Bell Curve The Law Talking Guy Raised by Republicans U.S. West
Well, he's kind of had it in for me ever since I accidentally ran over his dog. Actually, replace "accidentally" with "repeatedly," and replace "dog" with "son."

Saturday, December 13, 2008

Cars Costs and Why People Aren't "Buying American"

The Republicans who killed the Big Three bail out did so because they refused to vote for any interference in the market that would impose more constraints on management than labor.  Their argument is that the main reason the Big Three are in trouble is because the unions have inflated labor costs to such an extent that the Big Three are getting beat by the foreign auto makers operating plants in the US (the Japanese companies like Honda in particular) who have non-union workforces and can under sell their American competition as a result.  

OK.  So let's take a look at the mid-sized sedan category of cars.  Here is a list of the best and worst mid sized sedans on the market in the US.  Notice that only one of the best 5 is an American car (the Chevy Malibu).  All of the worst 5 are American cars.  Now let's talk about cost.  The Honda Accord (the best car in the category) sells for a retail sticker price of about $21,000.  The Pontiac G6 (one of the worst cars in the category - essentially a renamed Grand Am) sells for a retail sticker price of about $21, 160.  Now, no one pays sticker so the actual sale price of these cars is probably about the same and which is more expensive depends on the dealer, the buyer and the deal being struck.  My point is this.  Given that the G6 and the Accord cost the buyer about the same amount, it's hard to make the argument that the UAW's high labor costs are reason more people want an Accord than a G6.  Might part of the problem be that the G6 is essentially a retread design of the old Grand Am that never well regarded by people who judge cars.  

I believe that one of our occasional visitors is quite well versed in the kinds of wage and benefits concessions that Union workers have been making in the auto industry lately (is it you Rolleroid?).  I'd love it if we got a little primer on that kind of thing from you.


USwest said...

Today, I was in my photo class and there were about 5 people in class talking about why they aren't buying cars right now. With the exception of one person who owns a hybrid, all the others were waiting for the new hybrid selection or hydrogen vehicles.

The bottom line is that the auto industry has not given anyone a compelling reason to buy cars. Since 9/11 the auto dealers, all of them, have offered all sorts of incentives to get people to buy. So everyone bought. How many SUVs do you need until you're done?

Everyone, even Honda, is seeing sales drop. This is because of economic uncertainty, but I think think the other reason is that everyone pretty much has a car that they are satisfied with.

My boyfriend went to the local auto mall today and there was no business, period. This is an affluent community where I live. The Chevy dealer is closing. He said Honda Accords were going for $26K-$28k. The Civic was going for $23K. That is expensive. And the Ford, Chevy, and GM dealers still had 2007s on the lot, brand new.

He talked to a friend who had a Lexus that was getting really old. So he decided to go help the US auto makers by buying a Cadillac. He arrived at the Cadillac dealer who said, "Before I even start talking to you, what is your FISA score?" The guy excused himself, went across the street to the Lexus dealer and traded in his old Lexus for a new one.

Why are the US dealers in trouble again?

Bert Q. Slushbrow, Sr. said...

In 2007 Toyota and GM both sold almost the same number of vehicles (Toyota: 9,366,418 to GM: 9,370,000). For that period Toyota reported $55,876,000,000 (yes, that is billion with a b) more in profit than GM (Toyota: $17,146,000,000 to GM: -$38,730,000,000).

I understand that much of that difference results from a one-off tax expense of some sort but still.

Also I see in Bloomberg that the big Japanese manufacturers earned an average $2,400 more per vehicle than the "Big 3" (2005 data). They did that mainly through lower labor and health care costs.

One interesting bit regarding the costs incurred by retired autoworkers is that while GM et al. have a huge pool of such people, Toyota, which opened their first US plant in the mid 80's, does not.

On a personal note we (me and the pants wearer) only buy Japanese cars because they are more reliable and hold their value longer. Rather simple lesson in that for American automakers, one would think.

Raised By Republicans said...

Anyone know how the retirement packages are funded back in Japan where the older Japanese plants are?

Also, those numbers you cite are probably global sales not US sales. GM has subsidiaries in Europe that produce much smaller, better made, more fuel efficient models than are available here in the states. Those cars could be selling better.

Here in the states I find it hard to believe that GM is keeping up with Toyota in sales. I see a lot more Toyotas and Hondas on the road than GM cars.

USwest said...

RBR, take a look at the SUVs and pick ups. I bet most of those workhorse vehicles are GM and Ford. The Ford F150 is the top selling us truck. The smaller sedans and such are more likely to be Japanese makers.

Along those lines, Ford also has successful lines in Europe. Ford cars there are like Japanese and Korean cars here. They are affordable and reliable. In France, it's either the French makers, Mercedes or Ford.

USWest said...

According to a June 2007 article in the New Yorker:

"A 2006 report by the Harbour-Felax Group, a well-respected automotive-industry analyst, concluded that in 2005 Chrysler’s health-care costs were about eleven hundred dollars more per vehicle than Toyota’s. But even if that gap were closed Chrysler and other U.S. automakers would be far less profitable and would be growing more slowly than their foreign competitors. Ultimately, American manufacturers sell too few cars for too little money, and have to offer too many incentives—thousands in cash back or low-interest financing—on the vehicles they do manage to sell.

That same Harbour-Felax report found that, on average, Japanese automakers’ profits for 2005 were twenty-nine hundred dollars more per vehicle sold in the U.S. than those of American automakers. And most of that profit comes not from lower production costs but from the Japanese automakers’ being able to charge more, because their cars are better designed and more reliable, and because their mix of products is smarter."

I have also read that US automakers fail to apply technologies discovered in the engineering of one model to its other vehicles. The companies, it seems, are stovepiped. The Japanese makers, however, cross pollinate all the time. When US auto makers bought foreign car companies, they did so more as financial propositions than as opportunities for innovation. Chrysler did not improve its vehicles by joining with Mercedes. In fact, Chrysler deteriorated the quality of Mercedes. Auto Trend consistently counsels readers not to buy Mercedes. The ones made in this market, the ones that aren't diesel, are unreliable and expensive to repair.They loaded the cars up with unreliable electronics, heated seats, voice commands, etc, that break easily and do not contribute to the safety or ride of the car.

I recently looked at a used Mercedes and compared that to a new Honda Accord. Hands down, the value proposition was with the Honda. It has everything the Mercedes had and cost $15K less NEW! Auto commercials for the Big three, up until this last year were all for SUVs and trucks. Chrysler has things like the PT Cruiser. Comfortable, but its an attempt to lure Babyboomers back to something that resembles their teenage years.

So even if the US government took over the legacy costs and then told the automakers to sink or swim based on that, they would still struggle.

The Law Talking Guy said...

I'm a little shocked at the comment, "more constraints on management than on labor." That sounds like a GOP talking point.

Management was the one asking for the bailout, not labor, so of course it would come with strings for management, not labor. The UAW came to the Hill to support management, but the UAW did not ask for a dime from the Feds and will not receive any. All they are hoping is that IF the feds bailout management, management might not cut so many jobs.

What the Republican senators demanded instead was to legislate wage cuts to labor that management was not asking for, and without letting management decide how best to restructure. Why? Because the GOP wants to deal a body blow to the labor movement.

The Law Talking Guy said...

It is really silly for the GOP to insist that the Unions killed the Big 3 by "inflating" labor costs. It's a tired canard.

There is, true, a cost differential between the Big 3 labor costs and foreign workforces, but let's think about this for a minute. Does anyone complain that American cars are too expensive? No. They tend to be cheaper, on average, for cars within their class. In fact, low price is often the selling point for US cars today. Meanwhile, we import Lexus, Infiniti, Saab, Audi, Mercedes, BMW, etc. These are more expensive cars.

Labor costs may make it more difficult for the Big 3 to compete with Kia or Hyundai, at the very low end of the market, but the real competition is Toyota, Nissan, Volkswagen, Honda - the mid-range cars. The cars for between $20K-$40K. For those mid-range cars, the problem is that the American-made autos are perceived as being cheaper in every way, not more expensive.

In 1996, I sought to buy an SUV. I narrowed it down to the Ford Explorer, the Nissan Pathfinder, and the Toyota 4Runner. That was the price order, as well, with the Ford as the cheapest and the Toyota as the most costly. I picked the Nissan. It handled a little better than the Toyota. The Ford, although about 10% cheaper ($2K-$3K) drove like a pickup truck and was plasticky, noisy, and unstylish. It also had the worst gas mileage. The difference between 12mpg and 15mpg may not seem like much (they both stink) but it's 20-25% difference.

So the problem is with management and their engineering, design, and marketing choices. Not with high labor costs.

Raised By Republicans said...

LTG, it is a GOP talking point. And it's why they voted against the bail out. I don't agree with them. I was just reporting what they said was their reason for voting against it.

You mistook my account of the GOP's motives for my own views. If you read further you will see..."My point is this. Given that the G6 and the Accord cost the buyer about the same amount, it's hard to make the argument that the UAW's high labor costs are reason more people want an Accord than a G6. Might part of the problem be that the G6 is essentially a retread design of the old Grand Am that never well regarded by people who judge cars."

Dr. Strangelove said...

I know you would not have sought the concessions from labor that the Republicans demanded. I understand you disagree with their claims that labor costs are the problem. I am sure LTG understands that as well.

What I think LTG was trying to say is that it is a "GOP talking point" to describe the proposed bailout bill as legislation that, "would impose more constraints on management than labor." That is an inaccurate characterization of the bill. And anyhow, the real reason the Republicans voted against the bailout had nothing to do with that: they were just trying to bust the union.

USwest said...

Thank you all for talking over me.

Dr. Strangelove said...


You point out something critical here that we often forget: foreign cars are not actually cheaper anymore. That was how they grabbed a foothold back in the 1970s and 80s, but now Toyota and Honda are more expensive and, as you noted, they get to charge a premium for their reputation for reliability and style.

In my opinion, some American cars (I am fond of certain Ford models) really are considerably better than their reputation would suggest. Unfortunately, there are also a number of lousy cars, with the kind of unreliable electronics and fragile extras you spoke of. That goes to the issue of the mix of products as well.

I figure the Big Three are going to struggle whether the government helps them or not--but I also think we should at least give them (and their workers) a fighting chance.

Dr. Strangelove said...

Although I'm a PC person, I think Apple has done a great job: every product is a winner. There are no bad products. Toyota and Honda have done the same. Ford has some great products but also some real lemons. Microsoft has the same problem. I keep waiting for the iCar :-)

Raised By Republicans said...

Sorry US West,

I took your comment to be a response to Bert Q. Slushbrow and was giving time to let him respond directly.

The information you present in the comment is very much what my impression is as well so I have little to say except - mega dittos.

USwest said...

I was bolstering Bert's comment and expanding on it. I think my comment, in fairness, was more in response to my daily irritation at work these days where I seem to make a point, which is ignored, then some guy makes the very same point using nearly the same words 5 minutes later and everyone is suddenly paying rapt attention.

Anyway, I was hoping someone would have some insight into the Japanese workers compensation. I tried to do some quick research, but didn't get very far.

I am also surprised that no one picked up on the idea that our automakers are terribly inefficient in how they run their production lines. If you don't cross pollinate, you won't innovate. I thought that was a fundamental principle of business these days. I would be interested to find out how much cross-pollination there is between Ford and Mazda because they come off of the same assembly lines and have for years. Anyone know? Any car buffs out there?

Raised By Republicans said...

I'm not a car buff but the Big Three's inability to use innovations in one model in other models doesn't surprise me when I think of the history of these companies. We sometimes forget that Buick, Chevrolet, Cadillac, Pontiac, and Oldsmobile all used to be separate companies. Maybe they retained a certain amount of isolation from each other even after they got combined into GM. Same story with Chrysler, Dodge and Plymouth and Ford, Lincoln and Mercury. And that's not even taking all the European subsidiaries like Opal into account.