Requiem for a Dying Auto Industry

It makes a certain amount of intuitive sense. Auto companies have been making handsome profits. Company executives are being handsomely compensated. On the other side, workers can barely get by on what the companies are paying them.

Ergo, by a certain type of logic, profits should be redistributed, from stockholders and executives to workers. 

Naturally, the issues are far more complex than media reports suggest. So, for your edification, here is some analysis, from Greg Ip and Clifford Winston at the Wall Street Journal.

As noted on this blog, at some point salary levels must reflect productivity. If your labor adds a certain amount of value to a product, you deserve to be compensated appropriately. If not, not.

And yet, as Greg Ip points out, American workers, by and large, have not been more productive. 

Pay is ultimately tied to productivity: the quantity and quality of products a company’s workforce churns out. And here, American manufacturing companies and workers are in trouble. The issue isn’t with labor-intensive products such as clothing and furniture, which largely moved offshore long ago. Rather, it’s in the most advanced products: electric cars and batteries, power-generation equipment, commercial aircraft and semiconductors.

The issue is going to become: can American workers compete in the global marketplace. Also, as Ip will point out, productivity also involves the way a company organizes production. 

For all the talk about onshoring manufacturing, America is not doing very well in competition:

President Biden might be celebrating a manufacturing renaissance based on new factories, but the share prices of former manufacturing icons Ford Motor , Intel, Boeing and General Electric  suggest skepticism is warranted about the durability of this renaissance: All are at a fraction of all-time share-price highs.

Yes, American companies still lead the world in design and innovation, but the resulting products increasingly are made abroad, especially in Asia. Biden, like former President Donald Trump before him, wants to reverse this, through tariffs, subsidies and other government interventions. Japan, South Korea, Taiwan and especially China certainly intervened plenty to help their manufacturers. 

One has been told that it’s just a question of government policies. Once we have more tariffs and more sanctions; once we remove China from the World Trade Organization; all will be well and American manufacturing will recover.

Ip disagrees:

But attributing manufacturing performance to government policies alone is dangerous; it underplays how far Asian manufacturers have come in cost and quality and how far their American counterparts have slipped. 

Since 2009, manufacturing output per hour in the U.S. has grown just 0.2% a year, well below the economy as a whole and peer economies in Europe and Asia, except Japan.

Manufacturing productivity growth 2009-2022 (annual average)Source: U.S. Labor Dept. (U.S.); OECD (U.K., Germany, France, Italy); CEIC Data (Taiwan, South Korea, Japan)

And, of course, the existence of labor unions seems to reduce productivity. Unionized plants are less efficient than nonunionized plants.

Ip explains:

The Detroit Three—Ford, General Motors , and Stellantis, owner of Chrysler—have been losing market share for years, to other brands and to nonunion U.S. plants. They account for just two of the 10 most dependable brands ranked by J.D. Power and just one of the 10 best cars picked by Consumer Reports. In electric vehicles, they are far behind Tesla, whose highest-output plant and main export base is in Shanghai. 

Detroit auto manufacturers excel at output per employee. Unfortunately, the cost per vehicle is among the world’s highest.

That’s why Detroit is recoiling at the UAW’s demands. While their output per employee is among the highest of 11 global manufacturers ranked by consultants AlixPartners, so are their costs per vehicle. The lowest cost: China’s. 

And then there is the problem of skilled workers. We have noted it on occasion on this blog, but America, and especially its educational system, is not producing enough skilled workers. 

Labor presents problems other than just cost, such as the shortage of skilled workers. “They find desirable candidates, they hire them, they train them, they don’t retain them,” said Jim Schmidt, an automotive expert at consultants Oliver Wyman. “A lot of the younger workforce doesn’t want to do that type of work.” For some, absenteeism is another problem.

Ip continues, pointing out that America has problems that go well beyond the automobile industry. Consider the airplane manufacturing competition between Boeing and Airbus:

The U.S.’s manufacturing problems go much further than autos. Since its top-selling 737 was grounded by crashes in 2018 and 2019, production problems have left Boeing far behind Europe’s 

Airbus , which delivered three times as many aircraft last year and twice as many this year. Boeing’s 787 Dreamliner has been plagued by quality defects. Since the pandemic, Boeing has experienced “a crisis of loyalty among its workforce” with high turnover compounding supply chain problems, said Michel Merluzeau of AIR, an aerospace advisory firm. 

The story regarding the government policies that promote the building of semiconductor plants in Arizona, is similar. We do not have the skilled workforce to do the job:

Even constructing a fab’s clean room involves pouring the concrete and welding the pipes in just such a way to avoid tiny imprecisions that ultimately reduce yields, Lin said. It’s why TSMC is seeking to bring several hundred workers from Taiwan to Arizona to aid in the construction. Local trade unions have objected, saying this contradicts the Chips Act’s goal of creating local employment. 

Unions need to accept they’re not yet up to the job. “Everyone loses the skills they don’t practice,” Kevin Xu wrote recently on his China-focused blog, Interconnected. Xu, who once worked with unions to get former President Barack Obama elected, says unions need to be told “that they are not the best, but they can be if they stay humble (and) soak up all the know-how and skills from workers elsewhere.”

If that does not suffice, Clifford Winston argues this morning in the Journal that government interference has doomed the automobile industry. Tariffs on foreign automobiles prevented Detroit from improving its products. Refusing to allow the companies to go bankrupt rewarded inefficiency. Regulations imposed unrealistic and costly requirements. Ergo, American automakers could not compete effectively.

During the past four decades, Winston explains, Detroit’s automakers have lost more than half of their market share.

And also,

Government policies that have reduced auto makers’ competitiveness include inefficient safety and environmental rules and mandates. Regulations mandated installation of various safety devices, such as shatterproof windshields and energy-absorbing steering columns, that raised auto makers’ costs but didn’t reduce overall highway deaths. Legislation required auto makers to install air bags on both sides of the front seat by 1998, increasing costs and risking the safety of smaller passengers. Corporate average fuel economy standards enacted in 1975 continue to increase, raising auto makers’ costs and consumer prices with uncertain benefits to the environment. And state and federal mandates to increase dramatically the share of electric vehicles on the road are pressuring auto makers to transform their production processes.

For the record, Winston works at the liberal Brookings Institute.

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