What American Automakers Need to Learn from Boeing
September 3rd, 2007 by 
CA Editors
Garrett Edel sends: ‘Twas not but five years ago that Boeing, one of the icons of American innovation and industry, was trading at a relatively paltry sum of less than $25 and the politicians across the Atlantic were heralding the golden age of European collectivism with their own Airbus. And now here we are in 2007. The A380, Airbus’ gargantuan 747 slayer, is in a quagmire of quality problems and manufacturing difficulties while waitlist for Boeing’s innovative 787 “Dreamliner†extends well into the next decade. What was once considered to be proof of the best of government controlled industry is now indicative of the inevitable problems that occur as industrial processes are sifted through the bureaucracy of government. While Boeing regrouped after a devastating corporate scandal and rightly focused its attention on creating a plane for medium distance flights with revolutionary composite construction, Airbus hatched a plan to build the largest plane in the world only practical for intercontinental flights. The sort of business model that stresses a high profile, high cost project marketed to a small market segment is only appealing to, well, politicians, while Boeing, answering to an army of stockholders, had to come up with the goods and a sensible strategy or face bankruptcy. Chauvinistic ramblings aside, can the ailing domestic auto industry learn anything from this turn of events?
The plot arc of General Motors and Ford are very similar. Company is founded, company innovates, company goes public, company dominates market, foreign competitor eyes windfall profits and wants a piece of the action, pride cometh before the fall, the fall. Unfortunately, Japanese auto makers are a much more formidable opponent than those dainty Western Europeans for several reasons:
1) The big automakers from Japan and South Korea are publicly traded and run by ruthless and crafty capitalists
2) The car market more closely resembles perfect competition with more competitors and less easily differentiated products, and
3) Boeing doesn’t have to deal with the United Auto Workers Union.
The Japanese culture has attained a reputation for hard work and rightfully so. The post war rebuilding, ironically funded by the United States, ensured that Japan was inculcated with the manufacturing processes and quality control that won a two front war for the Allies. Ever since then, Japan has been a hotbed of technological innovation and the car industry is no exception. Toyota eclipsed GM as the world’s largest automaker not out of some passing fad for energy efficient cars, but because they produced the greatest cars on the market at an unequalled price. Toyota and Honda started their foray into the American market not competing with Cadillac and Lincoln luxury brands, but with the bread and butter mid size family cars of the Big Three. Once a sturdy foothold was established, out came the luxury arms of Lexus and Acura. The Asian industrialists, as opposed to the socialists across the pond, take an organic and nimble approach that hasn’t shown any sign of complacency.
GM and Ford have begun the painful process of slimming down their respective corporations. Consider the following: Toyota has equaled and surpassed GM’s market share with three brands: Toyota, Lexus, and Scion. At last count, GM has 6 different brands - GMC, Chevrolet, Pontiac, Buick, Cadillac, and Saturn - not including the elimination of Oldsmobile only a few years ago. Such a glut of brands and the inevitable baggage of personnel and manufacturing costs kill the profit margin for each car sold. Ford, after the mismanaging of its “Premier Auto Group†of Jaguar, Land Rover, Aston Martin, and Volvo by the dynastic Ford heirs, is finally cutting losses with Aston already picked up by a private equity firm and talks underway to release the Jag/Rover package. The fact is that both companies are getting serious about returning to the agile corporate structure that put two reliable cars into every garage of the middle class in the 20th century.
With regards to the nature of a perfectly competitive market structure, let us travel back to the days of first semester macroeconomics. The gist of a perfectly competitive market is that there are many competitors selling a uniform product at a uniform price and everyone simply breaks even and has equal market share. While of course the car market isn’t exactly perfectly competitive, it is a lot closer than the commercial airplane industry and what makes it closer is also what makes it harder for an American comeback. The point that there are more competitors in the car industry than the airplane industry is clear enough. The existence of a close-to-uniform product may be in conflict with my contention that Japan has just until very recently produced superior cars. But if they were better enough to disqualify the car industry from comparison to perfect competition, then there wouldn’t be an article because all US car companies would be out of business. Why would anyone buy an American car if they weren’t at least in the same realm of quality as their foreign counterpart? Finally even though car market share isn’t perfectly equal nor profits equal to zero, it’s a lot more egalitarian than it once was.
Framing the question of the potential for a Boeing-esque revival in the context of a perfectly competitive market gives some pretty sobering roadblocks. Consider that while Boeing only has to produce a better plane than one competitor, the Big Three have to contend with all of the new technology coming out of Western Europe, Japan, and South Korea. Every car company recognizes that in order to grab a bigger chunk of the market, their product must offer something to differentiate itself from a largely uniform market. This means that the Big Three cannot simply react to the changes in the auto market, but also innovate beyond the conventional customer’s expectations. As innovation will come incrementally with each new model evolution every few years, this also guarantees that investors have to buckle in for the long haul. Finally, this market ensures that the era of windfall profits is long gone and a determined vigilance against complacency is now a prerequisite to avoid bankruptcy.
Finally, there is the United Auto Workers union or the UAW. This union has had a hand in making American auto workers some of the best paid blue collar workers in the world. Forbes cites the average hourly compensation of UAW workers at $73.21, or 52% higher than the average hourly wages paid to US employees of Japanese automakers, who are not unionized. Considering that Japanese auto plants are cranking out cars as fast as people can buy them, clearly their lack of unionization has not hampered their ability to attract workers or customers. GM’s health insurance plan tacks an excess $1500 to each car sold. Think of what wonders could be done with another $1500 in profits or how many more cars could be sold at a sticker price of $1500 less. This is not to say that Toyota and Honda don’t have significant health care costs, but they aren’t nearly as bloated as their American counterparts. Negotiations between Ford, GM, and the UAW are taking place this fall and the future of all three organizations hangs in the balance.
Barring a biblical flood of the Japanese island, America will never enjoy the market share it once did. But I believe that it has the potential to rebound to profitability. When the hour is dark, I have faith that the resolve of the American worker is enough to get over the nonsense that has plagued American car companies since the 1970s. A return of prominence as significantly and precipitously as Boeing is unlikely, but the potential for growth is undoubtedly there. A short run investment it is not, but with things looking up for both companies — innovative cars, improved quality ratings, attractive design, and a corporate structure with the desire to reform – I believe the long-term investor will be rewarded. After all, who did Ford hire to be its CEO? Alan Mulally, the former Executive VP of Boeing recognized for his key role in propelling their commercial jet business ahead of Airbus. With all the parallels here, it should be interesting to watch this business school case-study-in-the-making unfold.
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September 5th, 2007 at 1:45 am
American car design is one of the ugliest in the world and their electronics is 10 years behind the top western European car manufacturers [Renault-Nissan, Peugeot, Volkswagen, Mercedes, BMW] the only hope for GM is to cut all the crap they build in the US to adopt some smart design concept their European branch OPEL has.
Ownwer of a Dodge and a Chevrolet
September 5th, 2007 at 11:35 pm
The $73/hour quote is not accurate, but yes the UAW workers do make more than the U.S. made Japanese cars. But currently the Japanese dont have the number of retirees that the big 3 have.
What are the retirees suppose to do about healthcare if the big 3 cut their healthcare?
This is a matter of human descency. The government only takes over at ages 62 or higher depending on the year of ones birth.
In Japan, they have socialized healthcare for their employees in their nation. Is this an equal playing field? I am not bashing Japan or their corporations they are only doing what they can to earn money, but we in the U.S. leave industries to survive on their own in this globalized playing field. But other nations governments work to support their corporations.
Let me not bring up the very important factors of Chinas currency manipulation that the U.S. ignores, or their inhumane treatment of workers. Of course UAW workers get a bum rap, how can they possibly compete with that?
Keep in mind that recently many toys and other products that are shipped here from china do not meet our safety standards, but if they were made right here in the U.S., american corporations would have to meet higher safety standards. This would mean that the added cost of safety controls would make American made products more expensive. Now, I ask one to compare a cheaper foreign version with manipulated currency, low wage rates for employees who do not have the right to collectively bargain for pay and benefits, and clearly almost no safety standards. Of course the American worker cannot compete.
Also, Alan Mulaly was paid nearly $50 Million in his first 3 months as CEO. But what did he do to earn it. Since then, Fords market share has fallen month after month. I would think a $100 thousand dollar salary would be good enough until one actually turns a corporation around. And until that point, the $50 Million could be used to invest in R&D, marketing, or other business improving strategy.
Heres one more point to consider, we are spending countless billions to rebuild Iraqs infostructure. But what about our own. Remember that bridge that collapsed in Minnesota? Or our preparedness in New Orleans?
We have no national healthcare, but workers pay the highest tax rates in the world. But Japan has socialized health care. But wasnt it US capital that was funneled into their economy ever since WW2 ended? One could argue that our tax dollars are still paying dividends to their healthcare system while we have more than 40 Million people with no healthcare. And many of the 260 Million that do have healthcare coverage are still denied payments from HMO’s.
Just something to think about.
An American Worker
September 6th, 2007 at 12:14 am
Citations have been added to the hourly compensation figures; if you want to debate those then I expect you to bring your own sources - that doesn’t include the UAW.
September 6th, 2007 at 9:04 pm
Fair enough, I remember reading the article that Forbes put out, but one must also remember that article came out a few years ago. Now I am not discrediting Forbes, they are not liars, but they must get their information from what is released by the Big 3.
What isnt in those figures are the concessions made by the UAW.
That figure (73/Hour is outdated). But I am not arguing that the total compensation is high in comparison to national labor or international standard wages/comensations. This information was widely published aroud September/October of 2005.
UAW workers do pay into their healthcare now. And believe me, I am sure they will be paying more into their healthcare when the contracts are renegotiated. If not then wage cuts or higher production quotas or whatever to make the Big 3 more profitable or at least to cut operating costs down.
But to respond to Mr. James Cullen’s comment that the UAW’s citations are not valid, I ask why? If they are true, then why would they not be allowed to defend themselves. In an intellegent conversation (and I am respecting all opinions who participate even if they disagree with me) why would one be afraid to hear from the other side. I say if the UAW’s citations are wrong, then show evidence that supports your disagreement. Personally I would like to be enlightened.
But keep in mind also that when the current contract that will expire 9-14-07, was agreed upon in September/2004 the healthcare costs were no where near where they were when the company agreed to pay full healthcare. It was the spike in healthcare that created the original benefits compensation to $73/hour just before the UAW made concessions to releive the Big 3 from part of the spike in costs. And keep in mind that the UAW did agree in September 2006 to open the contract willingly to make more concessions with the Competitive Operation Agreement. That renegotiation gave the Big 3 more flexibility to compete with foriegn rivals. So while not all will approve of the UAW, at least give them credit for being flexible.
September 6th, 2007 at 9:58 pm
The Forbes article was written in May 2007, hardly outdated.
As for sourcing, why would you use the UAW for your wage estimates when independent observers (i.e. Forbes, the Chicago Tribune) both claim the $70-75/hr range for wages? I would be much more inclined to believe those than any numbers from the UAW - or an automaker, for that matter… maybe you feel differently.
The UAW can do whatever they want, it is their jobs on the line in the end. They cannot force themselves back into relevancy, they need to prove it in the court of public opinion.
September 6th, 2007 at 10:20 pm
Sorry, I should have said in my last comment that it was a 2005 article by newsweek that quoted the $73/hour rates. It was in fact not Forbes. I realized that when I was searching for the citation only after I posted that comment.
But, I still say that the information they are quoting is old. Im sorry to say, but the UAW did make concessions. They now pay into the healthcare costs. In addition, they pay co-payments on doctors visits that vary between $10 and $25 per visit, and $10 to $15 co-payment on prescriptions. These are costs that the employees did not pay when the $73/benefits were quoted 2 years ago by the company.
But once again, Forbes can publish old data and still not be liable for misinformation. Keep in mind the Big 3 companies are in negotiations, and the companies are trying to win the court of public opinion too, if they can use outdated information to win in that court they will. Yes the UAW wil be bias too, but that doesnt mean that their view should be disguarded. If so then you can’t take the corporations view into consideration for they can be bias too.
Forbes and other publications like them can only get information from financial statements or quotes from insiders. They cannot see first hand the actual budgets that companies have, if they do have that inside information then that would cause investigations by the SEC unless the Big 3 made that information public.
Believe me I respect Forbes, I believe I made that very clear.
But my original statement still stands, that that figure omits the concessions on healthcare.
But I did write much more than just this point. Can you comment on the rest of what I said. I do appreciate this debate.
Yes the court of public opinion is the central factor that will decide the success of the Big 3, but I believe in both entities desire to change.
I do respect your research and views by the way. I just think that not all media publications are 100% accurate or current.
September 6th, 2007 at 10:41 pm
Sorry one more thing to add, that wage/compensation quote isnt per active employee, but it also incurs the benefits paid to retirees. And as I have stated before, the newly built foreign auto companies don’t have the retiree numbers that the Big 3 have. But they will in the future. My point in earlier posts was that if the US government would assist more in the healthcare like the Japanese government does with their citizens healthcare, then the Big 3 would be in a more level playing field.
As it stands now, the US government allows a free for all for any foreign company to come in and exploit the economic windfalls. Thats great, if the other countries would allow for any American corporation to do the same in their nations. But this is not the case. I personally am for fair-free trade, but the world isnt so generous with their economies.
Would you agree?
September 7th, 2007 at 12:02 am
Last year was the first time that non-unionized workers at a foreign-owned assembly plant made more than members of the United Auto Workers union make on average in a year. The Detroit Free Press reveals in a very interesting article that Toyota paid out bonuses of $6,000 to $8,000 last year at its largest U.S. plant in Georgetown, KY. Combined with the base pay made by a non-union worker at the plant, that equates to $30/hour or $60,000/year based on a 2,000-hour work year. That is more than the $27/hour or $54,000 a UAW member made on average last year. Union workers, or course, hardly received any profit sharing bonuses last year due to the poor overall performance of the domestic automakers.
This isn’t actually surprising, as a matter of fact it was bound to happen. In many instances, Toyota and other large foreign automakers operating assembly plants in the U.S. pay their workers near-UAW wages in an effort to dissuade them from unionizing. In a year when Toyota’s sales have grown to record levels and the domestics are losing market share fast, it was inevitable that Toyota’s big bonuses would put the pay of its assembly workers in the U.S. ahead of the UAW, which saw no bonuses last year and likely won’t for a few. The lack of overtime hours was another hit to the UAW that dropped the pay for many of its members. In time, as the domestics (if the domestics?) recover and the big bonus checks are in the mail again, we expect the UAW’s pay to again top that of any non-union assembly workers in the U.S.
We recommend reading the whole article written by Jason Roberson from the Free Press, as there’s a lot of layers to dig through with this story.
[Source: Detroit Free Press]
September 7th, 2007 at 12:11 am
Oh and Boeing does have the UAW to deal with.
The UAW represents Boeing workers, and they are according to “What American Automakers Need to Learn from Boeing” beating their non union counterparts Airbus.
September 7th, 2007 at 12:40 am
Jamie,
I didn’t write the article so I don’t pretend to speak for Garrett, but I would note that 3% of Boeing’s employees are UAW and that seems to be primarily in the Integrated Defense arm of their business. 70% or so of General Motors’ employees are UAW members though…
September 7th, 2007 at 9:01 am
The author(s) are stated as CA editors. But I recognize you are not the author.
One more point before I end my views on this site.
Toyota has 2 UAW assembly plants in the US, the Corolla and the light pick-up that Toyota makes are UAW. The Corolla is at the top of its class for quality and sales. The light pick-up sales are steadily increasing. So, it is true that with the right management, a UAW shop can succeed.
So, I just don’t see how the UAW brings down a company, it was in fact management that failed to see the threat of the Japanese rivals in the 70’s, not the UAW. If management would have responded back then, I do beleive the current US auto market would look a lot different than it does today.
I hope not to have made enemies here, but I would like to give blame and credit where it is due.
Thanks
September 7th, 2007 at 11:16 am
In response to Phil: that was true five years ago and I acknowledge in my article that American car companies were neglecting innovative design for decades. But that is simply not the case anymore. Look at any new Cadillac, the quantum leap of Saturn, or the superb engineering at unparalleled cost of the new Corvette and you’ll have to agree that GM is making real progress in both aesthetic and electronic design.
In response to Jamie: I never said that the UAW was some evil parasite or that it needed to be abolished altogether. Further, I don’t even propose that the UAW is the fundamental problem with US automakers, I simply assert that it is a formidable issue. I even end my article on an optimistic note, insinuating that the UAW and their employers can come to an amenable resolution.
You also note that Japanese socialized healthcare takes the burden off of their healthcare costs domestically and that we “leave industries to survive on their own.” How far does one take this? If the government could legislate the prosperity of American industry, then this article wouldn’t be relevant in the first place because it would simply be a political issue. I am of the opinion that any potential benefits of socialized medicine and protectionist trade practices that would not leave companies “on their own” would be more than offset by punishing the average consumer in higher taxes and less access to foreign goods.
I hope that with my explanation of my intent and my digression into the politics of my formerly apolitical article satisfy your concerns.
September 7th, 2007 at 1:44 pm
Thank You Garrett, perhaps I did go off on tangents.
I was interested in the report, I hope you take that as a complement.
October 30th, 2007 at 1:36 am
Well as far as Boeing they still have a lot to learn from AIRBUS who built first fly by wire commercial jets in the world
Huge success!