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.