What's wrong with American Big Business?

[russ_watters]

3 (if I get to it...) case studies: The auto industry, the airline industry, and the steel industry. I thought of this because recently I've had a number of conversations with friends/family about the problems with the auto industry - so I'll start with that...

The big-3 auto makers (set aside that Chrysler is now foreign owned - it's still mostly Chrysler) are in trouble, and I think everyone (except, possibly, the big-3 auto makers...) knows it. GM is probably in the worst shape - they are posting losses and it's stock is at 22, down from as much as 50 in '03.

So, the question is: why? The answers are many, intertwined, and systemic:

1. Quite simply, they don't sell products people want to buy. Who wants a Crown Vic or a Buick Regal? Lucky for them, most police departments have to buy domestic, but that could change. Most of their money is in SUVs and light trucks, but oil prices were unusually low 5 (10?) years ago when the SUV boom started, and with higher prices, that'll end. Sports cars: today it's mostly the little Japanese ones, but what equivalent products do American companies sell? About the only American sports cars that are doing well are the Mustang and the Corvette (want a little roadster? Too bad - buy a Mazda Miata...) - and the 'vette only exists because an exec at GM damn near broke the law by essentially misappropriating company money to redesign it 5ish years ago when the corporation wanted to get rid of it. Family sedans? Please - Honda and Toyota are eating their lunch. Related...

2. They cost too much. If a Taurus sells for $20k and a Camry for $18k (made-up), and they are equivalent cars, which are people more likely to buy? Duh?! Related...

3. Unions. American labor is expensive. Really expensive. I'm having trouble finding numbers, but needless to say, union pay rates are a big part of why cars cost so much and companies are struggling to turn profits. Related...

4. Employee pension plans. http://www.fool.com/news/commentary/2003/commentary030625bm.htm" is an article about GM's from '03, and maybe this is a complex enough issue to warrant it's own thread, but pension plans are a big part of what is bankrupting all 3 industries I listed. All I'll say for now is that a significant fraction of the problem is corporate mismanagement - and a lot of that is due to flawed laws and too-much government protection of companies that screw-up .

Enough of these issues translate so directly into the other industries I mentioned that maybe I don't even need to go into the other industries except to say that both the recent airline and steel bankrupcies were largely blamed on pensions/unions. And more major bankrupcies are certainly coming. Some of these companies are so big they'll go bankrupt several times and still exist (UsAir - 2 in 2 years?? WTH!?) But within the next 20, some of these companies (like the steel industry) may cease to exist.

I'm going to credit Southwest Airlines with it, but they were only the beginning of the new low-cost, employee owned business model for airlines. Reagardless, it works, and that revolution is going to forever change how airlines run in the US. Ford now owns Mazda and so far has been putting more Mazda into Ford than Ford into Mazda, which is helping problem #1 & 2. But fixing the American Big Business Model will take far more than that...

 

[turbo]

3. Unions. American labor is expensive. Really expensive. I'm having trouble finding numbers, but needless to say, union pay rates are a big part of why cars cost so much and companies are struggling to turn profits. Related...
4. Employee pension plans. http://www.fool.com/news/commentary/2003/commentary030625bm.htm" is an article about GM's from '03, and maybe this is a complex enough issue to warrant it's own thread, but pension plans are a big part of what is bankrupting all 3 industries I listed. All I'll say for now is that a significant fraction of the problem is corporate mismanagement - and a lot of that is due to flawed laws.

The Honda Accord is made here in the US, and had (maybe still has, but I don't know) the highest percentage of US-made parts of any vehicle sold in the US. It is a car designed for the US market. It is build by American labor in a plant in Marysville Ohio - the same plant (and essentially the same workforce) that Ford dumped in a strategic plant-closing. Likewise, you can find Nissan Pathfinders and Toyota Camrys made in Kentucky. The American workforce is not too expensive to produce quality products at a competitive price.

http://www.suburbanchicagonews.com/homes/news/1_4_CEZM_CARCONTENT_S1.htm

 

[Bystander]

Zero market appeal, and too damned expensive (rolling 2,3, & 4 together). Which brings up the question where, when, and how management (the "who") got lost (the "what"). I blame Harvard when I'm feeling flip, but I'm not sure there isn't something to the idea.

 

[russ_watters]

The Honda Accord is made here in the US, and had (maybe still has, but I don't know) the highest percentage of US-made parts of any vehicle sold in the US. It is a car designed for the US market. It is build by American labor in a plant in Marysville Ohio - the same plant (and essentially the same workforce) that Ford dumped in a strategic plant-closing. Likewise, you can find Nissan Pathfinders and Toyota Camrys made in Kentucky. The American workforce is not too expensive to produce quality products at a competitive price.

Foreign companies don't use American business models - I should have been clearer about that. So while American labor may work for Honda, it doesn't work for the Big 3 because of, among other things, the pension and union issues:

Big Three executives and union officials point out that Honda has several advantages domestic automakers don't. While Honda offers its Ohio workers full medical benefits and a pension plan, it has hardly any retirees to support. About an hour's drive west, at United Auto Workers Local 696 in Dayton, the worker-retiree pyramid is inverted: The local represents about 1,600 fully employed members, working for auto-parts supplier Delphi--and about 3,500 retirees. Honda's newer factories are also far more efficient; and a nonunionized workforce allows Honda more freedom to invest in labor-saving technology.

No to unions. On the factory floor at Anna, many workers wear antiunion buttons on their white coveralls. Several UAW efforts to unionize have failed. "Honda has so much stuff in place for improving things, you really don't need a union," says Tammy Ferguson, a supervisor on a disk-brake line. [emphasis added]

http://www.usnews.com/usnews/biztech/articles/040607/7honda_2.htm

It may be partially separate issue, but it's something I've mentioned before: it is my opinion that most unions today do more harm than good. People have argued that big-business has too much power - well unions have (and exercise, on purpose or not) the power to take-down big business. Looking out for the workers means looking out for the company as well, because if you don't, those workers will find themselves unemployed when their company goes belly-up.

 

[russ_watters]

Zero market appeal, and too damned expensive (rolling 2,3, & 4 together). Which brings up the question where, when, and how management (the "who") got lost (the "what"). I blame Harvard when I'm feeling flip, but I'm not sure there isn't something to the idea.

My boss likes to blame MBA's for many of the country's problems (I assume that's what you meant). AFAIK, the laws haven't changed recently, so something else must have changed in the way executives think and lead. Perhaps the rise of the small-time investor has motivated CEOs to go after short-term profits instead of long-term growth?

 

[Astronuc]

I pretty much agree with you Russ, but I would put most blame on bad management, more than any other factor.

Here is an interesting book - The End of Detroit: How the Big Three Lost Their Grip on the American Car Market - by Micheline Maynard - http://search.barnesandnoble.com/booksearch/isbnInquiry.asp?userid=ZYw15Keyh6&isbn=0385507704&itm=20 or https://www.amazon.com/gp/product/0385507704/?tag=pfamazon01-20

Labor intensive industries are in trouble, but it's the well paying jobs that keep the economy going - 60+% of the economy is due to consumer spending.

But look at this -

G. R. Wagoner
Chairman & CEO
General Motors
In 2004, G. R. Wagoner raked in $9,957,020 in total compensation including stock option grants from General Motors.
And G. R. Wagoner has another $5,000,000 in unexercised stock options from previous years.

Source: AFL-CIO, but could be verified by other sources like Fortune Mag.

Labor costs - http://www.uaw.org/barg/03/barg02.cfm

How much are current UAW auto industry wages?
As of the second quarter of 2003, a UAW-represented assembler earns $25.63 per hour of straight time. A typical UAW-represented skilled-trades worker earns $29.75 per hour of straight time. Between 1992 and 2002, inflation-adjusted real wages for UAW-represented autoworkers increased by 13.5 percent. This is a compounded annual pay increase, after inflation, of 1.28 percent.

Executive pay at UAW employers in the auto industry, meanwhile, has increased by 22 percent during the past four years. (These figures do not include DaimlerChrysler. As a German company, it is not required to report executive compensation.)

Average salary, bonus and other compensation for the top five executives at Delphi, Ford, General Motors and Visteon in 2002 was more than $1.5 million. This substantial sum, which does not include the value of stock options, was achieved even though Ford and GM – in the midst of sales slumps – did not pay any executive bonuses last year, and the CEO of Ford did not receive a salary in 2002.

Delphi paid more than $5 million in bonuses to its top five executives in 2002, while Visteon paid out more than $1.5 million. On average, the two firms paid $334,043 in bonuses to each top executive in 2002. This sum is 1,670 times greater than the average $200 profit-sharing payment received by UAW members at Delphi and Visteon.

In 2000 hrs of full time, 50 weeks * 40 hrs/wk, a worker could earn $50-60K per year.

The question becomes - what is reasonable compensation for labor and for managers? Do managers really work 30, 40, 50 or 100 harder than labor personnel?

 

[Informal Logic]

I would put most blame on bad management...

With the operative word being "most," I agree. It does seem (as discussed in other threads) that Americans do not have the same work ethic as the pioneers who originally built this country. Americans work more hours and have less vacation time than many other countries (except Asian countries like Japan), but how productive are these hours?

In 2000 hrs of full time, 50 weeks * 40 hrs/wk, a worker could earn $50-60K per year. The question becomes - what is reasonable compensation for labor and for managers? Do managers really work 30, 40, 50 or 100 harder than labor personnel?

The difference should be based on skills and supposedly education that allows one to work smarter not just harder. I wonder if managers are working smarter, and not just for their own personal gain but on behalf of the company.

My boss likes to blame MBA's for many of the country's problems (I assume that's what you meant). AFAIK, the laws haven't changed recently, so something else must have changed in the way executives think and lead. Perhaps the rise of the small-time investor has motivated CEOs to go after short-term profits instead of long-term growth?

Your boss (the Archie Bunkers of the world) is part of the problem. But yes, the American business model is short term in nature (quarterly measurement), and this is a problem.

In general, Americans now change industries an average of five times in their lives. Pension plans have given way to 401K funds that can be rolled over. Unions have become so diminished I question how much a factor this is in America anymore.

 

[Bystander]

My boss likes to blame MBA's for many of the country's problems (I assume that's what you meant). AFAIK, the laws haven't changed recently, so something else must have changed in the way executives think and lead. Perhaps the rise of the small-time investor has motivated CEOs to go after short-term profits instead of long-term growth?

You "grok." WW II contributed to a perception, myth, something, that "management" can do anything. Kaiser, the Groves-Oppenheimer team, Ike, GM manufacturing more Avengers than Grumman, Singer's small arms business (collector's items), General Mills building bombsights are some examples that come to mind. The first and the last three involve "managers" getting into businesses about which they know nothing. Their successes during the war may have been incorporated into a managerial "mystique" that's turned into a real monster.

Managerial compensation? Get a hundred $10M/a maggots pilfering from GM --- that's $100 a vehicle, or thereabouts. The navy buys aircraft carriers at $10-20 a pound, and people scream; "the big three" nick people the same and more, and are losing money for the shareholders --- several hundred billion dollars per annum are disappearing into a black hole somewhere. GMAC, the "repo man," consumer credit, bankruptcies, legal fees, title and transfer taxes --- from end of assembly line at $10-20 a pound, MSRP, to the scrapyard at $0.10 a pound, how much of the MSRP is actually collected? And by whom?

Not trying to hijack, sidetrack, or derail the thread --- this might be a group project in economics.

 

[russ_watters]

In 2000 hrs of full time, 50 weeks * 40 hrs/wk, a worker could earn $50-60K per year.

The question becomes - what is reasonable compensation for labor and for managers? Do managers really work 30, 40, 50 or 100 harder than labor personnel?

I don't think either number is reasonable. An assembly-line worker - even in a skilled job - is not worth more than a teacher, most of whom have at least a master's degree. And a CEO who is driving a company into the ground for a short-term profit isn't worth his salary either.

However, the argument that a CEO isn't worth 100 times more because he doesn't work 100 times harder isn't valid - how hard they work has little to do with how muh they get paid. The reason a CEO makes so much more is that there aren't many people who can do what a CEO does (based on qualifications alone), while anyone with a high-school degree can work an assembly-line. That alone makes CEO's worth at least an order of magnitude more. And that's before you even factor in the extrordinary responsibility that goes with leading a company of 10,000+ employees.

Quality of leadership has such a huge impact on employee performance, that it is not unreasonable for a CEO to be paid as a percentage of profit, productivity, or payroll - and that means big numbers.

 

[Astronuc]

And that's before you even factor in the extrordinary responsibility that goes with leading a company of 10,000+ employees.

That's the problem I have, the assumption that many people make that the CEO is running things. CEO's don't. There is a management team and structure.

The CEO is supposed to strategize about the future direction of the company. There is often a CFO, COO, CIO etc, and president, VP's, managers and general managers, supervisors, etc. Those various managers run the daily operations.

Does a CEO risk his own capital - not necessarily. Most of the capital risk is taken by financial companies (banks) and investors (stock and bond holders).

Business Management Guru Peter Drucker (http://en.wikipedia.org/wiki/Peter_Drucker) mentioned somewhere that the highest paid executive in any company should not make more than ~20 (or so) time the lowest paid employee, and with exception, I tend to agree with that.

 

[Anttech]

I work for an American company..
And from everything I have seen, most american managers just don't cut the mustard in Europe. Also I find american's facination with management degrees counter-productive. Especailly since I find from my personal experience they implement none of what they learn.. It seems with management you can show a horse the water but can't make him drink..

 

[edward]

Unless I missed a post, there is another big element involved in the high cost of American labor. HEALTH CARE.

GM leader says health care costs are ruining U.S. economy; expenses add up to $1,500 for each car the company sells

In a speech to the Economic Club of Chicago, the chairman of General Motors said health care costs are wrecking the U.S. economy. Rick Wagoner said his company spends more than $1,500 in employee medical expenses for each new car it sells. Many foreign companies, meanwhile, can take advantage of much lower health care costs in their home countries, and put their savings to work building new plants in the U.S.

Personally I don't feel that health care should be just another commodity bought and sold on the stock market. It is too vital to the American economy and to the American people to be left in a speculative environment where the provider is only looking at the bottom line.

 

[selfAdjoint]

The point that Japanese companies can manage to make competitive autos in the USA with American workers has to be up front in all these discussions. What I want to know is whether Honda and the others have unions, and if so, what kind of contracts they have.

For decades, the auto unions sought and received fat-loaded contracts from complaisant oligopolitical managements. They had a closed market; they could pass the costs on to the customers with "administered prices" that were not subject to Econ 101 constraints, so why not?
.
The UAW and Detroit management are dinosaurs joined at the hip, they will sink together. But US labor will rise (and IS!) again, in a new and more efficient avatar. It remains to be seen whether US management can do the same.

 

[Astronuc]

Unless I missed a post, there is another big element involved in the high cost of American labor. HEALTH CARE.

Well health care and pensions/retirement. Health care in general is costing lots of money, but it is making some people very wealthy. Just think of all those 'bio-tech companies' churning out products that mostly would not be needed if people ate properly and exercised, or didn't smoke or drink too much.

The bottom line is that the economy cannot afford to give each and everyone $10,000's or $100,000's of medical services. The whole of insurance is minimizing the risk and covering only a small fraction of the population just in case. The problem arises when the 'exception' becomes the 'rule'.

Retirement is another matter - any worker should put away at least 5% of his or her income per year for 30 or 40 years or more, and hopefully get a good return on investment.

 

[Moonbear]

I have a different issue with unions that relates to the productivity concern raised earlier. Unions don't just demand decent wages for their workers, they also make it next to impossible to fire the dead weights. That really raises costs when you have to start hiring two or three people to do the job of one because you can't just fire the slackers and hire hard-workers in their place.

Certainly these companies are also doing poorly, as pointed out above, because they just aren't selling a product the American consumer wants. They seem too locked into old designs and afraid to introduce something new. What the foreign auto-makers have that the US auto-makers don't are sensible AND sporty cars; the type that fits a family of four comfortably and still has nice, tight handling and a fun look. There's nothing at all desirable in the mid-range between compact cars (not really suitable for families, although they still have appeal to the single commuter) and minivans. Nothing that the young professional would like to show up in when picking up co-workers or friends to attend a swanky dinner. They're basically missing the entire market of people who want to spend money on a new car every few years.

 

[Kerrie]

Always enjoy your topics Russ...

I work for a manufacturing company that uses steel in its parts (custom brushes for machinery). We have a huge problem actually getting the steel, let alone purchasing it at a decent cost. Problem is China is buying up a ton of scrap steel.

 

[Informal Logic]

Business Management Guru Peter Drucker (http://en.wikipedia.org/wiki/Peter_Drucker) mentioned somewhere that the highest paid executive in any company should not make more than ~20 (or so) time the lowest paid employee, and with exception, I tend to agree with that.

Just saw this:

While pensions fall short, CEOs fly high--Ford, GM, United Airlines, Continental. They're just four of the companies struggling with falling profits and pension problems as their executives get huge payouts.

...Unfunded pension obligations at Ford have risen to a whopping $12.3 billion, and General Motors is looking at shortfalls of $7.5 billion.

In the executive suites of these companies, however, there's no pain to be found. United Airlines chief executive Glenn Tilton collected $3.4 million in compensation in the year leading up to the airline’s 2002 bankruptcy. He received another $4.5 million of his pre-bankruptcy pay package in 2003-2005.

And while the pension pit grows at Ford, chief executive William Clay Ford Jr. has collected $53 million over the past three years. At GM, G. Richard Wagoner Jr. got $40.7 million over that period. Start investing with $100.

It's no secret that corporate bigwigs have paid themselves handsomely while stiffing their workers and sending jobs overseas. It's particularly galling, though, to see these same executives locking in their own lifetime of luxury while rolling the dice with their workers' retirement years.

http://moneycentral.msn.com/content/P119362.asp

I work for an American company.. And from everything I have seen, most american managers just don't cut the mustard in Europe. Also I find american's facination with management degrees counter-productive. Especailly since I find from my personal experience they implement none of what they learn.. It seems with management you can show a horse the water but can't make him drink..

A college professor once asked his class for a show of hands on how many of them were earning degrees to make more money vesus increase their knowledge. I think you can guess why the majority of students were there.

Certainly these companies are also doing poorly, as pointed out above, because they just aren't selling a product the American consumer wants. They seem too locked into old designs and afraid to introduce something new. What the foreign auto-makers have that the US auto-makers don't are sensible AND sporty cars; the type that fits a family of four comfortably and still has nice, tight handling and a fun look. There's nothing at all desirable in the mid-range between compact cars (not really suitable for families, although they still have appeal to the single commuter) and minivans. Nothing that the young professional would like to show up in when picking up co-workers or friends to attend a swanky dinner. They're basically missing the entire market of people who want to spend money on a new car every few years.

Poor quality is even more of the problem. I have driven many rental cars over the years--always American made, and cannot wait to drive my own vehicle upon return home. I buy German or Japanese, because of the quality.

 

[Skyhunter]

The Honda Accord is made here in the US, and had (maybe still has, but I don't know) the highest percentage of US-made parts of any vehicle sold in the US. It is a car designed for the US market. It is build by American labor in a plant in Marysville Ohio - the same plant (and essentially the same workforce) that Ford dumped in a strategic plant-closing. Likewise, you can find Nissan Pathfinders and Toyota Camrys made in Kentucky. The American workforce is not too expensive to produce quality products at a competitive price.
http://www.suburbanchicagonews.com/homes/news/1_4_CEZM_CARCONTENT_S1.htm

Honda located the plant in Union County Ohio because Governor Taft (the first one not the current 1 digit approval rating governor) built TRC, the Transportation Research Center. Originally they just built motorcycles there.

Honda is not unionized, in fact when they started hiring for the new Accord plant they would not hire anyone it they had ever been a union member. They outsource a lot of their work to local companies that pay minimum wage with no benefits. The work is is repetitive and many workers suffer repetitive stress injuries.

I have a friend who is a chiropractor in Marysville. He isn't very successful because he treats so many of these people even though they cannot afford to pay him. The companies deny that the injuries are work related and fight all the workmans compensation claims.

[edit]I want to clarify that it is the third party companies not Honda that have no benefits and fight the workerscomp. [/edit]