileage for their vehicles.

Presumably, that sort of outside political pressure was "socialism", at any rate as long as the CEO's and their high-living executives were getting huge salaries and benefits.

Now, apparently, asking for $25 billion for short-term purposes --- on top of $25 billion earlier this fall --- isn't socialism, it's intended to save the auto-industry for capitalism.


3) Which brings us back to the core question in this thread: why the better financial shape of the Japanese and Korean auto-firms?

If I get some more free time today --- a big "if' right now --- I'll try to run some google searches to see what can be dug up to explain why Honda, Toyota, Nissan, and Hyundai are in much better shape than the Big-3 car companies and their EU counterparts.


4) Right now, in the Japanese case, I suspect it's a combination of:

• Firm-created unions, as opposed to nation-wide unions that do exist in Japan (mostly in the public service sectors) and are traditionally left-wing. And hence a closer identification of the work force with the long-term financial health of their firms.

• Management that, traditionally, is more open to suggestions from line-workers and supervisors about improving quality (and hence, over time, productivity and profits).

• Less arrogantly aggrandized benefits by top management, such as those that flourish in the Big-3 companies: separate, luxury-laden dining rooms, separate parking spots, separated and segregated offices way off the assembly floors, private airplanes, and the like . . . all bound, it seems, to make average workers cynical.

• Far better sensitivity to different market-driven customer concerns and needs . . . with a much longer-term perspective.

• The long-term perspective facilitated by the financial sources of the Japanese firms: bank loans mainly, with the bankers owning much of the equity-shares and sitting on the boards of the Japanese firms (and vice versa, by the way).

--- In non-standardized, highly innovative industries like the computer and ICT, such a long-term perspective seems to collide with the rapid decision-making that only aggressive, risk-taking entrepreneurial firms can make . . . themselves financed in the 1980s and 1990s by start-up venture capital here. (It didn't exist in either Germany or Japan until the mid-1990s, this venture capital; and it was too monopolized in Japan by the big established firms like Panasonic/Mashiuta and Sony (like IBM, too wedded to old ways to compete with Microsoft and Intel and Apple), and in Germany too alien to the play-it-cautiously culture. (In both Japan and Germany, only about 1 in 50 adults created a new firm of any size every year; in Britain and Italy, 1 in 30; and in the US 1 in 10. Figures for the late 1990s.)

--- All this on the one hand. On the other hand, in big standardized industries, where incremental improvements in quality and productivity are required for competitive vigor, such long-term capital financing seems to be a big advantage compared to the need of big US corporations to show quarterly profits for the equity-investor.


Michael Gordon, AKA, the buggy professor

At 11/19/2008 5:12 PM, Blogger the buggy professor said...

Just found a chart that shows profits per vehicle . . . very positive for Honda, Nissan, and Toyota, and negative for the Big-3.

Click here


At 11/19/2008 7:18 PM, Blogger bobble said...

"When Honda announced it was hiring 900 employees, 33,000 people applied. "

it's great news that there are new good jobs being created. lets hope for more jobs like this.

but, the fact the 33,000 people applied for 2000 jobs shows just how bad the employment situation is in the U.S.

re the bailout. let them go chapter 11. the bond holders and shareholders need to be wiped out. they made a bad bet and they lost.

the feds can provide the needed debtor in possession financing, attaching conditions such as management and board change, no golden parachutes or bonuses.

only problem left is the pension costs. i have no idea where to go with that.

At 11/19/2008 7:24 PM, Blogger the buggy professor said...

Well, after about 20 minutes of browsing with the use of google, I've come up with three useful articles --- and that exhausts my time and knowledge.

• The flexibility and impressive willingness by Japanese transplants to adapt their production to the US market. This includes decisions to promote Americans to top management-posts.

• How Toyota treats its workers at closed plants compared to their American firm-counterparts at theirs: they don’t lay them off, they keep paying them while retraining those workers for improved efficiency once the plants re-open.

• Japanese transplants worry about suppliers if US big-3 collapse: a year’s paralysis to follow for them too?

Hard to know how accurate this last report is about the supplier-base suffering for the transplants if the Big-3 collapse. Though it may be true, their PR-flackguys are no doubt busy planting stories all over the media.


Michael Gordon, AKA, the buggy professor

At 9/06/2011 12:27 AM, Blogger Wishbone20t said...

Wow how time tells such a different tale! As we are now in 2011- and US automakers are taking back huge chunks of market share (source Ward's automotive data tracking). Word has it that both Honda and Toyota had a "bailout" of there own provided by the Japanese government. Chevy Cruse is now the best selling car 2 months in a row- Ford is set to release a 67 mile per gallon Diesel Focus early next year and Chrysler is up nearly 30%. This all while Toyota and Honda are down nearly 30%. Civic lost it's coveted recommended status with consumer reports and looks like they will now suffer another 1M car recall. Getting comfy at the top looks like it has consequences- as if we have not seen that before the other way around. I don't only predict a huge reemergence of the big 3, data supports that we are in the beggings of one now!


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