Monday, December 01, 2008

Big 3 vs. Foreign Transplants: Fantasy vs. Reality

The men from Detroit will jet into Washington tomorrow -- presumably going commercial this time -- to make another pitch for a taxpayer rescue. Meanwhile, in the other American auto industry you rarely read about, car makers are gaining market share and adjusting amid the sales slump, without seeking a cent from the government.

These are the 12 "foreign," or so-called transplant, producers making cars across America's South and Midwest. Toyota, BMW, Kia and others now make 54% of the cars Americans buy (see chart above). The internationals also employ some 113,000 Americans, compared with 239,000 at U.S.-owned carmakers, and several times that number indirectly.

The international car makers aren't cheering for Detroit's collapse. Their own production would be hit if such large suppliers as the automotive interior maker Lear were to go down with a GM or Chrysler. They fear, as well, a protectionist backlash. But by the same token, a government lifeline for Detroit punishes these other companies and their American employees for making better business decisions.

The root of this other industry's success is no secret. In fact, Detroit has already adopted some of its efficiency and employment strategies, though not yet enough. To put it concisely, the transplants operate under conditions imposed by the free market. Detroit lives on Fantasy Island.

Consider labor costs. Take-home wages at the U.S. car makers average $28.42 an hour, according to the Center for Automotive Research. That's on par with $26 at Toyota, $24 at Honda and $21 at Hyundai. But include benefits, and the picture changes. Hourly labor costs are $44.20 on average for the non-Detroit producers, in line with most manufacturing jobs, but are $73.21 for Detroit (see chart below).

This $29 cost gap reflects the way Big Three management and unions have conspired to make themselves uncompetitive -- increasingly so as their market share has collapsed (see the top chart above). Over the decades the United Auto Workers won pension and health-care benefits far more generous than in almost any other American industry. As a result, for every UAW member working at a U.S. car maker today, three retirees collect benefits; at GM, the ratio is 4.6 to one (see chart below).

The international producers' relatively recent arrival has spared them these legacy burdens. But they also made sure not to get saddled with them in the first place. One way was to locate in investment-friendly states. The South proved especially attractive, offering tax breaks and a low-cost, nonunion labor pool. Mississippi, Alabama, Tennessee and South Carolina -- which accounted for a quarter of U.S. car production last year -- are "right-to-work" states where employees can't be forced to join a union.

The absence of the UAW also gives car producers the flexibility to deploy employees as needed. Work rules vary across company and plant, but foreign rules are generally less restrictive. At Detroit's plants, electricians or mechanics tend to perform certain narrow tasks and often sit idle. That rarely happens outside Michigan. In the nonunionized plants, temporary workers can also be hired, and let go, as market conditions dictate.

~Today' WSJ editorial America's Other Auto Industry


At 12/01/2008 12:37 PM, Anonymous Anonymous said...

Professor Perry,

I think your graph “Total Compensation per Hour” should be changed to “Total Labor Costs.” Anyone who knows anything about supply-chain, cost-accounting knows there are distinct differences between wages, compensation, and labor costs. In addition to legacy costs, total labor costs often include the plant hospital, hourly labor relation’s department, and cafeteria (if it is subsidized) . . . . Compensation usually consists of wages and fringe benefits.

Without seeing the methodology behind the figures, I doubt two locations of GM plants figure labor costs closely enough alike that they can be compared without making some accounting adjustments. I don’t question that GM’s labor costs are higher than Toyota’s with their legacy costs, but I would not consider the figures quoted in the graphs as sacrosanct. Self-reported data such as these often have an agenda behind them that would not hold up under an independent financial audit.

At 12/01/2008 12:54 PM, Blogger Mark J. Perry said...

Walt: I changed the title of the graph as you suggested.

At 12/01/2008 1:51 PM, Anonymous Anonymous said...


At 12/01/2008 3:18 PM, Blogger misterjosh said...

So legacy costs (pensioners) are the cement shoes that will drown the domestic auto makers. I have yet to see any specific constructive suggestions on how to change out of these cement shoes into some work boots. Should the auto makers declare bankruptcy and then tell the pensioners good luck? Seems kinda harsh, but the pensioners are going to get screwed one way or the other.

At 12/01/2008 5:58 PM, Blogger stilettoheels said...

Should the auto makers declare bankruptcy and then tell the pensioners good luck?

Yes they should. The PBGC (read taxpayers at large) will insure the pensions to the current maximums per month.

A $4200 monthly pension (maximum amount) based on a 2.7% 10 year T-Bond annuitized requires ~$1 million in capital.

The PBGC guarantees about 45 million workers and retirees. The federal government is on the hook big time. The state governments are in even worse shape.

At 12/01/2008 10:10 PM, Blogger save_the_rustbelt said...

Toyota and Honda will not have to worry about legacy costs, I don't think there are any. And the workers are now watching their 401 (k) balances sink into the sunset.

And when the workers get into their late 50s and early 60s and are no longer healthy enough to work the line, they can be dumped without pension or health care (until age 65).

Walt G. is mostly right, cost accounting is a flexible and creative sector of accounting. That the same mislabeled information has be circulated and recirculated so often suggests an agenda.

The Big 3 and the UAW have created many of their own problems. This is, however, not a justification for a misinformation campaign.

At 12/01/2008 11:25 PM, Blogger David Foster said...

If the pensions had been properly funded during the working life of the employees, then the ratio of retired employees to current employees would be irrelevant.

If sufficient funds were *not* being transferred to the pension trusts during the working life of the employees, then the reported profits of the companies were incorrect, because the accrual of the liabilities should have been deducted from them.


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