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The future of Toyota
Some of Toyota's U.S. plans are now more than 20 years old, and a growing number of its workers are paid the top wage of about $25 an hour. That's less than Detroit's veteran union hands make now, but a contract inked last fall will enable U.S. automakers to replace many highly paid employees with cheaper workers. By 2011, Toyota's cost advantage over Detroit could disappear.
By late 2009, Toyota's assembly plant in Georgetown, Kentucky could have the highest labor costs of any auto factory in the country. Here is the story.
When I visited Utah, I rented a Hyundai and I have to say it drove very nicely...
Posted by Tyler Cowen on April 20, 2008 at 10:15 AM in Current Affairs | Permalink
Comments
One of the arguments for scaling a person's rate over time is that he becomes more skillful and more productive
By such a standard the Toyota plant should be at the top of the productivity charts. (or is our whole labor contract theory worng?)
Posted by: jayh at Apr 20, 2008 10:41:08 AM
Also from the article:
Detroit's recent four-year union deal lets automakers pay lower wages to people whose work doesn't actually involve making cars—maintenance staffers, those who sort materials, cleaning crews, and the like. These new workers will cost $26 an hour including benefits, compared with $62 an hour for employees who put the cars together, says Sean McAlinden, chief economist at the Center for Automotive Research in Ann Arbor, Mich.
So, Toyota's top wage is $25/hr, while Detroit's is $62/hr (for those who actually make cars). In fact, at $26/hr, even Detroit's non-carmaking employees are making more than anyone at Toyota. How does this translate into the "highest labor costs in the country"?
Posted by: turbosaab at Apr 20, 2008 11:32:41 AM
hyundai has come a long way from the days of the excel gl/gls (my first car). They've got true luxury cars in korea...$100k+, or so I remember reading in some auto mag a while ago...
Posted by: shawn at Apr 20, 2008 11:49:02 AM
jayh gets it right. What matters here is not labor cost but productivity, and Toyota is right up there with the best of them. Manufacturing geeks like myself tend to over-admire Toyota a bit too much, but in this case there is no bias. Toyota is simply more productive.
For interesting material on Toyota check out Evolving Excellence. www.evolvingexcellence.com
Posted by: PEden at Apr 20, 2008 11:51:16 AM
tubosaab:
"including benefits" can triple effective hourly wage
PEden:
perhaps you can share some interesting ways Toyota is more efficient than Ford
Posted by: anonymouse at Apr 20, 2008 1:04:51 PM
The productivity issue has another wrinkle: If workers get more pay because of SENIORITY instead of productivity (common in unions --- and in Japanese companies, btw), then the weak correlation between wages and productivity leads to inefficient factories. I wonder what those correlations are/will be in US-based plants. (Note also that CEOs are paid so well because they are *supposed* to be that productive. We see that they often get fat $$ when profits drop, so it seems that some parts of organizations have no clue about productivity-pay...)
Posted by: David Zetland at Apr 20, 2008 1:26:27 PM
wage of about $25 an hour
compared with $62 an hourWhen GM (who I used to work for) quotes labor numbers, they quote a term-of-art called "fully burdened overhead." FBO includes salary, healthcare, employer portion of taxes, land, equipment depreciation, and utilities. It is about 2.5x the actual wages that the person earns. Sadly, this article is comparing apples and oranges with the Toyota vs "Big Three." The actual wages are about the same, but the author chose to compare "wages" at Toyota vs "fully burdened overhead" at GM, Ford and Chrysler. How dishonest.
Posted by: Tangurena at Apr 20, 2008 1:39:12 PM
Another thing that was left off the article is that Toyota has always had a 401k plan, vs GM's traditional pension plan. GM's plan was frozen at the end of 2006; all new employees are part of the 401k plan, and if one had X years of creditable service at the end of 2006, one could never get x+1 years of service. One could look at the 5500 filings (www.freeerisa.com has online copies of these publicly available documents) of both companies and notice the huge difference between them. Toyota has less than 100 retired folks in the US drawing benefits, while the last time I checked, GM's pension plan was cutting 460,000 checks per month.
As for the "seniority" comment above, when I left the division of GM that I was working for (now part of what is called Delphi), the lowest seniority of line workers at my plant was 11 years. That meant every blue collar worker who had worked there less than 11 years had already been layed off. If you cared, I could find articles from NY Times showing that Ford was getting worried because most of their assembly line workers were in their 50s - because they've cut back so much that anyone younger had already been laid off.
I'm also surprised by the "74,500 workers" comment in the BusinessWeek article. Wikipedia states GM has 284,000 employees. Perhaps the author is trying to make the claim that there are only 74,500 unionized workers at GM, which might be about right since the company has always had "too many chiefs and not enough indians" as the old saying goes.
Posted by: tangurena at Apr 20, 2008 2:07:20 PM
turbosaab, because wage rates aren't labor costs, necessarily. If Detroit's $62/hr. workers are more than twice as productive than Toyota's $25/hr workers either due to better training, better equipment, etc. then higher wages rates or not, their labor costs could be equal.
BTW, that is pure speculation, I don't know their productivity, union involvement in big cities tends to skew wage relationships. I'm just explaining how wage rates aren't the same thing as labor costs.
Posted by: Jacob Oost at Apr 20, 2008 2:16:05 PM
And they began selling porn
Posted by: karl at Apr 20, 2008 2:53:40 PM
When the Toyota workers are in their 50s, and begin suffering the chronic health problems associated with manufacturing, will they be dumped with inadequate pensions and no health care benefits? Without a union it is likely.
Most of the reported figures of GM compensation are based on creative cost accounting, often including prior workers' legacy costs. Whatever, the new workers will be taking dramatic cuts.
(Henry Ford 1st came to believe that his business model would only work when an auto assembler could afford to buy the product he assembled, and Ford eventually got there. The new 2nd tier auto workers will not likely be able to afford a new car unless they live in it.)
Posted by: save_the_rustbelt at Apr 20, 2008 3:00:48 PM
When the Toyota workers are in their 50s, and begin suffering the chronic health problems associated with manufacturing, will they be dumped with inadequate pensions and no health care benefits? Without a union it is likely.
Most of the reported figures of GM compensation are based on creative cost accounting, often including prior workers' legacy costs. Whatever, the new workers will be taking dramatic cuts.
(Henry Ford 1st came to believe that his business model would only work when an auto assembler could afford to buy the product he assembled, and Ford eventually got there. The new 2nd tier auto workers will not likely be able to afford a new car unless they live in it.)
Posted by: save_the_rustbelt at Apr 20, 2008 3:01:57 PM
The article forgets to mention that the non-union status of Toyota's employees also gives managers more ability to retool their production lines. Right now, the American auto-makers pay more for less productive workers and their engineers have made up for it with cheaper components.
And based on talking with multiple engineers at Ford and GM (I'm a mechanical engineer), every one felt a very 1950's, government-style culture in the American car companies. While GE hires employees willing to speak their mind in a group, American car companies want robots instead of thinkers and innovators. Personally, I blame the unions for diving into any possible profits and creating a disincentive for managers and engineers to innovate.
Rural America's allegiance to Ford and Chevy trucks has kept a meltdown from happening the past 25 years, but sustained high energy prices has broken that down completely. The answer for the car companies may be what Ford has done with Fusion: build in Mexico.
Posted by: Matt at Apr 20, 2008 3:31:58 PM
Journeyman GM Workers make around $110,000/year overtime included. Pretty good for a job that only requires a high school education.
Posted by: Major Hughes at Apr 20, 2008 4:29:11 PM
rustbelt, Hazlitt's "Economics in One Lesson" has a great chapter on the "buy back the product" fallacy.
Your main argument seems to be that without unions, workers are unwitting dupes in the hands of managers. While that can be true in less developed and more isolated economies (mining towns in the wilderness, for example), it is less true in a developed, populous economy where there is much competition for jobs and for workers. Here, the bidding process for wages and non-pecuniary benefits is much more liquid. Every non-union job I've had (and that's all but one) offered some kind of health insurance plan, even for part-time workers.
Were it not for sky-high costs at the provider level (thank you FDA, AMA, licensing boards, academic accreditors, and the government for cartelizing the health industry, stifling competition and innovation, and keeping prices artificially high), employer-funded insurance wouldn't even be an issue for most people. Getting a cold or breaking your arm wouldn't set you back $1,500.
As for retirement, again, this is an area that the government has totally fouled up with excessive capital gains taxes, social security, etc. It is only because of war-time wage freezes that we fell into the trap of expecting our employers to give us insurance and other benefits. Most people would rather just have more money.
And if everybody unionized as you seem to be hoping, if every industry were ran as inefficiently as Detroit's auto industry, how could anybody afford anything? If you "negotiated" too-high wages for every worker everywhere, price levels would just rise. Either the Federal Reserve would have to lower interest rates to zero or everything would be too expensive and a great many people would be unemployed.
Posted by: Jacob Oost at Apr 20, 2008 6:20:33 PM
These figures just show what managers in unionized industries know too well; the biggest problem with unions is not their dollar costs but their productivity. It's gotten somewhat better in recent years, now that the unions have (mostly) become aware of this thing the rest of us call "competition," but only grudgingly so. Many union leaders still want to pretend that competition doesn't really exist, or that shareholder returns are optional for the enterprise to survive, let alone thrive.
In any case, it's too late for the U.S. manufacturers. They're brain dead. No decent manager has gone to work for GM or Ford for over 30 years. What talented manager would waste their life in an environment where the line workers consider them the enemy? Where every innovation or productivity-enhancing idea would be met with resistance or aggression?
Folks, the U.S. auto manufacturers are bankrupt. It's only a matter of time before it becomes official. And the unions will look to place the blame anywhere else.
Posted by: M. Hodak at Apr 20, 2008 8:14:49 PM
Labor costs are a small part of the equation, consider also pension and health care responsibilities, much less for Toyota.
Posted by: Paul N at Apr 20, 2008 8:55:50 PM
And here in Ohio we have state lawmakers who want to make seven PAID days of sick leave mandatory for all the workers in the state (everybody, not just gov't employees). At a time when our tax system is rated like the second worst in the nation for businesses. And jobs are fleeing to other states. They publicly claim that it won't affect costs or productivity. Just another legacy of the "choke the life out of industry" mentality of the economically illiterate.
Posted by: Jacob Oost at Apr 20, 2008 10:36:06 PM
The reason we have Toyota plants in the United States is because Pres. Reagan imposed a quota on Japanese car imports in 1982, a fact that free trade fundamentalists often conveniently forget.
Posted by: Steve Sailer at Apr 20, 2008 11:30:19 PM
Steve, that's one reason. The other part is Toyota's Just In Time philosophy. You can't eliminate work in process when most of it is sitting in a floating warehouse between ports.
Posted by: Eric H at Apr 21, 2008 12:39:04 AM
I'm loving the revisionist history here on this site. GM is in trouble because it pays its workers too much? Poppycock. GM is in trouble because it makes junky cars. This is not because the auto workers are lazy--it's because the company can't design a decent car. The auto workers have become a red herring, used by managers who can't figure out how to make a car that customers want. Instead they make low quality, unreliable cars that are actually less expensive to buy than their japanese competitors and whose resale value degrades faster than competitors'. This is not because the auto workers are goldbricking, it's because it's a lousy company.
Hey, Tyler, you say Kia is going to eat Toyota's lunch. Would you care to put that down in black and white and make it interesting? I don't expect so, but I'm willing to be pleasantly surprised.
Posted by: MostlyAPragmatist at Apr 21, 2008 5:59:50 AM
... and this all means next to nothing unless Toyota stops making products that people desire, and Ford and GM figure out how to make desirable autos. These, unfortunately, would be sea-changes for the
respective companies.
Posted by: glenn at Apr 21, 2008 6:04:19 AM
I believe that the world's most profitable car company also pays some of the industries highest wages. It also refuses to play by Wall Street accounting rules demanding quarterly information, and just happened to buy Germany's largest car manufacturer.
But then, Porsche has never really played by the rules. Which is why so many other car companies use Porsche for their design work.
Posted by: not_scottbot at Apr 21, 2008 7:02:46 AM
When the Toyota workers are in their 50s, and begin suffering the chronic health problems associated with manufacturing, will they be dumped with inadequate pensions and no health care benefits? Without a union it is likely.
There is no Toyota pension to dump. Toyota has a 401k/money purchase plan. They do not have a defined benefit plan (what folks traditionally think of when they think "pension"). You can determine exactly what sort of plan someone has by looking at line 8 of the form 5500. Codes starting with "1" are for defined benefit plans, codes starting with "2" are for defined contribution plans (of which your 401k is the most common member). Toyota's form 5500, line 8 shows "2C, 3F, 3H." GM's shows "1A, 1C, 1E, 1G." See pages 18-19 of http://www.dol.gov/ebsa/pdf/2007-5500inst.pdf
http://www.dol.gov/ebsa/publications/wyskapr.html
Almost all of these filings are publicly disclosable, and are required by law to become available to public inspection within 45 days of filing.
Posted by: Tangurena at Apr 21, 2008 9:40:41 AM
JAcob:
I have been publically criticizing the Big 3 and the UAW for three decades, not that anyone would listen to me.
My point is that working for a transplant company is not utopia, the workers are very much at will and very much on their own if they cannot work until age 65.
Tanq - I've read the 5500, and please excuse me for using the generic word "pension" rather than quoting the code section, none of which nullifies my point.
Posted by: save_the_rustbelt at Apr 21, 2008 10:04:18 AM
