What's NOT wrong with Detroit
From Kaus's redux of GM's predicament:
"apparently the total labor cost for a GM hourly worker ( including health, pensions etc.) is about $146,000 per year. They're competing against Toyota and Honda who pay $96,000 per year--on equally American workers in American factories. Much of this disparity is in health care costs, something that would be fixed if the government took over that burden. But, according to CNN (citing Harbour-Felex data) $630 per vehicle is for union-negotiated "issues like work rules, line relief and holiday pay," while "paying UAW members for not working when plants are shut costs another $350 per vehicle."
Various calculations put the difference in profit per car on average at 2900 USD.
I agree with Kaus that American cars aren't made of more expensive materials. As Kaus says, if American cars could spend another 1,000 USD per car on better materials, some of their cars might be a bit more attractive. But I don't think that that means that the final cost of the car is due to employee salaries. After all, GM's total expense on wages and healthcare is around 20 billion USD per year, which is only around 10% of its total costs. Since it takes about 30 hours to manufacture a car, an hourly worker making 73 USD an hour (blue collar average pay AND BENEFITS for US carmakers) contributes 2190 USD per car for an American car. At 44 USD an hour (blue collar average pay for Japanese carmakers), it contributes 1320 USD an hour. That's a difference of 870 USD per car that comes from blue collar pay and benefits. So there must be other reasons why GMs cars are so much more expensive to make.
One of the ways to lose money is by operating many brands. Toyota has three brands, worldwide: Toyota, Lexus and Scion. Honda has two: Honda and Acura. GM has 11 brands! Buick, Cadillac, Chevrolet, GMC, Holden, Hummer, Opel, Pontiac, Saab, Saturn and Vauxhall. With 284,000 core employees worldwide, producing about 9 million cars per year, GM is spreading its engineering talent very thin. Toyota has slightly more core employees (299,000), turning out about the same number of vehicles, but they are centered in only three brands, all of which have relatively small product line-ups.
I believe that the limited number of platforms lies at the root of many other differences between the American and Japanese cars. Less platforms means more time spent engineering them. So the quality can be higher and more thought can go to making production more efficient and cheaper. Newer products come faster, perpetually putting competitors at a disadvantage. Fewer products means less attention to niche markets, which are always expensive to cater to, and more attention to what most people appreciate: quality, longevity, fuel efficiency and price. GM's shotgun approach to marketing simply isn't as efficient as Toyota's sniper attacks.
A direct consequence of spending more time engineering fewer platforms, and of building fewer different platforms, is that it takes less time to build a car. The hard numbers for that are telling. In North-American plants, it takes Toyota 29.93 hours to build a car, whereas GM takes 32.36 hours, 2.43 hours longer. This 8% to edge in productivity goes a long way in explaining the 10% edge in total profit that Toyota has. Oh, and Ford takes 35.10 hours - 17% longer than Toyota. Of course, it could be that Toyota is spending more money on non-labor improvements of its factories. Better automation increases productivity. If the cost of the increased automation is less than the cost of the hours of work saved, it helps profitability. Unfortunately I didn't find capital equipment expense data yet, but I don't think it will matter. Simply looking at capacity utilization points out another place where American manufacturers lose money hand over fist. Toyota runs its plants at 103% utilization, i.e. they work overtime to keep up with demand. The best of the American manufacturers (GM), runs its plants at 93% of capacity. That's 7% of GM's invested capital that is sitting idle, while Toyota's dime is working overtime. Ford sidelines an impressive 23% of its manufacturing capacity. This is a huge cost factor. So while it could be that Toyota buys more automation equipment, or at least uses what it has much better (by, for example, engineering the cars better), all of their equipment is used to more than its capacity.
Note that there are many ways to measure productivity, some of which are susceptible to outsourcing of body parts, which is something American producers are more prone to doing. Some of those productivity measures have GM running neck-to-neck with Toyota. But that ignores the outsourced parts. The drawback of outsourcing core components shows itself here. In principle GM could play one parts provider against another in order to force them to become leaner and meaner. But there aren't that many parts providers, and having more than one source for the same part is risky (higher variability), and changes in the components are more difficult to manage.
Comparing the salaries is not that simple. First of all, Toyota manufactures in places like Huntsville, Alabama and Blue Springs, Mississippi. Those are cheaper places to live than Detroit, MI, as you can tell from cost of living calculators. Toyota also still imports a larger fraction of its content, which helps as long as the yen remains relatively weak. And GM having many retirees to support is only the tip of the iceberg: being fairly recent, the Japanese plants have a younger workforce, which is obviously cheaper (less seniority, less illness). At least that advantage will become smaller with time.
According to the CNN article that Kaus refers to, the difference in PROFIT is on average about 2900 USD per car between Japanese and American carmakers. With the average price of a new car being 28,400 USD (FTC data), that's about 10% of the price. The article blames healthcare for most of the difference between US and Japanese companies - 1635 USD per car for GM compared to 215 for Toyota. But that pretends that Toyota-US is a fully independent company, which it is not. Toyota pays for healthcare of its workers in Japan through corporate taxes, which run a healthy 40.9%. This year, Toyota is paying 7.6 billion dollars in taxes, whereas GM will pay only 2.8 billion dollars in taxes. That is 533 USD in taxes per car that Toyota pays more.
A closer look to the income statements shows another crucial difference in the way the two corporations operate. GM operates under a vast debt load, run up through chronic mismanagement. This interest alone translates to a whopping 12 billion dollar expense each year. Toyota, frugal all along, only pays less than half a billion in interests. This means that the debt load of GM is adding 1278 USD to the cost of each car.
Toyota has a younger workforce than GM, located in cheap, rural areas, which explains why its workers are cheaper. It only manages three brands, offering a very limited number of vehicles in each class, allowing it the advantage of scale and focus. It utilizes its capital equipment better than GM, and vastly superior to Ford or Chrysler. Most importantly, it carries no debt. All these things help explain why its costs on each car are lower than GM's.
However, this is only half the story. Bigger scale for each model, better management of resources and a better fiscal position explain why Toyota is currently in a difficult to assail position now. But how did it get there? The focus on fewer brands and models, in short. It forced them to focus on the big middle market. And they realized that most consumers don't want choice. At least not choice just for the sake of choice. They want a car that is first of all reliable and cheap to run, not excessive in any aspect. Something that feels solid and quiet, and looks expensive but isn't. With sensible packages of options. Everything else is gravy.
But we're still not at the end of this issue. We're trying to explain a difference in profitability, and we've only discussed costs. If costs were really the only problem, then we could expect costs for a GM car to be higher than for an equivalent Toyota car. But we would expect the GM car to fetch the same price. And it does not, not by a very long shot. For example, the Chevy Malibu is a midsize family sedan, in principle competing against the Honda Accord and the Toyota Camry. I say in principle, since in reality, you can have any Malibu for two to three thousand dollar less than a similar Accord and Camry, and even then they don't sell in nearly the same quantities.
That is the cost of decades of brand neglect. Made in Japan used to be a joke. Right now, it carries a price premium of thousands. And that, unfortunately is the other reason that Japanese car makers are so much more profitable. To reverse that, GM, Ford and the DamnedChrysler need to pull off what Toyota and Honda did in the Eighties: turn their brand name from a joke into a badge of honour. That won't be accomplished by squeezing American workers further, but by producing better products.
"apparently the total labor cost for a GM hourly worker ( including health, pensions etc.) is about $146,000 per year. They're competing against Toyota and Honda who pay $96,000 per year--on equally American workers in American factories. Much of this disparity is in health care costs, something that would be fixed if the government took over that burden. But, according to CNN (citing Harbour-Felex data) $630 per vehicle is for union-negotiated "issues like work rules, line relief and holiday pay," while "paying UAW members for not working when plants are shut costs another $350 per vehicle."
Various calculations put the difference in profit per car on average at 2900 USD.
I agree with Kaus that American cars aren't made of more expensive materials. As Kaus says, if American cars could spend another 1,000 USD per car on better materials, some of their cars might be a bit more attractive. But I don't think that that means that the final cost of the car is due to employee salaries. After all, GM's total expense on wages and healthcare is around 20 billion USD per year, which is only around 10% of its total costs. Since it takes about 30 hours to manufacture a car, an hourly worker making 73 USD an hour (blue collar average pay AND BENEFITS for US carmakers) contributes 2190 USD per car for an American car. At 44 USD an hour (blue collar average pay for Japanese carmakers), it contributes 1320 USD an hour. That's a difference of 870 USD per car that comes from blue collar pay and benefits. So there must be other reasons why GMs cars are so much more expensive to make.
One of the ways to lose money is by operating many brands. Toyota has three brands, worldwide: Toyota, Lexus and Scion. Honda has two: Honda and Acura. GM has 11 brands! Buick, Cadillac, Chevrolet, GMC, Holden, Hummer, Opel, Pontiac, Saab, Saturn and Vauxhall. With 284,000 core employees worldwide, producing about 9 million cars per year, GM is spreading its engineering talent very thin. Toyota has slightly more core employees (299,000), turning out about the same number of vehicles, but they are centered in only three brands, all of which have relatively small product line-ups.
I believe that the limited number of platforms lies at the root of many other differences between the American and Japanese cars. Less platforms means more time spent engineering them. So the quality can be higher and more thought can go to making production more efficient and cheaper. Newer products come faster, perpetually putting competitors at a disadvantage. Fewer products means less attention to niche markets, which are always expensive to cater to, and more attention to what most people appreciate: quality, longevity, fuel efficiency and price. GM's shotgun approach to marketing simply isn't as efficient as Toyota's sniper attacks.
A direct consequence of spending more time engineering fewer platforms, and of building fewer different platforms, is that it takes less time to build a car. The hard numbers for that are telling. In North-American plants, it takes Toyota 29.93 hours to build a car, whereas GM takes 32.36 hours, 2.43 hours longer. This 8% to edge in productivity goes a long way in explaining the 10% edge in total profit that Toyota has. Oh, and Ford takes 35.10 hours - 17% longer than Toyota. Of course, it could be that Toyota is spending more money on non-labor improvements of its factories. Better automation increases productivity. If the cost of the increased automation is less than the cost of the hours of work saved, it helps profitability. Unfortunately I didn't find capital equipment expense data yet, but I don't think it will matter. Simply looking at capacity utilization points out another place where American manufacturers lose money hand over fist. Toyota runs its plants at 103% utilization, i.e. they work overtime to keep up with demand. The best of the American manufacturers (GM), runs its plants at 93% of capacity. That's 7% of GM's invested capital that is sitting idle, while Toyota's dime is working overtime. Ford sidelines an impressive 23% of its manufacturing capacity. This is a huge cost factor. So while it could be that Toyota buys more automation equipment, or at least uses what it has much better (by, for example, engineering the cars better), all of their equipment is used to more than its capacity.
Note that there are many ways to measure productivity, some of which are susceptible to outsourcing of body parts, which is something American producers are more prone to doing. Some of those productivity measures have GM running neck-to-neck with Toyota. But that ignores the outsourced parts. The drawback of outsourcing core components shows itself here. In principle GM could play one parts provider against another in order to force them to become leaner and meaner. But there aren't that many parts providers, and having more than one source for the same part is risky (higher variability), and changes in the components are more difficult to manage.
Comparing the salaries is not that simple. First of all, Toyota manufactures in places like Huntsville, Alabama and Blue Springs, Mississippi. Those are cheaper places to live than Detroit, MI, as you can tell from cost of living calculators. Toyota also still imports a larger fraction of its content, which helps as long as the yen remains relatively weak. And GM having many retirees to support is only the tip of the iceberg: being fairly recent, the Japanese plants have a younger workforce, which is obviously cheaper (less seniority, less illness). At least that advantage will become smaller with time.
According to the CNN article that Kaus refers to, the difference in PROFIT is on average about 2900 USD per car between Japanese and American carmakers. With the average price of a new car being 28,400 USD (FTC data), that's about 10% of the price. The article blames healthcare for most of the difference between US and Japanese companies - 1635 USD per car for GM compared to 215 for Toyota. But that pretends that Toyota-US is a fully independent company, which it is not. Toyota pays for healthcare of its workers in Japan through corporate taxes, which run a healthy 40.9%. This year, Toyota is paying 7.6 billion dollars in taxes, whereas GM will pay only 2.8 billion dollars in taxes. That is 533 USD in taxes per car that Toyota pays more.
A closer look to the income statements shows another crucial difference in the way the two corporations operate. GM operates under a vast debt load, run up through chronic mismanagement. This interest alone translates to a whopping 12 billion dollar expense each year. Toyota, frugal all along, only pays less than half a billion in interests. This means that the debt load of GM is adding 1278 USD to the cost of each car.
Toyota has a younger workforce than GM, located in cheap, rural areas, which explains why its workers are cheaper. It only manages three brands, offering a very limited number of vehicles in each class, allowing it the advantage of scale and focus. It utilizes its capital equipment better than GM, and vastly superior to Ford or Chrysler. Most importantly, it carries no debt. All these things help explain why its costs on each car are lower than GM's.
However, this is only half the story. Bigger scale for each model, better management of resources and a better fiscal position explain why Toyota is currently in a difficult to assail position now. But how did it get there? The focus on fewer brands and models, in short. It forced them to focus on the big middle market. And they realized that most consumers don't want choice. At least not choice just for the sake of choice. They want a car that is first of all reliable and cheap to run, not excessive in any aspect. Something that feels solid and quiet, and looks expensive but isn't. With sensible packages of options. Everything else is gravy.
But we're still not at the end of this issue. We're trying to explain a difference in profitability, and we've only discussed costs. If costs were really the only problem, then we could expect costs for a GM car to be higher than for an equivalent Toyota car. But we would expect the GM car to fetch the same price. And it does not, not by a very long shot. For example, the Chevy Malibu is a midsize family sedan, in principle competing against the Honda Accord and the Toyota Camry. I say in principle, since in reality, you can have any Malibu for two to three thousand dollar less than a similar Accord and Camry, and even then they don't sell in nearly the same quantities.
That is the cost of decades of brand neglect. Made in Japan used to be a joke. Right now, it carries a price premium of thousands. And that, unfortunately is the other reason that Japanese car makers are so much more profitable. To reverse that, GM, Ford and the DamnedChrysler need to pull off what Toyota and Honda did in the Eighties: turn their brand name from a joke into a badge of honour. That won't be accomplished by squeezing American workers further, but by producing better products.
posted by Endorendil at 10:55
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