Big Three Bailout

November 19, 2008, 8:51 pm — New York Times
A ‘Big Three’ Failure and U.S. Auto Making
By Catherine Rampell
Earlier this week I wrote about how many jobs might initially be destroyed in a major contraction of the Detroit Three auto companies. I promised to follow up on the question of how many of those jobs might be recovered by foreign manufacturers that step in to fill the void. So here goes.
Some argue that the jobs shed by the Big Three would be shipped abroad — where labor is cheaper — never to return to America again. A contraction of the Detroit Three would represent the end of the American industrial base, they say. That’s not necessarily the case.
Many of the “foreign” cars Americans buy are actually built right here in the United States. And there are quite a few reasons that foreign car companies would most likely expand their production here if they grabbed more market share from the Big Three.
First, labor costs, while important, are not as big an issue as most Americans think. While much of the debate about the auto industry has concentrated on the expensive wages given to unionized workers, labor represents a surprisingly small portion of the cost of producing cars. Only about 10 percent of the cost of building a car comes from direct labor costs, according to Kim Hall, director of the Automotive Communities Program at the Center for Automotive Research (C.A.R. is a nonprofit research center with ties to industry, labor, government and academia).
Second, it’s expensive to ship huge numbers of big, heavy cars around the world, especially when fuel costs are high. Producing here saves companies money.
“All the automotive manufacturers in the world want to produce here because this is where they sell,” says Mark J. Perry, an economist at the University of Michigan-Flint.
Third, producing in the same market they sell in allows carmakers to hedge against currency exchange risks. In many ways it’s simpler, and more predictable, to manufacture and sell in one currency.
Fourth, manufacturing here allows companies to keep their fingers on the pulse of American consumer demands. Susan Helper, an economist at Case Western Reserve University, notes that a company that manufactures where it sells can get a better feel for how consumers use its product.
Fifth, manufacturing in America earns some good will among American consumers. “It’s a way to show that you are a good citizen in the country where you sell your products,” says John Paul MacDuffie, a management professor at the Wharton School of the University of Pennsylvania and a co-director of the International Motor Vehicle Program.
Sixth, foreign automakers would probably be able to purchase existing plants at bargain-basement prices –- and these plants would come with existing pools of trained human capital.
Given all these reasons, plus the assumption that Americans will continue to demand millions of cars each year, it would seem that jobs from American-owned car companies could easily make the transition to jobs at foreign-owned car companies. Right?
Maybe not, at least not in the near-term.
There are a few forces that would hinder foreign auto expansion in the United States.
The most immediate hurdle would be the supplier problem. The companies that supply parts to the Big Three also supply parts to foreign-owned plants in the United States. These suppliers have very thin margins, according to Francisco Veloso, a professor in the department of engineering and public policy and an auto industry expert at Carnegie Mellon University. This means that the failure of one automotive company could bring down its suppliers, which would then not be able to continue selling parts to their healthier customers.
Daimler, for example, makes the Mercedes-Benz M-Class in Alabama, Professor Helper says. “The entire cockpit is delivered by Delphi, which would probably be liquidated if G.M. failed,” she says, noting that a cockpit module supplier is “not as easily replaced” as an office stapler supplier.
Given the bad economy, it could take months or years before suppliers fully recover and then turn to meeting the needs of the companies that want to increase their production in the United States. For these reasons, Honda has expressed support for government aid to the Big Three.
Foreign automakers that successfully expand in the United States also may not want to hire former Big Three employees. While there are isolated instances of foreign companies scooping up facilities and human capital from domestically owned plants, many foreign automakers will probably start their own plants and create new work forces, for a few reasons.
One is a perception that in places where a Big Three manufacturing presence remains, residents and public officials will be prejudiced against the foreign interlopers (and be less cooperative on public infrastructure projects, for example, desired by foreign companies).
A second reason is the fact that some automakers will probably want to build their own plants, designed to their own technological specifications –- plants whose construction would probably be subsidized by states looking to attract new employers. Some of those states may also be right-to-work states, meaning that companies won’t have to pay the higher wages demanded by organized labor. (Many foreign-owned car companies have opened shop in Southern states for just this reason.)
Finally, there may be a perception that Big Three employees are somehow “contaminated” by having worked at a union plant or in American manufacturing, Professor Helper says. (This is a view that, Professor Helper argues, has been disproved by a plant that successfully went from “being one of G.M.’s worst plants to one of Toyota’s best with essentially same work force.”)
All this means that Americans whose jobs would be destroyed by a contraction in one or all of the Big Three would not necessarily be the same Americans whose jobs would be created by an expansion of one or all of the Big Three’s foreign-owned competitors. And those who would lose their jobs now would probably have trouble finding work immediately during a recession.
Some auto-related jobs, moreover, would probably never be recovered if foreign auto companies completely replace domestic companies.
Yes, some auto manufacturing jobs will inevitably be lost to more advanced (and more productive) technologies, but that would be the case even if American plants retain their domestic ownership. I’m talking about the jobs in engineering, research, design, administration, advertising and other mostly white-collar positions that can be performed in foreign companies’ home countries.
“All the development of the Prius battery was done in Japan,” says Professor Veloso. He says a foreign company expanding in the United States “probably wouldn’t have too much need for the whole G.M. Tech Center. They might pick up a few people, but that’s it.”