Some of Toyota’s U.S. plans are now more than 20 years old, and a growing number of its workers are paid the top wage of about $25 an hour. That’s less than Detroit’s veteran union hands make now, but a contract inked last fall will enable U.S. automakers to replace many highly paid employees with cheaper workers. By 2011, Toyota’s cost advantage over Detroit could disappear.
By late 2009, Toyota’s assembly plant in Georgetown, Kentucky could have the highest labor costs of any auto factory in the country. Here is the story.
When I visited Utah, I rented a Hyundai and I have to say it drove very nicely…
One of the arguments for scaling a person’s rate over time is that he becomes more skillful and more productive
By such a standard the Toyota plant should be at the top of the productivity charts. (or is our whole labor contract theory worng?)
hyundai has come a long way from the days of the excel gl/gls (my first car). They’ve got true luxury cars in korea…$100k+, or so I remember reading in some auto mag a while ago…
tubosaab:
“including benefits” can triple effective hourly wage
PEden:
perhaps you can share some interesting ways Toyota is more efficient than Ford
When GM (who I used to work for) quotes labor numbers, they quote a term-of-art called “fully burdened overhead.” FBO includes salary, healthcare, employer portion of taxes, land, equipment depreciation, and utilities. It is about 2.5x the actual wages that the person earns. Sadly, this article is comparing apples and oranges with the Toyota vs “Big Three.” The actual wages are about the same, but the author chose to compare “wages” at Toyota vs “fully burdened overhead” at GM, Ford and Chrysler. How dishonest.
turbosaab, because wage rates aren’t labor costs, necessarily. If Detroit’s $62/hr. workers are more than twice as productive than Toyota’s $25/hr workers either due to better training, better equipment, etc. then higher wages rates or not, their labor costs could be equal.
BTW, that is pure speculation, I don’t know their productivity, union involvement in big cities tends to skew wage relationships. I’m just explaining how wage rates aren’t the same thing as labor costs.
When the Toyota workers are in their 50s, and begin suffering the chronic health problems associated with manufacturing, will they be dumped with inadequate pensions and no health care benefits? Without a union it is likely.
Most of the reported figures of GM compensation are based on creative cost accounting, often including prior workers’ legacy costs. Whatever, the new workers will be taking dramatic cuts.
(Henry Ford 1st came to believe that his business model would only work when an auto assembler could afford to buy the product he assembled, and Ford eventually got there. The new 2nd tier auto workers will not likely be able to afford a new car unless they live in it.)
The article forgets to mention that the non-union status of Toyota’s employees also gives managers more ability to retool their production lines. Right now, the American auto-makers pay more for less productive workers and their engineers have made up for it with cheaper components.
And based on talking with multiple engineers at Ford and GM (I’m a mechanical engineer), every one felt a very 1950′s, government-style culture in the American car companies. While GE hires employees willing to speak their mind in a group, American car companies want robots instead of thinkers and innovators. Personally, I blame the unions for diving into any possible profits and creating a disincentive for managers and engineers to innovate.
Rural America’s allegiance to Ford and Chevy trucks has kept a meltdown from happening the past 25 years, but sustained high energy prices has broken that down completely. The answer for the car companies may be what Ford has done with Fusion: build in Mexico.
rustbelt, Hazlitt’s “Economics in One Lesson” has a great chapter on the “buy back the product” fallacy.
Your main argument seems to be that without unions, workers are unwitting dupes in the hands of managers. While that can be true in less developed and more isolated economies (mining towns in the wilderness, for example), it is less true in a developed, populous economy where there is much competition for jobs and for workers. Here, the bidding process for wages and non-pecuniary benefits is much more liquid. Every non-union job I’ve had (and that’s all but one) offered some kind of health insurance plan, even for part-time workers.
Were it not for sky-high costs at the provider level (thank you FDA, AMA, licensing boards, academic accreditors, and the government for cartelizing the health industry, stifling competition and innovation, and keeping prices artificially high), employer-funded insurance wouldn’t even be an issue for most people. Getting a cold or breaking your arm wouldn’t set you back $1,500.
As for retirement, again, this is an area that the government has totally fouled up with excessive capital gains taxes, social security, etc. It is only because of war-time wage freezes that we fell into the trap of expecting our employers to give us insurance and other benefits. Most people would rather just have more money.
And if everybody unionized as you seem to be hoping, if every industry were ran as inefficiently as Detroit’s auto industry, how could anybody afford anything? If you “negotiated” too-high wages for every worker everywhere, price levels would just rise. Either the Federal Reserve would have to lower interest rates to zero or everything would be too expensive and a great many people would be unemployed.
Labor costs are a small part of the equation, consider also pension and health care responsibilities, much less for Toyota.
The reason we have Toyota plants in the United States is because Pres. Reagan imposed a quota on Japanese car imports in 1982, a fact that free trade fundamentalists often conveniently forget.
I’m loving the revisionist history here on this site. GM is in trouble because it pays its workers too much? Poppycock. GM is in trouble because it makes junky cars. This is not because the auto workers are lazy–it’s because the company can’t design a decent car. The auto workers have become a red herring, used by managers who can’t figure out how to make a car that customers want. Instead they make low quality, unreliable cars that are actually less expensive to buy than their japanese competitors and whose resale value degrades faster than competitors’. This is not because the auto workers are goldbricking, it’s because it’s a lousy company.
Hey, Tyler, you say Kia is going to eat Toyota’s lunch. Would you care to put that down in black and white and make it interesting? I don’t expect so, but I’m willing to be pleasantly surprised.
I believe that the world’s most profitable car company also pays some of the industries highest wages. It also refuses to play by Wall Street accounting rules demanding quarterly information, and just happened to buy Germany’s largest car manufacturer.
But then, Porsche has never really played by the rules. Which is why so many other car companies use Porsche for their design work.
JAcob:
I have been publically criticizing the Big 3 and the UAW for three decades, not that anyone would listen to me.
My point is that working for a transplant company is not utopia, the workers are very much at will and very much on their own if they cannot work until age 65.
Tanq – I’ve read the 5500, and please excuse me for using the generic word “pension” rather than quoting the code section, none of which nullifies my point.
Slocum, GM makes crappy cars _and_ has to pay their workers more. There’s not necessarily any link between the two – if GM was able to charge as much for their small cars as Toyota and Honda can for _theirs_, they’d be much better off than they are today, right? Even with all else being equal?
“No, they wouldn’t be better off — if they matched Toyota and Honda model-for-model in terms of bang-for-the-buck and reputation but had to charge $2,000 more per vehicle,”
You just completely missed the point.
If a Cobalt, let’s say, can sell for $10,000; and a Civic, let’s say, can sell for $14,000, then if GM could build a Civic-quality car, and sell it for $14,000, they’d be much better off than they are today – regardless of labor costs. They might make a small profit, or lose less than they do now, but they’d be better off either way.
Talking about profit margins is ridiculous here – GM isn’t making money on the Cobalt. They’re losing money; and they could conceivably lose _less_ money or even make a little bit if they didn’t simply and purely hate small car buyers to the very depths of their bones. It’s seriously like when you make a sullen teenager do a chore he doesn’t want to do.
There’s no fundamental link between their labor costs and the fact that they build crappy cars. The claim otherwise is a red herring thrown around by those who just hate unions and want to blame them for GM’s decline even though the unions aren’t the ones designing crappy cars that people have to almost be paid to take off the lot.
US car companies do OK in China, but some of that is likely due to latent (understandable) prejudice against the Japanese there.
Steve Sailer: “The reason we have Toyota plants in the United States is because Pres. Reagan imposed a quota on Japanese car imports in 1982, a fact that free trade fundamentalists often conveniently forget.”
Do free trade fundamentalists “conveniently forget” that Reagan asked the Japanese for voluntary quotas? Free trade economists know that textile, steel, motorcycle, meat, and sugar industries all benefitted from Reagan protectionism. Most free trade economists are aware of Reagan’s mixed record on trade, though some are more critical than others.
Sheldon Richman of the Mises Institute pointed out in The Sad Legacy of Ronald Reagan that:
“the Reagan administration has been the most protectionist since Herbert Hoover’s. The portion of imports under restriction has doubled since 1980.”
Daniel Griswold of Cato Institute provides a more balanced view in Conservatives and Free Trade:
“It’s true that Reagan bowed to protectionist pressure more often than he should have, but in his words and most of his deeds, he came down squarely in favor of free trade. †¦It was the Reagan administration that launched the Uruguay Round of multilateral trade negotiations in 1986 that lowered global tariffs and created the World Trade Organization. It was his administration that won approval of the U.S.-Canada Free Trade Agreement in 1988. That agreement soon expanded to include Mexico in what became the North American Free Trade Agreement, realizing a vision that Reagan first articulated in the 1980 campaign. It was Reagan who vetoed protectionist textile quota bills in 1985 and 1988.†
Rex, the US car companies aren’t trying to break even on small cars. They’re building garbage and then giving them away so they can lower their CAFE average enough to continue to do what they really enjoy – build trucks and SUVs and big cars.
Today’s $12K MSRP Cobalt might have cost them $14K to build. Then they have to put another $2K on the hood to get it to leave. But you know what? A $14K Civic competitor would cost them about $14K to build, too; they’d just have to not loathe the very idea of small cars to do it. Which one would be the better move overall? Duh.
The really irritating thing is that I know the workers can do it; I really liked my 1992 Saturn SL2 (almost as good as Civic/Corolla; close enough to be worth the flier).
American companies might spend just as much in R&D as Toyota, but they have this tendency to have 8 brands, each trying to compete with each other, whereas Toyota has one lineup. The $/model seems to be higher. If not, GM is screwing up hard.
American companies might spend just as much in R&D as Toyota, but they have this tendency to have 8 brands, each trying to compete with each other, whereas Toyota has one lineup. The $/model seems to be higher. If not, GM is screwing up hard.
But you know what? A $14K Civic competitor would cost them about $14K to build, too; they’d just have to not loathe the very idea of small cars to do it. Which one would be the better move overall? Duh.
Nonsense — American companies would love to build small cars (or any cars) that consistently made them money, but with their labor costs, they haven’t been able to do it (with all the buyouts, the two-tier wage structure, and their assembly plants in Mexico, they may be able to do it now, though).
They previously focused on SUVs and pickups because that was a category of vehicle where they had a few advantages — loyal customers and Japanese competitors that didn’t (initially) have the models and factories to compete in that area (it’s only been recently that Japanese companies have had real full-sized pickups in their lineups). Even if gas prices hadn’t risen dramatically, this wouldn’t have lasted indefinitely as Toyota and Nissan have gotten into the full-sized truck business.
“Slocum, you simply aren’t listening. It wouldn’t cost them any more in labor to build good cars; it would cost them slightly (a few dozen dollars) more in parts.”
I’m listening, but what you’re saying is just not correct. A push-rod engine is simpler and cheaper to produce than a multi-valve overhead-cam engine. This article, for example, estimates the difference at $400:
“A DOHC V-8 has four camshafts and drive gears, beefy heads to hold the shafts, and two long chains. “Our V-8 is a simple and elegant design. It’s pretty easy to put together, which helps the reliability, and costs,” says Winegarden. He estimates a $400 saving over a DOHC.”
motor.http://www.caranddriver.com/features/columns/c_d_staff/larry_webster/the_pushrod_engine_finally_gets_its_due_column
Similarly, variable-valve timing on an overhead cam engine increases the cost. A 5-speed automatic transmission is more complex and expensive than a 4-speed transmission (and a six-speed is more complex still), and so on. It’s not just a few bucks in parts and some short-sighted bean-counters.
“What it would take is an investment in design and engineering comparable to that they make on the big cars and trucks; which is a long-term R&D cost.”
But R&D costs have to amortized over the life of the vehicles. So if your labor costs are high, you try to scrimp in other areas, and one way to scrimp is by less frequent redesigns. The Chrysler minivan platform, for example, was mostly unchanged except for sheet metal, interiors, and folding seats, between 1996 and 2007 (that’s twelve model years):
http://autos.msn.com/research/vip/overview.aspx?year=1996&make=Dodge&model=Caravan
http://www.edmunds.com/dodge/caravan/2007/consumerreview.html
And even in the new 2008 models, they’re still offering the same pushrod 3.3 and 3.8 liter V6 engines that they’ve been selling for almost 20 years (since the 1990 model year). They’re really not bad engines — simple, cheap and reliable, but the combination of power and fuel economy is just not state of the art.
It’s not that the U.S. manufacturers don’t know how to build state-of-the-art engines and transmissions, it’s just that they haven’t been able to build them at a low-enough cost to put them in their low and moderately-priced vehicles.
But it doesn’t explain for example why they have longer product cycles. Your argument ‘they save on R&D to make up for the extra cost in manufacturing’ doesn’t make sense on the margin. If the expected benefit of an extra dollar R&D is more than a dollar, you should have more R&D, no matter how costly manufacturing is.
I’m saying that the expected benefit of a dollar spent during an early model redesign is less than a dollar because of the labor cost disadvantages. The logic boils down to this:
- The ‘Big 3′ can’t just clone an Accord or Camry because it would cost them more to produce and they’d have to charge less for it (because of reputation effects). So that’s not a viable approach.
- They take it as a given that they’re going to have to sell their mid-size vehicles at a lower cost than an Accord or Camry, but their production costs are higher. So what do they do?
- Simpler, older, cheaper power-trains, less frequent redesigns, cheaper interior materials. All to hit a price point they believe the market says they have to hit.
The 2007 Malibu is a perfect example of this strategy. Pushrod engine? Check. Four-speed transmission? Check. Long-in-the-tooth platform? Check. Cheap interior materials? Check. Low price point. Check.
Having finally bought its way out of much of its cost disadvantage, the strategy is changing. The 2008 Malibu is intended to match the Accord and Camry in features and quality — but also in price:
http://www.edmunds.com/insideline/do/Drives/Comparos/articleId=124091
Will that work? GM does seem to be having some success with it. So can you guess which plant is the UAW thinking of striking?
http://ap.google.com/article/ALeqM5iZmnlRGdoCPnlm6CKaxAuZAHpgWwD904EDP00
If one looks at their annual report, looks at the line for “healthcare” ($4.8B) and then divides by the number of cars built (9.1M), one notices that healthcare alone costs about $500/car. SUVs have a profit margin that is about 5x the profit margin of passenger cars, so it is no wonder that bean counters would push SUV production.
http://www.gm.com/corporate/investor_information/docs/fin_data/gm06ar/download/gm06ar.pdf
Shortsighted mismanagement isn’t the exclusive domain of GM. The award winning Ford Taurus was hailed as their “turn around car” and “import beater” back in the 80s, when it was introduced. By the time it had been discontinued in 2006 (and replaced by the 500), Ford hadn’t been advertising the car for more than 2 years. The executive team that had been turning Chrysler around was all pushed out by the Daimler crew after the take over. I personally expect Chrysler to be a brain dead dinosaur after Daimler finally ditched it onto Cerberus, and will take about a decade to finally die.
Don’t they make Hyundai’s in Alabama now?
NOTE TO TOYOTA: How’s that quality/productivity thingy workin’ out for ya since you had to recall those 9 million cars?
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