Offshoring and the Auto Industry

(photo credit: Lou Linwei for The New York Times)

The U.S. government is about to kick $15 billion over to the U.S. auto industry. And what we have seen with all of the bailout cases thus far -- from AIG to Citibank -- is that that amount is probably just a down payment on a future bigger draw.

Michael Moore has compellingly argued that the best way to save the American auto industry is to force it to choke on its mistakes and bad management -- and change. In a public letter, Moore has offered the shocking truth that anyone could buy the entire American auto industry for less than $3 billion -- and U.S. taxpayers are about to pump 5 times that into the uncompetitive sector.

And on top of that -- there is NOTHING in the current outlines of the auto bailout package that requires the auto industry to keep jobs in the U.S. This money can go to help them manage their facilities abroad -- in lower wage countries -- while facilities continue to shut down in the U.S. with jobs shifted overseas.

In fact, despite some minor verbal, non-binding assurances from the auto chiefs that American taxpayer funds would not be applied to offshoring activities, there are no deals, no guarantees at all -- and if faced with a much higher, less efficient production base in the U.S. compared to cheaper platforms elsewhere -- this bailout money could in fact be financing a new major offshoring trend.

Even Paul Krugman alluded to this in his Stockholm remarks accepting his Nobel Prize, suggesting that gravitational forces are going to unwind Detroit's auto sector, no matter what Obama does. He said "the concentration of the industry around Detroit would disappear."

Obama's pre-government team in collaboration with Bush's outgoing economic officials are trying to diminish the sense of crisis in key sectors in the economy by guaranteeing loans and promising huge cash infusions. . .but, there are 'smart' ways to help move industry in new directions and then there is dumb spending.

Not dealing with the question of a new "social contract" inside the U.S. when taxpayer dollars are being pumped into the auto sector is a major mistake.

-- Steve Clemons directs the Smart Globalization Initiative and is Director of the American Strategy Program at the New America Foundation. He also publishes the popular political blog, The Washington Note

Comments

[LightningJoe]

Just an addendum, for those who believed too much of the Car Executives' tripe:

They love to say how labor "costs" them around $79.00 per hour (and then of course blame it on the UAW).

Truth is, that figure includes ALL of the following:

1) wages/salaries of working employees,

2) everything in those worker's benefit packages; health, retirement contributions, etc.

3) all of the Federal UI insurance, Social Security withholding, etc, that the manufacturers are required to pay (ie, everything that makes gross income into net income),

4) the ENTIRE expenditures package for already-retired employees, including pensions and healthcare.

Obviously, this is cheating. They took their TOTAL personel budget, including pension obligations, and divided it by the number of active workers. That last item brings the total WAY up, from the real wages workers earn in those auto plants.

So what do auto workers REALLY earn, before all the take-outs? About $28.00 per hour, average. About equivalent to what a municipal worker might make, after many years on the job.

And how does that compare to white-collar jobs? Don't even ask. It's nowhere near what the average salary is on Wall Street, for instance.

[Rosey]

EVERYONE MUST SEE THE FORD PLANT IN A TINY CORNER OF BRAZIL. The most amazing factory for a car maker. It shows why the Big 3 will never build in the US......and who could blame them... This plant can make several different cars at once..... lots of robots. The company encourages sharing among the workers...etc.etc.etc. The UAW would never allow for this and that is too bad. I don't wish people to lose their jobs.....but if SUCCESSFUL Toyota & Honda can build in U.S. for $18 an hour, why not the Big 3? Just asking!!!

[Ginsights]

Cash bailouts for multinational corporations are foolish.
The money they get into the U.S. allows them to free up funds for offshoring and other activities that do not benefit the U.S. taxpayer.
Since funds are fungible, no one is the wiser and the GM executive, when asked by Congress for assurance that U.S. government funds would stay in the U.S. could say `yes' with a straight face and we were all supposed to believe that.

.I don't know about the auto-industry, but high-tech industries, our `hope for the future' have been sequestering massive amounts of their Intellectual Property and the resulting profits in tax havens, making further investment and job creation in the U.S. unlikely. And this is all invisible to stockholders and employees, since the companies are not required to report in 10Ks or annual reports where there profits are being kept.

Much more transparency is required before effective action can be taken to assure that U.S. government and taxpayer money benefits the U.S. taxpayers and economy.

[mychris52]

I have a simple solution to the auto industry bailout. Have all three companies merge into one company, and have them operate as subsidiaries. They retain their identity, while at the same time cutting administrative costs, and combining manufacturing facilities.

[Ginsights]

It's the excessive mergers, under the pretense of gaining efficiency and cutting administrative cost, that have created companies that are now too large to fail. The benefits of being giant are overrated, except by the highest level of management, who think they can manage actually such a large enterprise without understanding the details of what is going on.
The solution in my view, is to create multiple ones, that will compete for the consumer and survive if they assemble the right stuff with adequate quality.
And this goes all the way down to the companies in the supply chain. Those companies must be selected for use of their products by the assemblers based on quality and price. That way one creates a vigorous interactive economy, rather than giants with 15 layers of supervisors, that are only worried about their jobs and bonuses.

[janmarina]

If they can't walk on down the road let them crawl,sooner or later they'll figure out how to get back on their own two feet.Bail-outs make mice out of men,sissy's.They've all ready lost the ball, and we are nothing but fools to give it back.

[Anandas]

I think it is insane to put good money after bad. Systems are failing and
there would be a fallout. American auto companies have had about 30 years
to wake up and smell the coffee by making better, more competitive,
longer lasting, and efficient cars, and they did not do it. Why would anyone
overseas want a gas guzzling American car with 8$ gallon fuel and tiny
roads? Why should corporate greed be rewarded? Why are we fooling
ourselves into thinking there even is any money around, when in the
financial world, the emperor has no clothes? They are all "interconnected"
because there is no money.

[DuganS1]

GM and Ford sell mostly small fuel efficient cars abroad. Their foreign operations also make money by the way.

[sposton]

Americans cars were never meant to be exported in any major way. Early on American auto makers set up auto plants overseas to design and manufacture cars for those markets. For example GM owns Opel in Germany, Vauxhall in UK, Holden in Australia, etc. Ford owns subsidiaries in Germany and UK and elsewhere. Even Chrysler had at one time European brands like Simca in France, which is now long gone.

[karmatt77]

AIG, BofA,Bear and Stearns, Fannie and Freddie, all got bailouts and everyone jumped on the bail out bandwagon. They can't fail or else all hell will break loose. We kept hearing bogus arguments and it was approved.
Now the automakers want a bailout and everyone attacks the quality of cars and the union workers. Why the double standard? No one should receive a bail out, but come on now, if the banks received one why not the auto makers? The working man gets nothing and his job is outsourced to Communist China and Communist Russia. Talk about trickle down economics. Soon there will be nothing to trickle down and all hell will break loose.

[DuganS1]

The economy can't function if the financial system collapses. The economy can continue to function if GM files for Chapter 11.

[sposton]

It never ceases to amaze me how many Americans working stiffs are anti-union and assign blame for all ailments caused by management onto unions. Why don't we blame five day week, eight hour days, workmen's compensation, minimal safety regulations, lack of child labor, ...? These are all gifts from the hard won, often bloody battles fought on our behalf by union people decades ago. Surely if we work 16 hours days and six days a week our companies would be more competitive and would never go out of business. Americans, wake up and smell the coffee. You are on the receiving end of a class war and you don't even know it! How pathetic.

[DuganS1]

The competition of the US automakers are mostly among the Japanese and Germany companies, and those companies have similar workweeks, similar workmans comp laws, similar safety regulation, and don't have child labor.

[sposton]

Precisely! In case of Germany they even have stronger unions and probably better benefits. There is one structural cost disadvantage that American auto makers have and that is the health cost; one more reason for a national health system. Other than that the vast majority of causes for their decline are self-inflicted by management.

Back in 1980's David Halberstam wrote an excellent book about the auto industry - The Reckoning. It is really worth reading this book. I suspect if Halberstam were around to update his book, he would just continue where he stopped because their current problems are of the same nature - moronic management.

[mioffe]

All cars are perfect but relict of previous century. We need completely change our transportation system.
We need to pay attention that most automotive and small aircraft engines have 25-30% thermal efficiency range. Because this efficiency apply to move not only passenger but and heavy cars, real efficiency of cars where we are mostly alone moving to job and back will be less than one percent.
Mass transportation will not help, because we are increasing distance to place where we are going and most important- time. Mass transportation takes more energy on short distances between stops.
Trying to save car industries we are loosing money, time and our invention spirit. We need no more efficient car still weighting more than 2000 Lb., but cart for one person with weight no more than 20Lb.
We need roads without intersection.

[mountainweb]

I buy ONLY Toyota cars and trucks! Why:
1) Made in America
2) Quality that GM and Chrysler have no hopes of competing with
3) Toyota has Competent management, GM & Chryser have totally incompetent management
4) Non union work force (unions in this country have totally corrupt leaders)
5) GM moving work offshore instead of fixing issues in the US.
6) Once had a Chrysler product that never ran correctly, they never fixed it, dealer faked oil and filter changes (hard to change a filter without removing the cover-caught them at it) told them either fix the car or I will never buy another Chrysler procuct - never bought one again.

[Dadzilla]

Mountianweb... Sorry but the notion that Toyota (or Honda for that matter) is a 'Made In America' is simply wrong when you consider the percent of content. Toyota may on a few models stamp, weld and produce some of the heavy parts in the US (as a fact I've worked in a casting facility making Toyota engine blocks) much of the units are in fact produced overseas. None of the imports touch the 75% average of GM product lines on domestic content.

Can you also explain how if the domestics are so bad, why do we read things like "Toyota reportedly is talking with General Motors about producing the hybrid Prius at their joint production plant in California, Japan's Tokyo Shimbun reported Friday.

http://www.autoobserver.com/2008/05/toyota-considering-california-production-of-prius-report-says.html

As far as quality goes I give the imports credit where due. That said the quality if the domestics has not only come a long way it is forcing the imports to step up their game further. In a number of categories domestics out shine the competition. In Midsized cars Buick gets the JD Power award.

I'll skip the whole anti-union bias you have been fed...

[X-man]

Do you want to be a country of lifestyle or a country of cheep labor?

We blame the big 3 for having a more expensive labor rate per unit and not being competitive; I disagree with not having competitive products but is paying the worker a good wage wrong?

The Big 3 gave their workers a pension is that wrong? Congress should say thank you for being so good to the American people. Instead they say you can"t compete with companies that don"t pay their workers and oh you need to get ride of your pensions to be competitive.

Is this the country we want??? Congress is looking out for Global Trade instead of the domestic economy. Who are they serving? I"m all for free trade but we need fair trade and if our trade partners don"t comply than we should impose tariffs.

GM just hosted NASA for a week for FREE to introduce them to a global collaboration tool that GM Created; but they aren"t innovative. They didn"t go to Honda or Toyota they went to GM.

The Big 3 are the last American Icon, you break them and you no longer have an American reminder of greatness or the ability to protect your self, How quickly we for get WWII.

Congress no longer controls our trade they gave that to a privet company called the WTO (world trade organization). That is Unconstitutional no one is suppose to control trade but congress. Who is looking out for AMERICA?

[ChinaMurdoch]

One issue not covered here concerns possible assistance given to subsidiaries of US car makers by other governments such as the German government supporting Opel, one of GM's European subsidiaries which has some great cars and been fairly profitable recently. The fear is on one hand that a sick GM parent will suck up any money given to Opel and on the other hand will not allow Opel to be bought by someone else. There is plenty of past evidence that GM has stripped Opel of funds that should have stayed with Opel so these concerns are present.

[cherylsass123]

be american ! buy toyota [ made in tennessee] , nissan [ kentucky + alabama] subaru[ made in michigan] or, better yet, honda [ made near bakersfield, california!] or be Un-american and buy an " american car " ; probably a worthless pile of s*it now made in mexico or even korea! and yes, made at a production cost which is a fraction of the $27.00 / hour they had to pay in detroit! hopefully they'll come with a little cocaine hidden in the panels somewhere so that the slobs working at sexist * mart [ wal * mart ] can at least cut them open and be able to feed their families on just $8.00 an hour! and for this we are fixing to bail out the big three " american" auto manufacturers? while the republicans are at it, why don't they just give some tax incentives so that GM can use them to build production plants over in Iraq once the war is over!

[Lakelander]

I agree--It's ironic that most of the "evil" foreign makers build their vehicles in the U.S., maintain happy relationships with their employees, generally good profit margins, and good quality, while the "expert" American car makers spend more time trying to boost their profits through lobbying, offshoring, and pushing knock-offs of popular "foreign" models off on a patriotic public--when they're not wasting money buying marquis foreign brands and ruining them through mismanagement--than building the fine automobiles we know they can produce.

I am a proud American, but common sense drives my patriotism. I drive a "foreign" car made in Ohio. My previous two vehicles, bought new, were "American" models built in Brazil. They got me where I needed to go, but they required a lot more maintenance and were a lot more expensive to run.

The "big three" must wake up and understand that token efforts to emulate successful management styles and manufacturing processes only go so far. Offshoring for cheap labor only works until the folks you hire in third-world countries realize their true worth in the market. We've already bailed out Chrysler once--a successful bailout whose benefits were squandered by idiot executives who never left their stereotypical "used car salesman" ethics behind, just upscaled them.

Before Congress gives anyone another penny, they should grow some cajones and require quid pro quo from the recipients--and quid pro quo doesn't mean the usual empty promises, lack of oversight, and lack of results.

[vicbennett]

No emergency.
The American people need to start handeling there business.
Ever since BUSH took office there have been all of these emergencies.
The only emergency is getting BUSH out of office.

Bad managment from the top equals EMERGENCY!

All the problems that we have are because we have allowed and our politicians have allowed CEO's all the slak to ROB the American workier and the American TAX payer.

Change the rules and you solve the problem.

They don't need more money without changing the rules.

The question is simple. Are the CEO as patriotic as the worker and the tax payers they are asking to recieve monye from?

[goodspeed]

Well, money was given to the banking industry with no binding oversight and credit just got tighter.

Money was given to AIG, with no binding oversight, who knows how that money is being spent or onto who pocket it went.

So now money is given to the Big Three, and no one is sure how or where they will spent it, and these guys are still talking "internal combustion engines" to boot.

So much for the money and so much for a reduction in oil dependency.

[WritusMaximus]

Yup, just like the first bailout Obama voted YES for---$700 billion-plus, with nothing to show for it. Obama got his language into the authorization bill to make sure Paulson wouldn't go hog wild, but Paulson went hog wild anyway. I guess Obama-The-Lawyer's language wasn't strong enough. Strange that there is no talk about keeping auto manufacturing and jobs in the U.S. as part of this auto industry bailout, for after all, Obama speaks endlessly about rewarding companies that do just that! Obama has been in somewhat of a rut since his YES vote on the bank bailout authorization, and it looks like he once again will foolishly sign on to an auto industry bailout with NO guarantees of keeping manufacturing infrastructure and jobs here in the U.S.

Someone please email Obama this article, and make sure to highlight the following:

"And on top of that -- there is NOTHING in the current outlines of the auto bailout package that requires the auto industry to keep jobs in the U.S. This money can go to help them manage their facilities abroad -- in lower wage countries -- while facilities continue to shut down in the U.S. with jobs shifted overseas."

[adaugeo]

If the language did exist, it would be as relevant as the U.A.W. cutting wages of the FUTURE hires...with demand shrinking they aren't keeping jobs anywhere, and better get on line for a job at the Dept. of Transportation to Build New Roads for the cars they are not producing.

[Lionel2]

The "Big Three" have spent the last thirty years moving their factories out of the US claiming they can't make money paying American wages. Meanwhile, TOYOTA has spent the last thirty years building more than a dozen plants inside the U. S. The last quarter's results: TOYOTA makes 4 billion in profits while the "Big Three" have racked up billions in losses.