Tuesday, November 29, 2005

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GM: it's about more than legacy costs

Sean Gregory asks a useful question in Time: if the problems at GM are symptomatic of American manufacturing writ large, then why are foreign auto firms doing so well in the United States?

According to the Center for Automotive Research (CAR), the number of manufacturing jobs created by foreign-based automakers in the U.S. has risen 72% since 1993, to about 60,000. (The Big Three currently account for around 240,000 manufacturing jobs in the U.S., down from 340,000 in 1993.) The Asian companies have grown the fastest. Toyota, which plans to overtake GM soon as the world's largest automaker, has 11 U.S. plants and expects to open a truck factory in San Antonio, Texas, in 2006. European brands, including BMW and Mercedes-Benz, are also growing. CAR estimates that foreign automakers operating in the U.S. add 1.8 million jobs to the American economy, including white-collar, dealership and supplier positions--from partsmakers to the bartenders at post-whistle watering holes.

Why do overseas firms seem to thrive, building profitable cars with U.S. workers, while Detroit languishes? For example, in the first quarter of 2005, Nissan made $1,603 on every vehicle sold in North America, while GM lost $2,311, according to Harbour Consulting. For starters, the transplants, generally with reputations for higher quality than American brands, don't offer the deep discounts that U.S. makers employ. And foreign manufacturers don't carry the legacy costs that drag U.S. companies down. Workers at foreign companies' nonunion shops make roughly the same in wages and benefits as unionized employees in Detroit. But Asian and European firms, with younger workforces in the U.S., aren't saddled with crippling pension and health-care obligations. GM spends $1,525 per vehicle in the U.S. on health care, compared with $300 per vehicle at Toyota.

Thanks to newer technology, the foreign manufacturers are more efficient too. The Big Three are closing the productivity gap; GM takes 23 hours of labor to produce one vehicle, down from 32 hours in 1998. But that's still longer than Toyota's 19.4 hours per vehicle and Nissan's 18.3. The real question, of course, is what kind of cars Americans want. Honda's timing at East Liberty was near perfect: its fuel-efficient Civic rolled off the line just as consumers were looking for ways to save on gas costs. "We're in a battle for survival right now," says CAR chairman David Cole. "Without decisive action, the domestics will not stay in the game."

Click here for a CAR report on the contribution of foreign automakers to the U.S. economy.

posted by Dan on 11.29.05 at 08:12 PM


GM formula:

1) make homely cars that are not durable

2) provide short warranties and lousy service

3) be arrogant

4) sign union contracts that allow featherbedding, tolerate high absenteeism, constant grievances, etc.

GM needed a new business models in the 80s, and needed to take a big strike to change the basic contract model. Neither happened.

The finance geeks running the company have built a great bank (GMAC) with an auto albatross tied to it.

GM still doesn't "get it," and it may require bankruptcy before the do.

In the mean time the toll of workers, families, suppliers, etc., is going to be gruesome.

posted by: save_the_rustbelt on 11.29.05 at 08:12 PM [permalink]

The foreign carmakers *do* have older workers and retirees. But they're generally back at the home country, and the company doesn't carry the healthcare costs like they do here.

posted by: Jon H on 11.29.05 at 08:12 PM [permalink]

Paul Graham has some interesting comments on why American-corporation-designed cars are so unappealing here. IMHO, the key quote is:

"Instead of relying on their own internal design compass (like Henry Ford did), American car companies try to make what marketing people think consumers want. But it isn't working. American cars continue to lose market share. And the reason is that the customer doesn't want what he thinks he wants.

"Letting focus groups design your cars for you only wins in the short term. In the long term, it pays to bet on good design. The focus group may say they want the meretricious feature du jour, but what they want even more is to imitate sophisticated buyers, and they, though a small minority, really do care about good design. Eventually the pimps and drug dealers notice that the doctors and lawyers have switched from Cadillac to Lexus, and do the same."

posted by: Mike Stiber on 11.29.05 at 08:12 PM [permalink]

And 3 mores points to your GM formula save_the rustbelt:

- Abuse your suppliers so much that they compromise quality and cooperation
- Disconect R&D from marketing and operations so that you waste one of the largest R&D budgets of the world
- Invest billions of dollars in automation in the 80s, aiming for productivities that
could have been achieved with lean manufacturing

posted by: PlanMaestro on 11.29.05 at 08:12 PM [permalink]

One of the interesting by-products of a stagnant industry or company is what happens to the age of your labor force. From the 1970s to the 1990 employment by the big 3 essentially stagnated as for all pratical purposes they did not hire new employees. Consequently, the average age of their work force grew sharply so that by the 1990s you needed your 20 year pin to get on the factory floor in Detroit. But compensation is very much a function of years of service, so average wage costs rose sharply. In contrast, the Japanese firms were opening new plants and hiring new emploess that had little experience.
So even ignoring the impact of unions, other legacy costs, etc., just the fact that production by the big 3 stagnated for 20 years generated a more expensive labor force.

posted by: spencer on 11.29.05 at 08:12 PM [permalink]

In the short run, a company can prosper by betting on inertia. In the long run, it can prosper only by betting on change.

GM and Ford were doing very well a few years ago, when fuel costs were low, the economy was booming, and customers were willing to spend their money on high-margin vehicles like trucks and SUVs. The fact was, though, that most of the people who bought SUVs did not need all the space they had and hardly ever took them off-road; the economy was not always going to be booming, and fuel costs were bound to go up. Faced with the choice of maximizing profit (hence share price) in the short term and preparing for change, GM and Ford barely even blinked. Now they are behind the eight ball as far as their customers are concerned, with cars less appealing than those made by Honda and Toyota and large vehicles less attractive to newly mileage-conscious consumers -- and also much more expensive than very similar used vehicles now flooding the market.

High wage and non-wage compensation and burdensome legacy costs would handicap American car manufacturers even if they had prepared for a future different from the mid-1990s, but if they had done this we wouldn't be talking about bankruptcy for either GM or Ford.

posted by: Zathras on 11.29.05 at 08:12 PM [permalink]

> Disconect R&D from marketing and
> oeprations so that you waste one
> of the largest R&D budgets of the
> world

While I doubt that the mythical 100 mpg carb ever existed, a good friend of mine spent 20 years in the Tech Center doing absolutely mind-boggling fundamental research resulting in numerous breakthroughs in auto technology that never made it into sellable products. Marketing always had a reason it wouldn't work, it seems.


posted by: Cranky Observer on 11.29.05 at 08:12 PM [permalink]

Well, Cranky, would not a GM bankruptcy be a positive good thing, releasing all that research for use by whomever succeeds GM in the US market?

posted by: Don on 11.29.05 at 08:12 PM [permalink]

I've managed to save up roughly $11703 in my bank account, but I'm not sure if I should buy a house or not. Do you think the market is stable or do you think that home prices will decrease by a lot?

posted by: Courtney Gidts on 11.29.05 at 08:12 PM [permalink]

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