Revival of U.S. automaking awaits if UAW will follow Toyota

January 14, 2009

morici– Peter Morici is a professor at the University of Maryland School of Business and former chief economist at the U.S. International Trade Commission. The views expressed are his own. –

General Motors and Chrysler are on the anvil of history. United Auto Workers President Ron Gettelfinger holds the hammer and will determine whether they emerge more competitive or shattered in pieces and sold to foreign investors.

In December, George W. Bush granted $17.4 billion in temporary loans on the condition those firms convert two-thirds of their debt into equity. Another condition was to persuade the UAW to accept stock for one half of what these companies owe to fund retiree health care and align wages, benefits and work rules with those of the Japanese automakers operating in the United States.

GM and Chrysler must complete these negotiations by March 31 or repay the money and face bankruptcy.

At U.S.-based Toyota factories, workers receive about $25 dollars an hour and good health care benefits. But they don’t retire at 50 after 30 years or get as much time off and huge severance packages. Toyota does not endure the medieval work rules and job classifications imposed by UAW contracts.

Most other Americans would be happy to get Toyota pay, benefits and working conditions. If Gettelfinger continues stubborn resistance to a better package than most Americans enjoy, then Detroit automakers will continue to require government subsidies or not have enough profits to invest and compete in hybrid and other new technologies that will transform personal transportation over the next decade.

Eventually, Washington will tire of their begging, they will march through bankruptcy, and their factories will be sold off to Japanese, Korean, European and Chinese automakers.

If Gettelfinger takes the Toyota package, then Washington should take a hard look at policies that can promote U.S. automaking as effectively as do industrial policies abroad.

This would include addressing undervalued currencies in Asia — currencies kept cheap in foreign exchange markets by government intervention in Japan, China and elsewhere.

Over the last two decades, Japan has kept the yen at least 30 percent undervalued against the dollar, and this provided Toyota with an average subsidy of at least $2,000 on every car it sold in the United States.

Through 2004, the Bank of Japan directly purchased dollars in currency markets to keep the yen undervalued, and since, it accomplished the same by keeping Japanese interest rates very low. This encouraged the so-called “carry trade,” where private investors borrow yen, use those to purchase dollars and then invest in short-term U.S. securities to exploit higher U.S. interest rates.

Now, the Federal Reserve has dramatically reduced U.S. interest rates, and the yen has risen closer to its true market value against the dollar. Japanese officials appear poised to again intervene directly in currency markets to restore Toyota’s unfair advantage, and Washington should take whatever steps are necessary to head off such Japanese protectionism.

In addition, Washington should take assertive steps to encourage production of fuel-efficient vehicles in the U.S. and create a strong export industry.

Washington could offer incentives to car buyers to trade in gas guzzlers for more fuel-efficient vehicles — the newer and the bigger the clunker and the more fuel-efficient the replacement, the more dollars the car buyer would receive if the guzzler is destroyed. This would raise the price carmakers receive from selling more fuel-efficient vehicles and boost car sales.

Washington could provide substantial product development assistance to U.S.-based automakers and suppliers. The latter include Toyota, Nissan and Honda, as well as the Detroit Three, battery makers and other suppliers to accelerate the production of innovative, high-mileage cars.

The condition for assistance would be that beneficiaries do their R&D and first large production runs in the United States, and share their patents at a reasonable cost with other companies manufacturing in the United States. The huge U.S. market would help attract producers from around the world and rejuvenate the U.S. auto supply chain.

Such smart industrial policies would contribute to national efforts to reduce CO2 emissions and reduce oil imports.

Finally, individual Americans should open their minds. Many are considering trading in trucks and SUVs for sedans and are naturally attracted to the Toyota Camry and similar import brands. Visit a Ford or Chevy showroom and test drive a Fusion or Malibu and be pleasantly surprised. Those are high-quality, affordable and reliable vehicles.

Washington is giving Detroit a second chance, and Americans should give its cars a second look.

10 comments

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Peter is absolutely correct – Toyota workers do not retire after 30 years of service – they retire after 25 years of service. CNBC interviewed a female production worker at the Toyota Kentucky plant, and she said she made $93,000 last year. I know of no one who works in production for GM knocking down that kind of money. It was also reported that on top of $30-an-hour wages, health care cost only $10 a month. As a UAW member, I gave up $1 an hour in perpetuity to help fund health care, and that’s in addition to my out-of-pocket expenses. In short, I would be glad to be brought to the same compensation level as Toyota’s workers – I could us a raise. Did I mention that they, too, are paid while on layoff?

Posted by tom in MO | Report as abusive

Mr. Morici had me nodding in agreement all the way to the point of bringing up the currency and exchange “myth”. Has the Bank of Japanese purchased dollars in the past, yes, but I would be quick to ask to what effect? Have they in recent memory, over the last 5 years, no. I speculate that every government “regulates” the value of it’s currency within the global market via interest rate manipulation AND they all should to assure local economies are competitive globally. I doubt that any bank, given the immensity of the global currency market, has the ability to significantly influence the exchange rate of any currency, globally, as proposed by Mr. Morici. Finally, let’s not forget the tens of thousands of Americans employed by Toyota and other non-Detroit 3 OEMs and our suppliers that build cars and truck in this country. We supported the government investment in the Detroit companies to stabilize the industry. As we move forward with economic stimulus lets do so treating all consumers equally, selecting no “winners” as we move beyond this dowturn.

Posted by Irv Miller | Report as abusive

This is reuters? This man is teaching our children? Wow. Is he supporting, \”Washington is giving Detroit a second chance, and Americans should give its cars a second look.\”? Is he bashing \”General Motors and Chrysler are on the anvil of history. United Auto Workers President Ron Gettelfinger holds the hammer and will determine whether they emerge more competitive or shattered in pieces and sold to foreign investors.\”? That is the problem, inflated egos and the need to comment on all subjects. remember that guy on cheers, the postman that lived with his mother and was an expert on everything. First was the veba agreement comment. Have you read the contracts? Veba wipes away much of the burden the company\’s book were holding by the end of this contract. The retirees that held to their side of the agreement are entitled and prior to the collaps of the economy everybody thought it was great to get these expenses off the books. But that deal was not good enough, the retirees need to take more risk. Where is the stock market today. Next you babbled on into work rules. Have you read the contract? Look at the number of classifications. I am getting long so without elaboration many \”medieval work rules\” are based off of safety concerns and levels of skill and responsabilities. As this things come to light they are included as clarification as all processes are documented in large older companys. So if the economy did not tank uaw workers were on pace to be at $55 all in pay to the imports $62. Looks competative to me. What about all those profitable years where did the money go? The companys made a lot of profit under these rules even in the global economy of today, until the crash. Ok so why should those thing you list as supportive not happen now. By the way You cant export with the trade deals we have now. Let anyone have their way with the daughters of liberty, but you may not even look onto their women. I guess the global trade deal only works coming into the us. I will not correct my punctuation or spelling as i am consuming beer after a stressfull night at work fixing a 20%failure rate in my automation to make sure every one of the 60+ units an hour that left my zone were 100% perfect. Ps I make vey close to your toyoda wage and almost no one can aford to retire at 50( once again i know you have not been diligent in you research) unless maybe you are skilled trades. I did like your support ideas. As you highlighted in your currency example governments around the world practice protectionism. so why should america not chose favorites based on where your proffis are taxed and that money used to grow the health of this country. Try using your power for good instead of evil.

Posted by me | Report as abusive

Irv Miller ………. do not kid your self. Toyota has enjoyed an unfair currency manuipulation for years increasing its profit margin over the big 3 vastly. the so called “Tens of Thousands of jobs” The imports have in America only amounts to 35,000 when GM alone has 140,000 employees so do the math. And that is down from a half a million only about 15 years ago. every import we buy sends money and jobs over seas we can no longer give our jobs away and shrink our economy at the same time not to mention the trade deficte for buying imports.

Posted by Damikco | Report as abusive

While currency manipulation did help Toyota, it was only one part of the whole story:
1) Toyota did not pay its CEO enough to buy private jets and 14BD houses in California. It paid them reasonably well.
2) They were maniancal about quality. Every worker had the right and authority to stop production is he suspected of bad quality. Any GM/Ford/Chrysler worker who does that will be fired on the spot.
3) Salaries were not lopsided in Toyota. The CEO/lawyers did not earn 700x times the pay of the machine tool worker.
4) Long term thinking. Toyota built Prius before there was an iraq war.
I still say all the big 3 should be allowed to go bankrupt and sold to efficient car makers. Their CEOs should not be allowed into the industry for 99 years.

Posted by Ananda | Report as abusive

I am a Ford/UAW member at a plant in Kentucky. As far as stopping the line for quality and then being fired, that is NOT true. We are encouraged to be responsible enough to stop the line if we believe quality is compromized.

Posted by Jay | Report as abusive

Ananda:

1) Prove this with facts. The Toyoda (that is the family name btw) family has many jets. The next of kin is waiting for CEO. You are just wrong here.

2) Toyota quality today is not the same a 5 yrs ago. They have consistently dropped in quality. Many recalls. Their V8s are the worst on fuel economy available. Domestics are very close to the quality now. Read up. Marketing is not reality.

3) This has been proven false many times. Average worker does not make 30 plus an hour. These are cherry picked by the media and politicians.

4) The Prius was in response to GM’s EV1 (or whatever it was). No one bought it- they did not kill it. Toyota’s move was pure luck. And they have gamed the old EPA ratings for all of their cars. Ask a Prius owner on their “ACTUAL” mileage. Smart move, but not ethical in my humble opinion. Search for the Civic Hybrid lawsuit that was just heard in CA. Just the beginning.

Enough with the marketing dribble. We should all look for facts and turn off the TV. I was a foreign buyer, but not anymore.

Posted by Matt T. | Report as abusive

Not only do the Japanese have a protected market of 5 million cars a year, they have the government pay for their workers and retirees health care. They also spend far more to help them develop new technology. The pay differences are gone since the last contract, as well as the “medieval work rules” he talks about. The uneven trade policy and currency manipulation are what really need to be addressed.

Posted by John A | Report as abusive

Quility and reliability have driven people away from the big 3, these days the other brands are also poor quility, driving some to drive older cars to avoid reliability issues.
The hybrid drive system was designed to (cheat) the EPA milage rating systems, by diverting the fuel usage to non peak drive.

Posted by steve | Report as abusive

The problem throughout our economy is that we, (by that I mean all of us, including me) including and especially unions, have placed a greater value on our worth as individuals ignoring our fellow countrymen. I hope that that is what Mr. Obama meant in his inaugural speech regarding taking responsibility for our own actions. I wish he had plagiarized JFK’s speech regarding asking not what your country can do for you, but what you can do for your country.

Posted by ClementW | Report as abusive