The Truth Behind Why Japanese Automakers are “Better”
I keep hearing over and over that “The U.S. automakers deserve to die off because they make crappy cars and bad decisions“. People think that’s why they can’t make a buck and are at risk of bankruptcy. But I have another side of the story that not many people are aware of:
The Biggest Differences Between U.S. and Japan Automakers
For the Japanese automakers like Toyota and Honda, the single biggest lesson they learned from the American automakers was this:
Don’t be too generous with employee retirement benefits.
The biggest problem right now with GM, Ford and Chrysler are their payrolls and pensions. The big three provided incredible retirement benefits to its employees for decades, and now they’re feeling the crushing weight of billions of dollars owed to hundreds of thousands of retirees each year.
But the Japanese makers don’t have that problem, but not simply because they had the foresight to avoid union contract deals like bloated salaries and the infamous “jobs bank” that paid workers 95% of their salary to do nothing until work is available. No no no, my friends. Here’s the dirty little secret about why the Japanese automakers are more solvent than their American counterparts:
The Japanese government pays most of the retiree’s pension and health care.
That’s right, Toyota, Honda, Nissan, and company don’t have to worry about paying their workers the most costly of all the benefits because their government covers them.
If GM had the U.S. government to subsidize the retirement benefits of its 400,000+ retirees, then I bet they would have loads of cash to use for capital investments, product re-engineering, and new vehicles (that people want). But they’re stuck paying for the decision of CEOs decades earlier who made deals with the UAW which they have to spend billions to cancel through employee buyouts (if the employee even accepts).
As a personal example, imagine if you didn’t have to worry about paying your mortgage and medical benefits (I use mortgage as an example because it’s a big chunk of most people’s month expenses). Think what you could do with all that extra money. You could upgrade your home, pay off other debts, go back to school, spend more on your child’s education, and so on.
But I’m not making an excuse for the domestic automakers. Rather, I’m merely pointing out a kink in the argument that shows the Japanese have some big advantages over U.S. automakers, other than a product mix better suited for the times:
Most of their U.S. workers aren’t even retired yet. In a 2006 NY Times article (for which I got most of the background info for this article), “Toyota’s American arm has just 258 retired production workers (G.M., by contrast, has more than 400,000 retirees)”. And as far as health care:
While G.M. paid $5.4 billion last year for the health care of its 141,000 workers, 449,000 retirees and their dependents, Toyota said in its 2005 annual report that its obligations to cover the health care expenses for its retirees “are not material.”
Wow. When one company can avoid billions in costs compared to its rival, then it has an immediate leg up on the competition. I’m not saying I want America to have nationalized health care and pensions, just that it’s not just the product mix keeping the big three down.
Only recently did the UAW make concessions to the Big 3 to make new retirees pay part of their health care costs. But thanks to contracts with all the rest of the retired work force, GM, Ford and Chrysler have to constantly try to renegotiate or offer insanely expensive buyouts to get out of their obligations. That’s one of the reasons GM and Ford can’t just cut brands like Saturn, Pontiac or Mercury; not only would they have to buy out dealer contracts, but they would also have to buy out all the generous retirement packages of its union workforce at those brands.
Unless they go bankrupt. Then they have the freedom to restructure without dealing with most of their contractual obligations.
Hmm, maybe we should just let them go under.
It all trickles down to the management on the 13th floor. There is a book I read in one of my college classes… written by a genius named Edward Deming. The book is titled, “Out of Crisis.” He saw this problem YEARS ago and offered his consulting to Ford and American Motors (now gone). They refused. He then traveled to Japan and made those companies what they are today!
-Tyler
@Tyler – Yep, I read that book too for my undergrad (an operations-type course). Excellent book and it’s weathered the years well.
I think this just shows how powerful the UAW was, and still is. They wouldn’t work without these contracts, so the big 3 had to agree. Now, when the big 3 are in trouble, is the UAW willing to make concessions… no. Bad decisions were made all around, and now everyone is going to suffer for it.
With respect to non-union workers in the United States, your post is not 100% accurate. The Japanese government will not pay their health insurance or retirement benefits. Nevertheless, they are able to profitably make cars (including small ones) in the US using US workers (and many US made parts).
The reason the UAW broke the Big Three was the automakers have massive fixed costs. When the UAW struck, they faced massive immediate losses. To stem the losses, they gave away the farm with respect to pension and other benefits.
With respect to their US-based workers, the Japanese have been smart. They placed plants in “right to work” states, they placed plants in areas where the plant jobs are prized by blue collar workers, and most importantly, they pay a “fair” wage to their workers. Workers are happy and know they have a “good deal” and are unlikely to strike. Finally, the US based workers would have ZERO leverage in the event of a strike. If the US plants shut down, the Japanese could meet demand with production from other plants in a pince.
“I bet they would have loads of cash to use for capital investments, product re-engineering, and new vehicles (that people want). ”
If the company sucks, no matter how much $ it has, it will continue to deliver inferior products. When did we see the last cool American car?
I agree that GM’s legacy costs are not tilted in it’s favor, but this still doesn’t excuse the simple fact that GM slowly dug themselves into a deeper hole once the Japanese automakers gained a foothold with the American consumer.
Not to mention, that Toyota and Honda have been somewhat better at matching production requirements (i.e. jobs) to correlate with their sales demand much better than GM or Ford.
When you think about it, we’re actually watching de-evolution take place.
that isn’t a dirty little secret and ignores several things. the japanese also pay higher taxes than in the u.s. so figure that one in. also figure in total cost of manufacturing the car, not just salaries. it’s amazing that the japanese and europeans build cars in the u.s., and the u.s. builds cars in mexico and canada and still the total per car cost is higher for american cars. that has nothing to do with labor costs. two half dozen, yada, yada.
the big 3 make crappy cars in the u.s. market regardless of how many heavily ad revenued motor trend awards it receives. i remember when the ford taurus was the best selling car in america. the problem is that honda kept improving the accord while ford rested on its laurels. import car makers also do not sell 3 or 4 different flavors of the same car like in the u.s (e.g. ford taurus was the same thing as the mercury sable, etc). chrysler was the biggest offender of the same car under three different badges of chrysler, plymouth, and doge in the 80s. the big 3 blew their wad on light truck/suv’s and minivans (which were nice), in order to bypass CAFE standards, all the while making ugly, unreliable cars in order to make the cafe standards. At the same time, they make 45mpg cars in europe.
the numbers speak for themselves: the big 3 have continually u.s. lost market share. this had nothing to do with the cost of the cars and everything to do with the quality and attractiveness of the cars. foreign cars have been higher priced, yet they continued to outsell big 3 cars. the big 3 may be starting to make more reliable cars now, but it’s a little too late. regardless of their reliability now, i still think their cars are ugly. i’ll keep my bmw, thankyou.
just a few random thoughts…but tim summed up most of mine.
1. no tarrifs on imported foreign items. if the govt wasn’t in bed with other countries, then we would impose tarrifs like they do to us.
2. the “big three” make excellent cars….in foreign countries. i am not a car nut like mike here is, but from what i read, when you go to foreign countries, the “mother company” ‘s foreign branches make excellent cars for their people here, but screw over the united states by not bringing them here.
3. most people in “right to work” states will bash the unions in a minute, but never seem to bring up the ungodly wages the higher ups make, for producing nothing but trash. being management is the only place where you can get promoted or make more money for screwing up. i, for one, am jealous.
You know, being a rank and file worker I still get extremely tired of hearing people bash management. Take Chris for example above…
1. You make a blanket statement that all managers are producing trash. Are there not at least some successes that you can point to?
2. Managers get promoted and make more money for screwing up. This is simply not true, they are held accountable. Would you have them fired at the first sign of a mistake? This is not how business works.
3. While it is true that foreign auto makers get some breaks on tariffs there are still some that they must pay. Would you rather the foreign auto makers make the cars completely in their home country without using American workers?
Finally, what specific car(s) would have them make here that they are not making as you state that they make excellent cars “over there”.
schoon,
1. pretty sure we are talking about the big 3 automakers, not about all companies as a whole.
2. lets use a real world example…john ashcroft lost an election in the US senate to a dead guy…so what does bush2 do, puts him as US attorney general. but yes, people get promoted because of incompetance or who they know…does it happen all the time, no, but to say it doesn’t happen is lunacy. yes, i would love to see incompetance get fired all the time, but when you have “golden parachutes” to the high ups as opposed to the lowly peons, it is downright insulting to the american worker.
3. i was referring to importing of cars. foreign countries tax the hell out of everything that is imported into their countries from outside….meanwhile, the united states does not do that. am i happy that foreign companies want to set up shop in america to cut costs…yes i am. do i own a foreign car made in the united states, yes i do. would i buy an american car made in america, yes i would (the fiance wants a ford 500).
what car companies: Opel , Vauxhaul, Holden apparently make great cars overseas, but we will never see them.
but i will say this, this may be the first time in my 8+ years of working my current job that i ever had someone in rank and file say that management is well worth what they get paid. if it wasn’t for rank and file in any industry busting their humps, the company would go belly up and management wouldn’t be able to get paid the wages they do to sit in their cushy office and push papers.
(disclosure…i have a bigger office then any of you with two restrooms in it…sure, it is a converted front lobby, but it is still applicable) 🙂
@Chris: I agree the big three have held out on giving us the cool cars that they get overseas, but it’s because they didn’t think Americans wanted them, and when we did, they were too late.
As for what we have from Holden, we have the Commodore, rebadged as the Pontiac G8 (lauded by critics btw).
From Opel and Vauxhall (both GM brands), we have the Aura and Astra (now Saturns), also welcomed by critics. And Ford is finally bringing over its Fiesta, which is an awesome car over in Europe.
But I do want to point out that your professional experience is working in state government, not for-profit corporations. Having worked for both sides (currently as a fed contractor seeing in on how the feds work), I can say they’re vastly difference.
There’s always a way to sneak your incompetence past your boss, and so on up the line, especially in an up period. But when times are tough, your lack of accomplishments and capabilities are noticed quickly by the bosses. The only place where it doesn’t seem to work by design is with the top executives, but that’s because it’s a “boys club”, just like in the government.
@chris, if the tax and tariff issue wasn’t a problem, why do you think foreign auto companies started to make cars in the US? the big 3’s foreign labels do avoid whatever import tax and tariffs.
are there bad managers? yes, but there are a ton of good managers out there too. the problem i see is over a decade’s worth of irresponsibility in our work force from rank and file to the managers. it isn’t manager specific by any means; moreover, those managers grew up in this work climate of rather uncontrollable employee base. employees were very spoiled the past decade. People jumped ship if they didn’t like the color of the post it notes.
the problem i see with all this manager and executive bashing for the sake of bashing executives and managers is what are we telling ourselves? you shouldn’t seek to excel anymore? being an executive is bad somehow? you shouldn’t be rewarded for hard work? don’t get me wrong, there are plenty of folks who need to be called to task for doing a poor job, but how much of all of this is pure whining on our part? I would say quite a bit of it. We have to shore up our individual responsibility before casting dispersions.
Yes, without the rank and file, the companies wouldn’t succeed; however, without leaders, the company wouldn’t succeed either. Not everyone is cut out to lead, and I would say that our work ethos and culture this past decade produced many weak leaders; however, not every manager is bad. Look at all the companies that did right, saved a ton of cash. They are the reason why we aren’t at 25% or higher unemployment right now. That was because managers at many companies were leading. It is much easier to whine about management than to be a manager and a leader.
i don’t get how executive compensation is insulting to the american worker. that makes no sense. if you feel insulted, then become one of them. the fact is, there are far more people who would rather not lead than there are who want to lead.
tim,
think about enron….all those people lost jobs and got nothing. the executives got a nice parachute when they left. one set of people worked…the other set fiddled while rome burned.
mike,
i also worked for that failure of a baseball team that folded for a couple years…there is a reason it folded 🙂
I have been looking for reasons to back up my gut feeling that it would be best to let the US auto companies that can’t stay afloat go bankrupt. Thanks for articulating some of them!
All your arguments about management and executives being evil are kind of a moot point for the GM companies at this time, it is far too late. It is kind of fun to read the different views though.
The benefits are a huge issue – but another problem is the quality of the product. I have owned Honda, Toyota, Nissan and they last forever if you take care of them. They all had over 200,000 miles when we sold them! The American cars we owned starting having trouble at about 85,000 miles – why does this happen?
If the American Automakers would have taken this issue seriously – Toyota and Honda would never have had a chance. Especially because they are more expensive.
@Chris, for every one executive idiot example you provide, I can give you a hundred others who are worth their salt. Yes, all these criminals get the media attention, but you make it sound like they are the norm. Many rank and file folks at enron invested and put their life’s bonus and savings in enron. Yeah, they were all happy while the ride was going up, but how stupid was that? regardless of how well a company is doing, a basic rule of investing is diversification. also, which set are sitting in jail?
bottom line is, we promote excellence in our society because it spurs competition, innovation, and entrepreneurship. If we are not going to reward people, then why bother? the reality is, companies and society does not function without leaders. Most people do not have the faculties to be leaders. Yes, there are bad apples in everything, but I like to think they are atypical.
@Generation: I agree, it seems that the american cars we owned and people who we knew all needed major repair between 40k-60k miles. don’t know why, but that is what it seemed. I think there is some truth to the notion that you have to make unreliable cars to a certain extent in order to sell new cars and to keep spare parts profitable. The profit margins on spare parts seems to be much higher, definitely costs more than the sum of the parts.
They need to wake up, this is why they need to be knocked some sense into upper management.
http://www.businessweek.com/magazine/content/08_37/b4099060491065.htm?campaign_id=rss_topEmailedStories
While the costs for retiree’s is huge, one thing that is forgotten is how life longivity has increased esp: in the last 2 decades, and how health care costs have increased, while providing more and earlier detection of terminal type diseases.
Also as many states are alos lining up for bailouts , why is it that thay also don’t call for their workers to take cuts in retiree benefits?