Sunday, November 16, 2008

Toyota's Labor Costs Could Exceed The Big Three By 2011

There is conventional wisdom, and then there is reality. Take, for example, David Harsanyi at the Denver Post, who gets on his mile-high high horse with Governor Granholm:

We're still going to buy cars, Madame Governor, but perhaps we will buy them from companies that have the temerity to say "no" to unions and crushing legacy costs associated with them. These corporations may not even be headquartered in Michigan.

So goes the subtle and not-so subtle battle cry arising from the voices on the right: unions, legacy costs, labor force, the Big Three always deemed to be uncompetitive with foreign automakers who have located in the southern states and pay their workers less money. Expect to hear this a lot in the coming week - but as the kids say, reality bites. Someone might want to clue these folks in that by the end of 2009, the auto factory with the highest labor costs in America could very well be the Toyota assembly plant in Georgetown, Kentucky.

Some of Toyota's U.S. plants 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. "The Japanese automakers have been here for almost 30 years," says Michael Robinet, an analyst at CSM Worldwide, a Northville (Mich.) research firm. "They'll start to have Big Three-like costs creeping in."

The Big Three has already shed 40% of its hourly workforce in the past three years alone, and, as anyone paying attention to the news in Michigan knows, they are moving to eliminate more. The new contract signed with the UAW came with major pay concessions for new hires, creating a two-tier wage system that will pay some workers substantially less than their older counterparts.

Advantage: Detroit. In a very short time.

The savings add up. General Motors (GM), for instance, has 74,500 workers. By 2011 GM will have about 68,000, and up to one-third of them will be earning the lower wage, predicts McAlinden. If GM can get all the buyouts it needs and hire cheaper labor to replace them, the company could cut its wage bill by $2.7 billion annually by 2011, he says. That adds up to $841 a car, or about half of the current cost differential with Toyota. A retiree health-care deal, which will give the United Auto Workers union $36 billion in exchange for taking over medical insurance, should save GM an additional $699 a car. That would turn Toyota's labor cost advantage over GM of $1,394 per car to a $108 disadvantage by 2011, McAlinden says.

There is a reason Gettelfinger pitched a fit when it was suggested that the UAW give up more; they already gave up quite a bit in the last go-round to help the automakers stay competitive. Pelosi will only say "restructure", and who knows what that will entail when they hash out the details. Look for fireworks in the testimony to Congress next week.

Toyota's response to the new reality of labor costs was to delay raises, lower starting wages, and look at putting medical care on-site. (Acute leukemia? Naw, it's just the flu. Get back to work.) That is all fine and dandy - if you want to play the "race to the bottom". Continue down that path and chances are eventually labor will rise up again and form unions that will demand better pay and working conditions - even at Toyota.

The pendulum swings both ways, as we recently found out. There are probably more savings to be squeezed out when it comes to labor costs, but it would might be better to look at other ways to structure pay and benefits, rather than the slash-and-burn method that those who secretly want to break the unions are suggesting.