Restructuring the Auto Industry
– Or Restructuring the Profits

Nov 30, 1984

Despite their mushrooming record profits, the major auto companies claim that there are still problems of being able to produce cars that are competitive with imports, especially Japanese imports. And they are saying that they are going to have to continue to restructure the industry to make big gains on the cost of production. These gains have to be made on 2 levels. First they have to find ways to make their operations more efficient and streamlined, by cutting their overhead costs. Second they have to keep the cost of labor down, and the workers will have to understand the necessity of being more moderate in their wage demands and to accept increasing productivity and the “easing” of plant work rules. By this they will ensure the security of their jobs.

The auto executives date their problems back to 10 years ago with the advent of the oil crisis and the economic crisis. The oil crisis with the skyrocketing cost of gasoline meant that the U.S. automakers had to make smaller cars, which would consume less gas, as their foreign competitors already did.

The economic crisis meant there was little prospect of a steadily growing auto market, that the likelihood was that the market would stagnate. In this stagnating market the competition was more intense, and so was the necessity to lower the cost of production...and the prices.

The Need to Cut Production Costs

So the U.S. auto companies began a push to slash the cost of production. By downsizing the cars, they made the cars smaller and lighter. This meant using less, and often cheaper, materials. But the most important way of slashing production was to force the auto workforce to make a series of sacrifices.

First of all, productivity was increased. Greater productivity meant that fewer workers were doing more work. The UAW estimates that productivity increased by 30 per cent from 1979 to 1983. This figure, which is more than double the average growth in productivity in U.S. manufacturing since World War II, is all the more remarkable because productivity continued to rise during the worst recession in 40 years, when auto production was cut almost in half. Productivity usually drops during recessions. In this recession, it continued to rise.

The UAW also reports that overtime has been running very heavy, that if what they call unreasonable amounts of overtime in the auto industry during the first 4 months of 1984 had been done away with, it would have opened up 97,000 additional jobs of people working 40 hours. So the auto companies have been lengthening the work day, both in terms of how much time the workers put in and in terms of how much the workers produce.

The result was that the auto companies have succeeded in cutting back their work force. In 1978 the UAW reports there were 738,000 workers employed by the auto companies. The UAW tends for its own reasons to understate the number of workers who are laid off. But still the UAW’s figures give an idea of the extent of the problem. In 1982, at the trough of the recession, employment dropped to 485,000. In 1983 car and truck production rose 32 per cent, but employment increased only 13 per cent, to 565,000. 170,000 workers were not brought back. Thus, unemployment in auto is running at 24.6 per cent.

The workers are also getting less money for the work. In 1982, the auto companies came to the union and said that they were losing money, they were about to go under because they claimed they had one or two bad years out of 70 profitable years. So they negotiated a concession contract. The average Ford and GM workers gave up, between adoption and expiration of the 1982 contract, $1,279 in suspended cost-of-living raises, $1,240 in annual improvement factor gains, and $2,000 in loss of 26 paid personal holidays, for a total wage concession package of $4,500. Offsetting this was the “gain” in the contract of profit sharing. At Ford the average worker received $450 from the profit sharing. At GM, the average worker received $700. So there was a net loss in wages of between $4,000 and $3,750. Now most of the wage concessions are begin extended in the new contract, with some new ones, like cuts in medical benefits, being added.

Increasing Prices – a Strange Way to Compete

But bringing down the cost of production is one thing. The auto companies did not decide to pass those savings on to the consumer. As contradictory as this may seem, given all their complaints about foreign imports and the necessity to be competitive, and about the reduced market and the necessity of enlarging it, the auto companies pursued the opposite strategy. They raised their prices steadily, despite the little show that they put on about auto rebates. Since 1973, the average price of a car was increased by over 180 per cent. The increases have far outstripped inflation. Even when inflation abated, the prices have increased. In the past 2 years, prices on the average have increased $2,600. As car models were down-sized, the prices were increased. Sticker shock was introduced into the national language.

A section of the population that used to buy U.S. cars was no longer able to afford them. This can be seen if we compare prices to average workers’ earnings. According to the Department of Commerce, the average transaction price of a car stood at $3,877 in 1973. This made up about 26.5 weeks of an average worker’s gross weekly earnings. As prices steadily moved upward, workers’ incomes stagnated and dropped. By 1983, the average transaction price of a car stood at $9,317. This took 33.2 weeks’ earnings, or almost 30 per cent more work time to pay off. It means that instead of using all the means at their disposal to try to take back a portion of the market that had been taken over by foreign imports, instead of even trying to find ways to encourage more people to buy cars, and therefore expand the market, the auto companies did the exact opposite. By pricing their cars ever higher, the auto companies contributed to the shrinking of the market. And in recognition of the strangling of the market by the crisis and the auto companies, the auto companies have closed down a portion of their production capacity. While in 1979 they had built 10.3 million cars, the auto companies today have the capacity to build only 9.8 million cars, and of course they aren’t nearly building all of those.

Why didn’t the auto companies slash their prices as they slashed their production costs? Despite what they say in their public relations, their main interest is not in necessarily increasing production. Their main interest is to increase their profits. And if they can maximize their profits, even at the expense of production, of course it is what they will do. And this is exactly what they did in this last period. So the auto companies produced only 70 per cent of the cars and trucks that they did in 1978. Yet with the very high prices and the tremendous productivity gains and concessions, their combined profits were almost twice as high in 1983 as in 1978. U.S. auto companies have maintained consistently higher profits than their Japanese competitors. In 1983, Toyota, Japan’s largest producer, made a profit of 840 million dollars on sales of 20 billion dollars. GM made, in 1983, 3.7 billion dollars on sales of 75 billion dollars. In other words GM’s profit was more than 440 per cent higher, on sales that were only 375 per cent higher. So GM’s profit was higher on proportionally lower sales than Toyota. From 1975 - 1979, GM’s average return on sales after taxes was 5.1 per cent, Ford’s was 3.1 per cent. On the other hand, Toyota had a return of 4.2 per cent, Nissan 3.3 per cent and Honda 2.1 per cent.

When Profits Outweigh Production

It is the auto companies’ drive for profits which is their basic interest, and not necessarily production. And it is this basic interest that explains what might appear to be a contradiction with what they say they are doing and what they actually do. This can be shown in other seeming contradictions.

So the auto companies have said that the key to their staying competitive is the upgrading of their production facilities. The auto companies had claimed plans to invest 80 billion dollars over 5 years. But in fact, according to Automotive News, an industry trade weekly, it is guessed that at most half that amount will be spent, not just by the big three, but by all the auto companies, and those companies supplying the U.S. auto industry. Behind this exaggeration lies an apparent slowdown in installing the latest technology. Symbolic of this new technology is the robot. The auto companies have had the capability to install robots in their factories since the beginning of the 1970s. Yet, the Japanese have installed more than twice as many robots in their factories as U.S. producers. In the U.S., robot sales so far have been slow, and according to future orders, they are not expected to increase significantly over the next 2 years. So the level of use of robots does not seem to be where it should be.

On the other hand, there are new factories that the auto companies have built that they are not using. One new Cadillac assembly plant in Detroit was scheduled to open 3 years ago, and replace two aging Cadillac assembly plants. But this opening has been put off for 3 years already, with no explanation from GM, although the plant sits there finished. A couple of years ago, Ford closed down a brand new mammoth foundry in Flat Rock, Michigan and moved the operations back to old facilities which are technologically much inferior. Why? Again the company gives no explanation.

For the auto companies, it is not enough to make heavy investments. Those investments have to pay off. In order for those investments to become profitable, production has to be run at a high level. Otherwise the auto companies paid for something that they don’t use, or they under-use. For the auto companies to be making heavy investments during a period of crisis, when demand just 3 years before was desperately low, and when demand even in good years, is not as high as it was in the previous decade, is a risky undertaking at best. So while they are making a big hoopla about how much they are investing in auto production, they are being very cautious. Obviously for the auto companies the question remains open about whether or not they have to invest in auto in this country, and how much to invest.

Looking for Other Ways to Make a Profit

They also look for various means to eke out the maximum profits from their investments, although various advantages that the U.S. companies use also have certain drawbacks. Today the U.S. auto industry executives credit the Japanese for greater manufacturing efficiency because the Japanese auto markers have concentrated their supplier and assembly operations all together in one small area. This is not a new idea of efficiency. The Japanese took it from Ford’s River Rouge complex set up in the 1920s in which all aspects of auto production from steelmaking to final assembly are in a single location. The U.S. auto makers had moved away from this after World War II. It scattered its final assembly plants all over the country with no relation to its supply operations. It placed its new supply operations such as foundries and engine plants with little regard to the assembly plants they are serving. They did this then, they admit as a way to keep the newly unionized and combative workers as dispersed as possible. But today they also make it continue to pay by stimulating bidding wars between different communities to see which one would pay the auto companies the most money to place the plants in their towns, which would give the biggest tax abatements and subsidies. So scattering the plants might be disadvantageous in terms of efficiency of production, at least this is what the manufacturers themselves say. But once more this shows that efficiency of production is not the most important problem of the company. If they can make more money by having the taxpayers subsidize the company’s investment, production and efficiency become less important.

This drive for profits also explains why the auto companies decide to invest in companies that have little or nothing to do with auto production, but simply because they have a promising rate of return on an investment. So GM, which has amassed over 10 billion dollars in cash and securities, has been on a buying spree for several years. GM bought a business consulting firm, a computer company for 2.5 billion dollars, and Fanuc, a U.S. subsidiary of a Japanese robot maker.

GM over the years has also bought into several foreign auto companies, including two Japanese car companies, Isuzu and Suzuki and a South Korean auto company. GM has started importing subcompact cars from all 3 of these companies into the U.S. So these companies’ production is competing with GM production at home. But once more, for GM, the question of production is not a question of building cars in this country. Their only criteria of where they invest, is where it is the most profitable.

Sacrifices with No Guarantees

The auto companies make no guarantees about where that investment will be. Even though today the U.S. auto industry is making a huge profit, even if it is competitive, there is no guarantee that these companies will continue to invest in it. This depends on if they find some place else that is more profitable to invest in.

So all the talk about the need to restructure is just propaganda to force the workers to make sacrifices, and push the various local governments to continue to subsidize them. And it is used to justify the higher prices paid by the consumer and protectionist measures to keep a larger number of foreign imports from being sold. But all this doesn’t mean that there will be a real restructuring of the auto industry and that even a part of the industry will remain here in this country.

In fact, the capitalists demand sacrifices but they give no guarantees. This is a main feature of capitalism. The capitalists claim for themselves the freedom to invest where and when they think it is most profitable. The workers are only supposed to hope, under these circumstances, that thanks to the high profits that the bosses make, that they still continue to keep their investment in their country. And the workers therefore will keep their jobs.

The only guarantee for the workers would be to take power and run the economy without the capitalists, according to a centralized plan under the workers’ control. This would be the only guarantee that the wealth the workers create and the economy which the workers make run will be used in the workers’ behalf.