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From the Desk of Jack Healy

Automotive Industry Changes Will Impact All of Manufacturing

By Jack Healy, Director, Manufacturing Advancement Center, jackh@massmep.org

Changes that are currently underway at both General Motors and the Ford Motor Company will have significant repercussions throughout the manufacturing sector. The issues that these companies are raising will become political lighting rods for dealing with health care, defined benefit pensions, and global trade -- challenges that affect us all.

But most of all, the changes in these companies will directly affect our northern New England businesses.

Automotive Industry*
 
Massachusetts
Maine
New Hampshire
Total
Output
$583
$138
$637
$1,358
Employment
2,537
687
2,886
6,110
Employee Compensation
$110
$22
$124
$256
Value Added
$179
$34
$182
$395
* All dollars are millions of year 2000 dollars. Data from IMPLAN Pro. year 2000 state dataset. IMPLAN data sources include the US Bureau of Economic Analysis, the US Bureau of Labor and Census. Automotive industry defined as: automotive apparel and trimming, automotive stampings, motor vehicles, truck and bus bodies, motor vehicle parts and accessories, truck trailers, and motor homes.

The $1.4 billion dollars of output reflected above does not include all of the machine manufacturers who make machinery and equipment for the automotive industry. Nor does it include consumable manufacturing commodities such as abrasives. Nor does it include any of the indirect support such as transportation. If these were included you would be looking at a number closer to $2 billion in output. If automotive manufacturing in New England were lost, it would also result in a loss of approximately $44 million dollars in local state taxes that would need to be made up from other sources.

Supply Chains Impact Regional Economies
Given the supplier reduction plans recently announced by both GM and Ford, we should expect that there will be losses, especially when you factor in the reduced volumes that both Ford and GM will now be producing.

At a recent symposium of the Metals Processing Institute at WPI, a Group Vice President of GM North America, stated that "The Global Headquarters of General Motors is located in Detroit. At GM, I can tell you that we have no plans to change that."  But there was no such reassurance relative to their suppliers.  Both GM and Ford view themselves as global companies and, as such, will source globally. That means regardless of where you are in their supply chains, you will have to meet globally competitive pricing…or be gone. 

Given the predominance of New England's second and third tier automotive suppliers, we will undoubtedly be the loser when the tier one manufacturers succumb to global competitors.

Today's supply chains are determined by the OEM's, such as Ford and GM. They, in turn control the manufacturing economics for many local regions. In this age of limited growth, the general overcapacity in manufacturing is now being played out in the automotive sector, but will be followed by other sectors, such as aerospace, which intend to reduce their existing supplier base by approximately 50% over the next five years. 

While most people in manufacturing generally understand the concept of supply chains, there is limited understanding about how much of a competitive advantage the right supply chain can provide, unless you work in companies like Dell Computer. We should expect that this level of comprehension will change as both GM and Ford reconfigure their supply chains.

Bankruptcies Shake America
As reported in the Washington Post, "About 150 major corporations are now in some stage of bankruptcy reorganization, including four of the nation's leading airlines.  As the prospect of other large enterprises taking a spin down Chapter 11 becomes more widely discussed in business circles (‘maybes' on the list include such iconic names as General Motors and Ford), the tactics used in bankruptcy courts are shaking the very foundations of the American Workplace." 

Bankruptcy obviously provides a vehicle for corporations like GM and Ford to shed their extreme, unfunded pension liabilities. But there is so much shedding going on that we've reached a point where there will be some movement to reform the Pension Benefit Guaranty Corp (PBGC), which Congress set up in 1974 to insure defined-benefit corporate pensions. The PBGC is now attempting to deal with a $23.3 billion net deficit and if it has to deal with the estimated  $45 to $50 billion in unfunded automotive obligations, we will be looking at a new system. 

The Impact on Suppliers
The other side of this bankruptcy tactic is the loss inflicted on the suppliers within the supply chain, as evidenced by the current Delphi bankruptcy proceedings.

Delphi was the largest parts supplier to GM and was formed when GM spun out all of its component manufacturing to one separate organization. GM's bankruptcy restructuring will allow Delphi to eliminate or reduce the legacy costs that were assumed from GM  when the organization was formed. Delphi is seeking to restructure their union contracts, shed retiree benefits, eliminate pension obligations, and deny payments to currents suppliers (all of whom had contracts) for goods and services.

Given the low margins for automotive products, the losses incurred by these engineered bankruptcies and the subsequent denial of payments for goods, will have a tremendous impact on an already troubled industry. Delphi suppliers must wonder about Delphi's bankruptcy petition for the court to award up to $87 million in bonuses to Delphi senior managers, who will also share 10% of the equity in the reorganized company.  Not bad remuneration for playing their part in getting the company into trouble in the first place. 

It's possible that court-supervised reorganizations, with current debtors in possession, will produce viable companies that are necessary for our economy. But I doubt it. And we should expect to see more of the same in the near future, especially if the payoff is large. One thing that automotive suppliers no longer need to wonder about is whether they should be taking the standard reserve for bad debt off their books. Delphi appears to be just the beginning. Standard reserves for bad debt, for most manufacturers, may be a thing of the past.

From Bellweather to Bust
Starting with the $5 dollar day, automotive manufacturing was long the bellwether for manufacturing, especially in the area of compensation. That has now dramatically changed. Employee benefit improvements are definitely at an end. We should expect that the converse will happen, especially in the area of health care, as GM and Ford, along with the United Auto Workers Union, know that their current programs of first dollar coverage, retiree coverage, and minimal employee contributions are not sustainable and must change. 

But no one has the magic bullet that manufacturers are looking for. The general call by both Ford and GM for government support in health care (aka a National Health Care Program) has already started, with the case being made that US auto makers must pay billions of dollars in health care costs that are unfairly weighing down the companies' abilities to compete. GM is already paying for the health care of more retirees than of active employees and is hammering this point home to their Congressional representatives.

The political reaction to this has already started within congress with the introduction of legislation, such as "Healthcare for Hybrids," whereby the government would assume certain health care costs for industry in exchange for a commitment to build hybrid vehicles. There will certainly be more to come as the election heats up towards the end of the year, and as the automotive companies bring more pressure to bear in Congress.

The Profit Bottom Line of Productivity
All of the issues that are being raised by US automotive manufactures are moot when it comes to productivity, which is a lesson for all manufacturers throughout the US. Harbour Consulting has reported that the average Toyota vehicle built last year in North America contained about 19.5 hours of labor and assembly, while each GM vehicle took about 23 hours and each Ford about 24.5 hours. Extrapolation of this indicates that if GM had matched Toyota's labor productivity ratios they would have cut their losses for 2004 in half. But they did not, as GM's focus is not on making cars but on "making a profit."

As reported in the Boston Globe recently, "For the first time, more foreign-brand cars sold in the United States were built here – 3.7 million – than were imported – 3.4 million."  This change was further highlighted by the fact that only 460,000 foreign cars were built in the US back in 1985 while 3.6 million were imported. 

Unfortunately, as GM and Ford lose this race, we will all be affected.

For the interested reader, we have included a summary of Steven Spears' keynote presentation at the recent Association of Manufacturing Excellence AME 2005 Annual Conference. 

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