General Motors: We Need Level Playing Field
GM chairman and CEO Rick Wagoner whines about having to compete with Japan in an OpinionJournal op-ed.
Since mid-October, General Motors has announced plans to cease production at 12 North American manufacturing facilities and eliminate 30,000 jobs by 2008; trim $1 billion in net material costs in 2006; and, in cooperation with the United Automobile Workers, reduce GM’s retiree health-care liabilities by $15 billion, or about 25%, for an annualized expense reduction of $3 billion.
The reason for these dramatic actions is no secret: GM has lost a lot of money in 2005, due to rapidly increasing health-care and raw-material costs, lower sales volumes and a weaker sales mix–essentially, we’ve sold fewer high-profit SUVs and more lower-profit cars. What is less clear is why things turned sour so fast for GM, as well as for other American auto makers and suppliers. To put it another way, why are so many foreign auto makers and suppliers doing well in the United States, while so many U.S.-based auto companies are not?
Why, unfair competition, of course:
So what are the fundamental challenges facing American manufacturing? One is the spiraling cost of health care in the United States. Last year, GM spent $5.2 billion on health care for its U.S. employees, retirees and dependents–a staggering $1,525 for every car and truck we produced. And the figure is going up again this year. Foreign auto makers have just a fraction of these costs, because they have few, if any, U.S. retirees, and in their home countries their governments fund a much greater portion of employee and retiree health-care costs.
Some argue that we have no one but ourselves to blame for our disproportionately high health-care “legacy costs.” That kind of observation reminds me of the saying that no good deed goes unpunished. That argument, while appealing to some, ignores the fact that American auto makers and other traditional manufacturing companies created a social contract with government and labor that raised America’s standard of living and provided much of the economic growth of the 20th century. American manufacturers were once held up as good corporate citizens for providing these benefits. Today, we are maligned for our poor judgment in “giving away” such benefits 40 years ago.
Another factor beyond our control is lawsuit abuse. Litigation now costs the U.S. economy more than $245 billion a year, or more than $845 per person. That’s more than 2% of our GDP. No other country has costs anywhere near this level. And the perverse thing is that, in many cases, the majority of courtroom settlements go to the lawyers and other litigation costs, not to the injured parties.
Another major concern is unfair trading practices, especially Japan’s long-term initiatives to artificially weaken the yen. A leading Japanese auto maker reports that for each movement of one yen against the dollar, it gains 20 billion yen in additional profitability–or nearly $170 million at today’s exchange rate. No wonder Japanese auto makers have noted their recent record profits were aided by exchange rates. And no wonder the U.S. trade-balance deficit continues to grow by leaps and bounds.
There are other issues, of course, but my point is this: We at GM have a number of tough challenges that we must and will address on our own–but we also carry some huge costs that our foreign competitors do not share.
Some say we’re looking for a bailout. Baloney–we at GM do not want a bailout. What we want–after we take the actions we are taking, in product, technology, cost and every area we’re working in our business today–is the chance to compete on a level playing field. It’s critical that government leaders, supported by business, unions and all our citizens, forge policy solutions to the issues undercutting American manufacturing competitiveness. We can do this. And we need to do it now.
There’s just one itty bitty problem with this argument: Most Japanese cars sold in the United States are made in the United States by American workers.
James Womack, responding to similar whining by Ford chairman Bill Ford, explains,
Consider a few facts about Toyota. About 65 percent of the vehicles the firm sells in North America it assembles in North America, and it would assemble a much higher proportion here if it could only keep up with its rapid sales growth. Toyota will open its seventh North American assembly line in Texas next summer and an eighth line in Ontario in 2008. It may start assembling vehicles at a Subaru plant in Indiana in 2009, and it is said to be looking for yet another assembly location. In addition, it has three engine manufacturing plants and is looking for a site for a fourth. By the end of the decade, Toyota will be able to assemble about as many cars as Chrysler does in North America, and it is closing in on the capacity Ford will have after plant closings that are widely expected to be announced in January.
he Big Three’s hold on the U.S. market seemed so secure by 1948, that they struck a deal with the United Auto Workers that added a new element to the Detroit system: high wages and generous benefits. The car-making business had become a tight oligopoly, with investment barriers for entry so high that no domestic firm could afford to join the club. On the labor side, the UAW held a monopoly. Thanks to rising demand for cars, there were plenty of profits to go around. Periodically the three vertically integrated companies and the union engaged in a bargaining ritual to determine how to split the loot. As long as improvements in mass-production offset the ever-higher wage rates by reducing the number of labor hours per vehicle, the cost of cars for consumers held stable.
The threat to this cozy arrangement came when foreign firms started investing in U.S. production facilities, beginning with Honda in Ohio in 1982, followed by Toyota in a joint venture with GM in California in 1984, and then Toyota again in its massive Georgetown, Ky., complex in 1986. If any government helped the Japanese at that time, it was the American government. When the Reagan administration came up with the Voluntary Restraint Agreement in 1981, it limited the number of imported Japanese cars sold in the United States for a period of years. Because consumer demand for Japanese cars then was greater than the supply, profit margins on the cars Japanese firms were allowed to sell soared. The Japanese companies then used those enormous profits to invest in North American factories and develop pricier up-market brands such as Lexus.
The Japanese auto makers had an outlook different from that of the Big Three. The purveyors of the old Ford-GM-Chrysler-UAW system assumed that all production laborers in the industry, including workers making parts, should be paid the same rate. The corporate and union leaders further assumed that their position was impregnable and that they could promise to pay defined-benefit pensions and other benefits decades into the future. The architects of the new Toyota-Honda system assumed that production labor would be paid different rates, as it was everywhere else in the world. Final-assembly workers would receive a premium and less skilled employees of parts makers — not owned by the car companies — would work for prevailing market wages. These Japanese firms also assumed that in hyper-competitive markets, no company could commit to benefits decades ahead. Better to base pensions on defined contributions made during work years rather than by guaranteeing payments in the far future.
[T]he leading Japanese car companies are making more money than their U.S. competitors not only because of lower costs, but because their lean design, production and purchasing system is turning out vehicles so desirable that Toyota and Honda can charge much higher prices for products in the same segment of the market. Indeed, these Japanese companies are giving wages and health packages to current workers in North America similar to those provided by their U.S. rivals, but they’re selling vehicles today for $2,500 more than comparably equipped cars made by Ford and GM. This revenue difference, more than the production cost issue, lies at the real heart of Motown’s problem.
Ford and GM have tried to embrace lean production methods, but as their market share shrinks, the legacy of the past looms larger. The U.S. firms need to shed large numbers of employees, but the main way to do that under “life-time employment” union contracts has been to encourage early retirement. This has solved one problem — too many active workers. But it created a second — too many retired workers for the active workers to support.
Wagoner’s defense of “no deed goes unpunished” is rather absurd. The fact that then-Big 3 automakers had a battle on their hands in the form of competition with Japanese cars was obvious even in the 1970s. That this was a permanent change was obvious to even the most casual observer once Honda began building its first plant here in 1982–over two decades ago now. That Ford and GM did not adapt to that changed business climate has nothing to do with goodness or fairness and everything to do with lousy management and greedy unions.
Furthermore, Japanese and German manufacturers operating in the United States have the same competitive issues as American-registered firms.* They, too, have to pay health care and retirement costs. They, too, are subject to lawsuits.
That American companies have to subsidize health care more than those in other countries is not really true, either. While the need for private insurance is obviated by a national health care system, the money to pay for either has to come from somewhere. In the United States, it comes in the form of direct payments by employers and employees. In Japan and Europe, it comes from the taypayers–i.e., firms and their employees.
*In a world of public companies and incredible integration of parts suppliers and investors, the extent to which Ford is more “American” than Honda is debatable.