Tuesday, August 09, 2005

Returns to labor in the rustbelt

Not only are GM and Ford hurting, but huge parts supplier Delphi is threatening bankruptcy (WSJ) if their US labor costs cannot be adjusted downwards. Recall that one of the main consequences of this era of globalization will be reduced returns to labor relative to capital...

WSJ: Delphi Corp. Chairman and Chief Executive Officer Robert S. "Steve" Miller said the automotive supplier is in discussions with former parent General Motors Corp. and the United Auto Workers about a comprehensive restructuring of Delphi's unprofitable U.S. operations aimed at avoiding bankruptcy reorganization.

Mr. Miller, a veteran leader of large-scale corporate restructurings, said discussions with GM and the union "are very constructive and give me hope that we can restructure out of court." But Mr. Miller said that if Delphi can't reach agreements with GM and the UAW that substantially cut its U.S. labor costs and allow for restructuring or sale of unprofitable businesses, the company can't continue on its current course until September 2007, when its current UAW contract expires.

See also this article in the Detroit News

TROY -- General Motors Corp.'s top purchasing executive Wednesday urged the automaker's suppliers to consider building parts in China in order to remain competitive. The automaker also reinforced the need for suppliers to meet aggressive cost-cutting goals and help it dramatically reduce warranty costs.

The meeting in Troy between GM and 380 executives from suppliers comes as the automaker is under pressure to cut its $85 billion global purchasing bill and other costs to help restore profits, particularly in North America. GM expects to report an $850 million first-quarter loss and has warned that 2005 earnings will be about 80 percent below earlier forecasts.

GM is consolidating its global automotive operations and has expanded the responsibilities of several top executives who oversee purchasing, product development and engineering worldwide... GM told suppliers it's not backing off a goal to cut material costs by 20 percent between 2003 and 2005, but did not demand further price cuts.

...The Detroit News spoke to several people who attended the meeting and obtained a 13-page slide presentation Andersson gave to suppliers.

GM spokesman Tom Wickham said the message GM's purchasing team delivered during the two-hour session was "we're a global company, we need a global supply base, a competitive supply base and we do need to work together." To meet GM's global needs and remain competitive, suppliers should consider building plants closer to growth markets, in particular, China, GM officials said. "Location is important for logistical reasons," said Wickham, "but it's really going to be the supplier call on what works better for them.

...While he didn't specifically demand that suppliers move production to China, Andersson's slide presentation made the message clear: "The footprint is shifting ...Will it be driven by the consumer, competition, or you?" The presentation also quoted from news stories that discussed rival Toyota Motor Corp.'s move to source parts in China and asserted that American suppliers are missing out on growth opportunities in China. A so-called global purchase price that GM and other companies seek is the lowest price available anywhere, said John Henke, president of Planning Perspectives Inc. and marketing professor at Oakland University. Getting a global purchase price on labor intensive components often requires dealing with suppliers located outside the United States, he said. "Simply because of wage structures around the world, you'll go to places like Mexico, China and India to get the best price on anything," Henke said.

The exodus of parts suppliers to countries where labor costs are cheaper is well underway and not likely to abate before the end of the decade. North American auto suppliers will close plants and move as much as 20 percent of their production to lower-cost regions by 2010, according to a survey conducted last year by Roland Berger Strategy Consultants in Troy. Some parts can be produced 20 to 40 percent cheaper in China and other low-cost regions than they can North America, experts say.

Troy-based Delphi Corp., GM's biggest supplier, has invested more than $400 million to open 11 factories in China since 1991 and is building a $15 million research and development center in Shanghai. Still, GM imports only one-tenth of 1 percent of the parts used in its U.S. assembly plants from China (Michigan factories supply 14 percent). But the company expects to increase its auto part purchases from China 20-fold in six years -- from $200 million in 2003 to $4 billion in 2009.

During Wednesday's meeting, company executives reiterated that only those suppliers who are competitive on quality, service, technology and price would win or retain GM's business. Andersson told the suppliers they must continue to play an important role in reducing GM's warranty costs, which have dropped from $35.56 per vehicle after six months in service, to $24.90 in 2004. GM's target for 2005 is $22.05 per vehicle.

DeKoker acknowledged it's in the suppliers' best interest to play ball with GM as it struggles through a tough year. "We want GM to be successful," he said, "because you can't sell parts to something that doesn't exist."

Meanwhile, GM's joint venture in China is producing a bestselling mini-minivan that sells for $5k and gets 43 mpg.


Anonymous said...

ah -- but where are the increased returns to capital? US nominal ten year rates are under 4.5% (up from under 4, tis true) -- v over 6 a few years ago. real yields are down too; upward price pressure on resources offsets falling prices in other sectors. Eurozone ten year paper yields maybe 3.5 (have not checked recently), or under 2 in real terms.

Companies do have tons of cash, but they are sitting on it, suggesting that they cannot find uses for it that yield more than lending it to the government ...

lower returns on labor and lower returns on capital, that is a conundrum ...

all explained by higher savings rates in low-income countries?

brad setser

Steve Hsu said...


You put your finger on it. Why aren't returns to capital higher?

We seem to be flooded with excess capital chasing returns. There are many contributing factors, which you know well, and the best I can do is suppose that all of them are contributing to some degree.

Perhaps there is a limit to the amount of capital that can be invested efficiently in developing economies like China? (Remember, they are still afflicted by crony capitalism, a real estate bubble, etc.) That would make it less crazy for them to be ploughing their dollars back into the US economy. Ditto for petro dollars - we buy expensive oil, and they have nothing better to do with the dollars than plough them back into bonds.

One possibility is that this is a short transient period which won't go on much longer (I guess you and Nouriel predicted this), and we will end up with very high interest rates after a dollar collapse.

Anonymous said...

Ok, so big companies are increasing profits by paying "eastern" wages and still selling at "western" prices. But, the more they do this, doesn't it become less sustainable?
how come my wage is decreasing and prices keep going up? who is paying those prices? not me for sure, not anymore.

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