Will Detroit's Loss Be Japan's Gain? 20 comments
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As anyone who has picked up a newspaper recently can tell you, Detroit’s “Big Three” auto makers are in trouble. So much trouble, in fact, that they might soon be known as the “Bankrupt Three.” On December 2, the three crippled American car producers issued a report to Congress essentially showing that General Motors (GM) and Chrysler could collapse before the end of the year, barring massive emergency loans from the government.
Last month the Big Three asked Congress for $25 billion in loans to carry them through the difficult economic environment. Legislators, however, declined the proposal due to doubts over the ability of the companies to return to profitability and subsequently pay back the borrowed money. GM, Ford (F) and Chrysler were asked to put together a report (to be presented on December 2) specifying how the loans would enable them to “become viable.” Unlike GM and Chrysler, Ford said it doesn’t require federal funds immediately, although the company did ask for a $9 billion credit line.
A reorganization through bankruptcy is an idea tossed around by many banking and financial experts. The companies could emerge as smaller, slimmer auto producers able to stand on their own two feet. GM and Chrysler, the two that would most likely need to file for bankruptcy, do not believe it is a viable option for any auto maker. They claim the stigma of a bankruptcy would cause consumers to stop buying their vehicles, further exasperating the main issue of plummeting sales.
No matter what Congress decides, the death of the Big Three dynasty seems imminent. Gone are the days of U.S. market share dominance and “Buy American” mantras. According to a recent Gallup poll, nearly 50% of Americans oppose a federal bail-out of the U.S. auto makers. The misguided mentality of “what’s good for the U.S. auto makers is good for the U.S.” is fading, as people realize any protectionist economic policy hinders the international free markets and hurts the consumer.
If Honda (HMC) and Toyota (TM) can make inexpensive, quality and energy efficient cars while Detroit can not, then let GM, Ford and Chrysler fail, taking their bloated union pension plans health-care benefits with them.
Land of the Rising Market Share
The Japanese auto makers have been building a presence in the U.S. for decades. Honda and Toyota’s market share steadily rise, and both companies have multiple production facilities in the States. The companies’ newer and more advanced factories are one of the reasons for their success over Detroit. While plants run by GM, Ford and Chrysler may take weeks
to switch assembly lines to produce a different model, the newer foreign-owned plants can do so within a day. This enables the factories to maneuver quickly in the face of changing demand outlooks and model profitability.
Another huge factor in Toyota’s and Honda’s profitability is labor costs. According to the Center for Automotive Research, wages for workers at U.S. car manufacturers average around $28 an hour, compared to $26 for Toyota and $24 at Honda. The more significant cost difference stems from the grossly generous pension and health-care packages granted to members of the United Auto Workers labor union. When including benefits, the average Detroit auto worker makes approximately $73 an hour, while non-Detroit producers pay around $44. With Honda and Toyota paying 40% less for labor, it is no wonder they can remain viable even during economic downturns.
The question remains: Will Detroit’s failures help Honda and Toyota? For the past few years, Detroit’s inability to produce quality vehicles outside the SUV and truck space has enabled foreign auto makers to quietly, but steadily, accumulate loyal customers for its small and mid-size cars. Now that SUVs have lost their popularity, the U.S. auto producers must rely on the rest of their line-up, which have razor-thin profit margins due to massive labor costs.
Falling sales, tiny margins and a damaged public image will have a long-lasting effect on GM, Ford, and Chrysler, no matter what Congress decides. Billions of dollars in loans may keep the companies afloat, but eventually the holes in the boat need to be fixed. Repairing the holes of the USS Detroit (i.e. lack of innovation, too powerful unions, and poor public perception) will take years, if not decades to accomplish.
Some argue that the rising market share of the Japanese autos is insignificant as overall sales fall. However, the recession will not last forever, and eventually the American consumer will return. When he does, he will need transportation. After this public debacle with the U.S. autos, odds are he will be going to a dealership bearing a Japanese brand name.
-Harry Lacheen
Disclosure: None.
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This article has 20 comments:
On the big day, the Japanese won by a mile.
The Americans, very discouraged and depressed, decided to investigate the reason for the crushing defeat. A management team made up of senior management was formed to investigate and recommend appropriate action.
Their conclusion was the Japanese had 8 people rowing and 1 person steering, while the American team had 8 people steering and 1 person rowing.
Feeling a deeper study was in order, American management hired a consulting company and paid them a large amount of money for a second opinion.
They advised, of course, that too many people were steering the boat, while not enough people were rowing.
Not sure of how to utilize that information, but wanting to prevent another loss to the Japanese, the rowing team's management structure was totally reorganized to 4 steering supervisors, 3 area steering superintendents, and 1 assistant superintendent steering manager.
They also implemented a new performance system that would give the 1 person rowing the boat greater incentive to work harder. It was called the 'Rowing Team Quality First Program' with meetings, dinners, and free pens for the rower There was discussion of getting new paddles, canoes, and other equipment, extra vacation days for practices and bonuses.
The next year the Japanese won by two miles.
Humiliated, the American management laid off the rower for poor performance, halted development of a new canoe, sold the paddles, and canceled all capital investments for new equipment. The money saved was distributed to the Senior Executives as bonuses and the next year's racing team was out-sourced to India.
Here's something else to think about:
Ford has spent the last thirty years moving all its factories out of the US, claiming they can't make money paying American wages.
TOYOTA has spent the last thirty years building more than a dozen plants inside the US .
The last quarter's results: TOYOTA makes 4 billion in profits while Ford racked up 9 billion in losses.
The cause is that the people from GM etc I have met where so arrogant and convinced about their system, that they would not listen to any thing. I was always being told about technological leadership and US world power.
I was always quite amused since to my opinion the production systems to my opinion where technological not very advanced and very inflexible.
e.g. the production lines from GM are built to produce one type of car. If you have 3 plants and 2 types of vehicles go down and one up then 2 plants lay dead and the 1 can not cope with production capacity.
Why is this: Well setting up a flexible line is more costly and requires much more coordination. It does not suit the John Wayne management style I encountered.
In fact I would like to join GM or Ford now, since I think this can be a very interesting time.
Obviously the US auto companies need new heads with different approaches, that people who are fix minded at the US corporations have a hard time to cope with these changes.
Don't look at Toyota, do it - this is probably the greatest challenge, telling people that what they have been doing was wrong and that the people copying them are doing it better.
On Dec 07 04:33 AM bs_o_meter wrote:
> A Japanese company ( Toyota ) and an American company (Ford) decided
> to have a canoe race on the Missouri River . Both teams practiced
> long and hard to reach their peak performance before the race.<br/>
>
You both touch on the fact that the Japanese and other transplant plants here are much newer. I agree that the US companies should have made more flexible plants for when market demands change, but is this possible at all of their locations without starting from scratch? I don't know.
As for arrogance, when I worked at GM, many of our engineers noticed even stronger arrogance and stubbornness from their German counterparts within the company. (That's not to say our American executives don't suffer from it).
Issues among the Big 3 regards quality and reliability are real and have been ongoing for decades. However, poor management and Michigan congressional inaction coupled with a union stranglehold are illnesses that can and must be fixed.
Consequences of bankruptcy failure in Detroit will surpass the Great Depression. Most of the public is uninformed and neither the government nor the newsmedia are getting the real message out. 12-15% unemployment by the middle of 2009 is predictable and catastrophic.
Polls showing 60% now lowered to 50% disapproval of government support merely demonstrates the public's ignorance. Having driven foreign produced cars for the past 20 years, I would also be reluctant to "buy American". However, the auto business is one of the last bastions for US technology to spur employment growth. The US must allow this transition to unfold.
On Dec 07 04:33 AM bs_o_meter wrote:
> A Japanese company ( Toyota ) and an American company (Ford) decided
> to have a canoe race on the Missouri River . Both teams practiced
> long and hard to reach their peak performance before the race.<br/>
>
> On the big day, the Japanese won by a mile.
>
> The Americans, very discouraged and depressed, decided to investigate
> the reason for the crushing defeat. A management team made up of
> senior management was formed to investigate and recommend appropriate
> action.
>
> Their conclusion was the Japanese had 8 people rowing and 1 person
> steering, while the American team had 8 people steering and 1 person
> rowing.
>
> Feeling a deeper study was in order, American management hired a
> consulting company and paid them a large amount of money for a second
> opinion.
>
> They advised, of course, that too many people were steering the boat,
> while not enough people were rowing.
>
> Not sure of how to utilize that information, but wanting to prevent
> another loss to the Japanese, the rowing team's management structure
> was totally reorganized to 4 steering supervisors, 3 area steering
> superintendents, and 1 assistant superintendent steering manager.
>
>
> They also implemented a new performance system that would give the
> 1 person rowing the boat greater incentive to work harder. It was
> called the 'Rowing Team Quality First Program' with meetings, dinners,
> and free pens for the rower There was discussion of getting new paddles,
> canoes, and other equipment, extra vacation days for practices and
> bonuses.
>
> The next year the Japanese won by two miles.
>
> Humiliated, the American management laid off the rower for poor performance,
> halted development of a new canoe, sold the paddles, and canceled
> all capital investments for new equipment. The money saved was distributed
> to the Senior Executives as bonuses and the next year's racing team
> was out-sourced to India.
>
> Here's something else to think about:
> Ford has spent the last thirty years moving all its factories out
> of the US, claiming they can't make money paying American wages.
>
>
> TOYOTA has spent the last thirty years building more than a dozen
> plants inside the US .
>
> The last quarter's results: TOYOTA makes 4 billion in profits while
> Ford racked up 9 billion in losses.
On Dec 07 05:42 AM Vienna wrote:
> Thank you for the nice article. I am from Europe and have been auditing
> US auto plants for some time.
>
> The cause is that the people from GM etc I have met where so arrogant
> and convinced about their system, that they would not listen to any
> thing. I was always being told about technological leadership and
> US world power.
>
> I was always quite amused since to my opinion the production systems
> to my opinion where technological not very advanced and very inflexible.
>
>
> e.g. the production lines from GM are built to produce one type of
> car. If you have 3 plants and 2 types of vehicles go down and one
> up then 2 plants lay dead and the 1 can not cope with production
> capacity.
>
> Why is this: Well setting up a flexible line is more costly and requires
> much more coordination. It does not suit the John Wayne management
> style I encountered.
>
> In fact I would like to join GM or Ford now, since I think this can
> be a very interesting time.
>
> Obviously the US auto companies need new heads with different approaches,
> that people who are fix minded at the US corporations have a hard
> time to cope with these changes.
>
> Don't look at Toyota, do it - this is probably the greatest challenge,
> telling people that what they have been doing was wrong and that
> the people copying them are doing it better.
>
> On Dec 07 04:33 AM bs_o_meter wrote:
> jack
You explained very well.
How about the UAW ?
They were the cheerleaders ?
The health-care system in Canada is a farce.
Canadians sometimes have to come to the USA
for treatment and specialists.
Many of their best doctors are now practicing in the US.
People pay high tax for that failure, and in Vancouver, the
sales tax is 15%. You won't like that.
On Dec 07 10:23 AM TenQ wrote:
> john;
> The health-care system in Canada is a farce.
> Canadians sometimes have to come to the USA
> for treatment and specialists.
> Many of their best doctors are now practicing in the US.
> People pay high tax for that failure, and in Vancouver, the
> sales tax is 15%. You won't like that.
All you have to do is drive into a US hospital parking lot and count the number of Canadian license plates to recognize nationalizing the American health system will destroy the quality of the Canadian health system. They won't have anywhere to go for treatment.
Not only do the Canadians pay a 15% VAT for health, those that can afford the insurance premiums do so which allows them to come south of the border for their needs.
It is madness to think a national health care system will work. Just look at Medicare and Medicaid, then think of a national system as more of the same on steroids. Nationalized health is not free (unless your an illegal alien), we all will pay for it from some pocket.
Sorry for being so direct about the arrogant part, in fact I am not German, but have the same language, but we do not get along well with them due to what you mentioned.
It was rather pointed towards the fact, the this time needs quick heavy changes, and that there will be no space for any personal idealistic prospectives.
To the health care:
I do not know about it in Canada, in central Europe it works quite fine, and I dont feel that I am not treated fine.
Maybe at some point it will not be as good as the one in the states, but everybody will be sure to receive 98% of the possible medical treatment. since this risk is spread over all industries and all people, the threat of a single collapse in one industry is very unlikely. No one, simply no one can not be without it. it costs approx. 30% of net Wage, with max. of approx. 7000$/month as calculation baseline.
For a general baseline - from net wage to full cost for corporation, people with low income have approx. 70% additional cost, people with higher wages up to 100%. Highest tax rate is 50%. We drive BMW and Mercedes and have beautiful old style high cost decorated towns.
For US perspective, just call it a medical fund of fund of funds being operated by an NPO NGO.
I read a lot about the greed thing here, maybe the rich US got a little to rich and too greedy.
The government must do something about that. Or, eventually everyone will be priced out of the system.
This is a sad fact. We have more Lawyers in the country than the whole world combined. And most Laws were/are made by them. See the point.
Studies have come to different conclusions about the result of this disparity in spending. A 2007 review of all studies comparing health outcomes in Canada and the U.S., in a Canadian peer-reviewed medical journal, found that "health outcomes may be superior in patients cared for in Canada versus the United States, but differences are not consistent." Life expectancy is longer in Canada, and its infant mortality rate is lower than that of the U.S. One commonly cited comparison, the World Health Organization's ratings of "overall health service performance", published in 2000, which used a "composite measure of achievement in the level of health, the distribution of health, the level of responsiveness and fairness of financial contribution", ranked Canada 30th and the U.S. 37th among 191 member nations. The average life expectancy for Canada was rated 12th at 72.0 years compared with 24th for the U.S. at 70.0 years.
The health care system in Canada is funded by a mix of public (70%) and private (30%) funding, with most services delivered by private (both for-profit and not-for-profit) providers.
Through all entities in its public-private system, the U.S. spends more per capita than any other nation in the world, but is the only wealthy industrialized country in the world that lacks some form of universal health care. The US model is everyman for him or herself, in Canada we may pay more in tax for things such as gas, but I'd rather pay an extra $15.00 a fill rather than go broke if I get sick. Think about it, no wonder there are so many people telling you that universal healthcare is bad, those are the people that would loose their gravy train if the system was set up for the people and not healthcare insurance companies and a medical system that charges rediculous fee's for it's services.
There are lots of problems, gripes, and comments listed. Here are some more things to think about. Are the current execs the only ones to blame? If a bailout doesn't come through, how much and how quickly will the resulting Detroit "Great Depression" trickle down to most everyone else in the US? Is a limited bailout better for the US (as a whole) than quiting cold turkey on these automakers? Will a limited bailout benefit the US more than the large number of unemployed auto workers who will now get unemployment checks (this sytem needs to be fixed too) and while the rest of the US still doesn't have a product? An abandonment will still cost the US - but now you have no product too.
Now the solutions?
For any one of the big 3 to recieve bailout money:
1) Execs and workers lose pay (up to 95%) on scale with their ranking. Example: if your pay is less than 90% of all the other company employees - your pay cut is 10%, more than 50% equals a 50% pay cut, and if your pay (execs or anyone) is more than 90% of all the other company employees...you guessed it....90% pay cut. This includes bonuses! As of last years rate. Applicable for first year. If you don't like it - start looking in help wanted ads!
2) Raises and adjustments of pay/ bonuses will be tied to performance in net profit every 3 or 6 months. A 10% increase in total net company profit equals 10% raise in the above stated salaries. Haven't devised of a cap yet. Pay cuts the same way in reverse.
3) Last year workers/ execs making over $250,000 - must give back to the company EVERYTHING over that number. This includes bonuses. I'm sure decisions by execs prior to this past year can be blamed as well - but how far can you really go.
4) Number of execs shrink by 20%.
5) Cars produced will be sold for no more than $1,000 over cost to any person willing to buy the new product and who can produce a W2 for the most recent year. If you didn't pay into the US treasury - you don't reap the benefit! Auto workers get the car at their usual discount.
6) Companies must submit a plan and stay on track to upgrade their facilities or create new modern flexible plants within 3-5 yrs. No sense giving a free handout without fixing some part of the problem. Sort of like giving them a fish for a day or teaching them how to fish.
7) Health care for the auto industry? Same as the pay cut outlined in number one. If you make less than 90% of the rest of the company employees - your copay is 10%. If you make more than 90% of the rest of the company employees - your copay is 90%.
8) Amount of bailout is a percentage of 22-25 billion. They get the percentage of their share of the US domestic auto market. If they provided 30% of the US domestic trucks/ autos then they get 30% of this amount. But why pay for the largest crappy auto builder.....so another 5-8B up for grabs. This is in proportion to the increase in sales over the past year. Sort of a reward for those that are on the right track in changing or upgrading their products to the conusmer even if it is late. Reward at least the redirection to get on the rigth track.
9) IF they don't like it.......they can start looking in the want ads! Beggers can't be choosers.
10) Increase gas tax to fund part of this. Up to max total price of $2.50 gallon. This is only worthwhile if gas stays cheap. I don't want my kids to pay for today's problems tomorrow. Why not keep being smart with transportation as if gas did cost more!
Personally I drive Honda due to reliability, style, and efficiency. I still give the US auto it's fair look. Just give me something to look at. I'm the consumer - cater to my needs!
This is not foolproof nor complete - but food for thought.
I have plenty of thought for many more topics.
I welcome any comments. Even more so if they are constructive or solutions are provided for those comments.
BTW - vote for me!!
Yes, it will destroy whatever standard of living advantages we have left over the Europeans, suck us into a permanent high-tax, low-performance economy, and leave us all with less choice and quality in health care. The claims that " is the only wealthy industrialized country in the world that lacks some form of universal health care" is false - in the US, we even treat illegal aliens in emergency rooms; the other countries spend less because they ration health care.
All this disaster of socialized healthcare because we ddint have the guts to tell the UAW to suck it up and accept changes to outdated benefits!?!? absurd!
"The US model is everyman for him or herself"
Baloney! That's a liberal talking point contrary to facts. The Government spending on health care is higher per capita in the US than in Canada. over 50% of health care spending in the US is Government funded or directed.
All those stats about infant mortality neglects the fact that would change quickly if Canada had 30 million illegal aliens, like the US does.
You are right on the button.
Very well said. Thanks.
canada's national health care is paid for by GST (goods & services tax, i.e. a national sales tax, on top of the provincial sales tax). i have heard some people complain that they have to wait too long for an appointment/ there have been complaints from doctors that their pay is too low. fee schedules are renegotiated annually with the government. it used to be when i traveled to canada i could get the GST on my hotel bill refunded @ the border, then they changed the law & i am now subsidizing canada's health care/
in u.s.a, health care is rationed by ability to pay cash. if you have no cash, you get sicker & end up in the emergency room costing 10x as much as it would have cost if you had had proper treatment early on. cities are bankrupted by inability to cover the emergency-room costs. hospitals close their emergency rooms due to inability to cover costs. is this any way to run a railroad?
canadian citizens able to pay cash are free to come to u.s.a (e.g., to mayo clinic) for treatment, and some do.
a friend in toronto has neurological problems of an obscure nature & tells me his treatments cost the govt/ 1,000,000 annually/ a u.s. citizen in his position would be dead. let's consider the humanity thereof.
> jack
Reasons for big 3's failures = Americans and German arrogance = nationalized healthcare = liberals and illegal aliens
I think if we add in gay marriage and gun laws, we have ourselves a political platform.