Why are companies like Toyota and Honda gaining more of the market, building new factories and adding more jobs to the economy when the domestic companies are losing market share and having to constantly cut back workforce? A better question would probably be, why can’t the domestic automakers fix their own problems by looking at what the competition is doing instead of begging the government to help?
George Bush said it best earlier this year when he stated that GM and Ford should develop a “product that’s relevant” instead of look to Washington to help with their out of control pension problems. For instance, take GM for example; they have to support three retirees for every one current employee. That is incredible, how can any company run a profitable business in a situation like that? An interesting piece of information from Forbes explains where many of the problems stem from:
To ensure labor peace over the years, domestic automakers negotiated union contracts that require them to pay workers even if their job has been permanently eliminated. To avoid such payouts, the Big Three have continued to produce cars and trucks above market demand. But those excess vehicles can be sold only with heavy discounts, which destroy the value of domestic brands.
So, let me see if I understand this. Someone can lose their job, yet still continue to get paid? Wait a second, how does that work? I know if I lose my job the most I’ll be receiving is some additional pay for unused time off and a little severance, but I won’t continue to get paid while not working. At first glance, you wouldn’t think something like this could be true, because, how can a company afford to pay people that don’t even work for them? Well, they can’t, and unfortunately having lived in and around the Detroit area and knowing many people who do work for places such as GM and Ford, I can certainly verify that this does happen.
Aside from the absurd union contracts that allow people without jobs to still collect income, you have the issue of simply grossly overpaying employees for the work that they do. A friend of mine just started working for GM on the assembly line, doing very easy work. They have no college education and no skills related to manufacturing at all, and none are required to do the job. The starting pay is $21 an hour. Even without overtime, that is over $43,000. Since overtime is generally available, they should be able to make over $50,000 doing very easy work with absolutely no education. And remember, that is just starting salary. I have relatives that still work for GM and some make over $30 an hour, with Saturday or holiday work paying upwards of $60 an hour. Is it really a surprise that domestic automakers can’t compete on price?
Of course how the unions have inflated pay and incentive packages over the years is only part of the problem. Innovation of exciting new products is the other major factor. Domestic designs have in the past been very conservative in nature, typically only producing a few flagship models that are cutting-edge, and then charge a premium for those models. The rest are very general looking sedans, trucks, and SUVs. Year to year, the models change very little in styling. And while design is one thing, another issue is fuel efficiency. Honda and Toyota have been pioneers in making fuel efficient vehicles, and with gasoline prices where they are now it is easy to see why more people are turning to these cars. Instead, the likes of GM and Ford continue to churn out very large and heavy vehicles with relatively low gas mileage simply because those vehicles make the most profit. As more users switch to gas-friendly vehicles this business model can’t sustain itself.
So how can the government help? I’m not sure if they can. One big argument is that of currency manipulation, stating that even if all else were equal among companies, the foreign competitors would still be ahead because Asia is artificially manipulating currency. Another big issue is that of health care. The Big 3 spent a combined 11.1 Billion dollars last year just to provide health care for both working and retired employees. The unions say a national health care system would reduce some of the additional costs paid out by the companies. That is a whole separate debate for another day, though.
The bottom line is, the domestic automakers have slowly dug themselves into a hole over the years. They may have the best benefits packages and provide great wages to middle-class America, but unfortunately their success could ultimately become their demise. It is clear that now that Americans are more apt to purchase vehicles that wear the badge of a foreign company, the big three do not have the power to price their vehicles at a premium while they try to support their employees and retirees. Changes need to be made, and I think it starts with the companies themselves. They can’t continue to pay people who don’t even work for them anymore, they need to evaluate with the unions how they can maintain sustainable pay and benefits that are appropriate and to come up with more fuel-efficient innovative designs to compete with the constantly evolving automotive market. The government won’t have a simple solution, and even if changes are made at that level, the effects on the company’s bottom line will take many years to be visible.
Author: Jeremy Vohwinkle
My name is Jeremy Vohwinkle, and I’ve spent a number of years working in the finance industry providing financial advice to regular investors and those participating in employer-sponsored retirement plans.
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S. Bahl, I appreciate the comments, but I'm a bit confused with the terrorism reference. I don't think forcing foreign companies out of the U.S. is the solution. Many "foreign" vehicles have more American made components than the domestic counterparts, as well as many assembly plants located right here in our country creating jobs that put food on the table for many Americans where companies like Ford and GM are constantly outsourcing and building factories in places like Mexico and Canada, forcing hard-working Americans out of jobs.
As far as financing terrorism by purchasing foreign products, take a look at the computer you are typing this message on. How much of that computer is not foreign? Most electronic components come from the same countries that are trying to build cars. Most of the stuff we all use on a daily basis are far from domestic products.
It is a global economy, there is no changing that. I'm sure there are ways to improve the situation both here and abroad, but I don't think forcing outside competition out of the country is the solution.
Yeah I wrote an article about this. I think that U.S. auto makers are at a disadvantage even before they start selling their cars. Pension plans rape them on yearly basis.
Rather than forcing US automakers to start building better vehicles (or "more relevant" as you put it), perhaps we should instead force the competition out of the United States? Why are Hondas and Toyotas even allowed to be sold here? Doesn't it make more sense to let the US companies continue to produce whatever product they feel best serves their bottom line and simply tell the Japanese and Koreans that they can no longer sell their products here? That would ensure that the US automotive buyer interested in purchasing a new vehicle would only be able to purchase one made here in the United States. The money would stay here and we could be sure it wasn't used to finance terrorism. When we send our dollars to Japan or Korea, we have no way of knowing if that money ends up coming back here in the form of tourism, or if it just gets dropped in an envelope labeled, "Osama Bin Laden".
Thanks for your thoughtful article, I just hope you look at the bigger picture outside of just autos...it's also about terrorism.