By on June 10, 2010

I understand the economic argument for the off-shoring of production, but I think the practice is reprehensible. U.S. automakers have benefitted greatly from federal largesse and should feel morally compelled to retain and create as many domestic jobs as possible.

As one of the strongest proponents of the Detroit Bailout, Rep John Dingell (D-MI) carries some weight when he makes statements like this. But how can Detroit rise again by ignoring the undeniably strong “economic argument” for outsourcing? In a Bloomberg BusinessWeek feature, Thomas Black shows why production numbers are on the rise in Mexico, and makes the case that the Detroit automakers will only increase their reliance on Mexican production when they are free from government ownership.

Why? The same reason illegal immigration is such a huge issue.

GM workers in Mexico earn wages and benefits of 340 pesos a day ($26.40) on average, or less than $4 an hour, said Tereso Medina, head of the union for GM’s 5,000 workers in Saltillo, a city that makes one in four Mexican autos.

GM’s average hourly worker salary in the US is $69,368. If a Mexican worker worked 365 work days a year at the cited rate, he would still make under $10,000. Average UAW concessions over the past decade range between $7k and $30k per year. It doesn’t exactly take a rocket-scientist to understand the “economic argument” at work here.

And the Mexican momentum is hard to ignore. Looking back at pre-crash production numbers, Black reports:

U.S. car and light truck production declined every year to 8.45 million in 2008 from 11.5 million in 2005, according to Ward’s Automotive Yearbook. In Mexico, output rose every year to 2.08 million in 2008 from 1.61 million in 2005, the data show…

Production fell in both countries last year, by 28 percent to 1.5 million units in Mexico and 34 percent to 5.56 million in the U.S., according to Ward’s.

This year, U.S. production in April rose 40 percent from a year earlier to an annualized rate of 7.05 million vehicles. Mexico’s output jumped 77 percent and is on pace to top 2008, according to the Mexican Automobile Industry Association.

Chrysler’s decision to build Fiat 500s in Toluca, GM’s new plant in St Luis Potosi and Ford’s re-opened Fiesta plant in Cuautitlan are all cited as evidence of a growing trend. And the analysts line up to be quoted as saying that politics alone are keeping Detroit from more aggressive Mexican investments.

Of course, the other way to look at it is that politics are the only reason GM and Chrysler still have the luxury of being torn between their bottom line and their moral obligation to Rep John Dingell the American people. Yet another perspective is that these weren’t truly “American” companies before the bailout anyway, and that rescuing multinationals and expecting loyalty in return is the height of naivete. In any case, it’s hard to imagine anything changing the fundamental imbalance between UAW/CAW and Mexican worker pay in the short term, so this is an issue we’re all stuck with for some time.

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18 Comments on “Quote Of The Day: Bye-Bye Miss American Pie Edition...”

  • avatar
    SVX pearlie

    So by extension, the transplant BMWs, Mercs, Subies and so on should move those jobs back to Europe & Japan?

    But wait, it’s Dingell. He’s never been smart about the auto industry.

  • avatar

    What’s to stop a future auto manufacturer/aggregator(Chinese or Indian managed perhaps) from assembling cars in Mexico and then selling them in the US through Walmart, Costco or Jiffy Lube locations.

    It’ll be a $9K El Elantra vs a $17K US made Chevy Cruze, both of similar quality.

  • avatar
    DC Bruce

    Not to be pedantic, but since politics is my hometown’s #1 industry, I can’t help noting that Congressman Dingell is a Democrat, not a Republican, as your article states.

    On the merits of the good Congressman’s statement, in a few sentences, he just illustrated why the auto bailout was not a good use of the public’s money. The bailed-out companies have to be competitive, and if that means moving production to Mexico to reduce costs, that’s what they have to do.

    However, as Honda is finding out in China, over time, cheap labor in outsourcing countries becomes less cheap. That can be expected to happen in Mexico. But also the truth that Congressman Dingle doesn’t want to admit is that for 25-30 years (say, 1945-1974), the domestic US auto industry was an oligopoly, with all the characteristics that one sees in an oligopoly: limited price competition, limited innovation, etc. The Big 3 operated under a price umbrella erected by GM. This was no secret to anyone, including the government’s antitrust enforcers, who were busy doing things like attacking IBM (remember that?); but it worked politically because the Big 3 were politically savvy (thanks, Congressman Dingell!) and shared the wealth with their workers.

    All of this was at the expense of the American consumer, of course; but they were told that larger social goals trumped sound economics. Now, the oligopoly has been busted up by a Japan and Germany that recovered from the devastation of World War II, and the European/Japanese market looks much more like the US market than previously (more wealth in those countries; relatively more expensive fuel here than had been the case) so, the party’s over in the US.

    Labor laws have the perverse effect of driving production offshore, too. While Nissan, Honda, Benz, BMW and I don’t know who else elect to build the cars in the US — by choice! — they do so in non-unionized plants in right-to-work states. Meanwhile, because the Big 3 are union shops, they are legally precluded from setting up non-union plants in Tennessee, Alabama or South Carolina or anywhere else in the US . . . but they can do so in Mexico!

    So, that’s where the jobs go, if you’re Ford, GM or Chrysler.

    And now, you understand why Big Labor was/is so opposed to NAFTA. Canada is, of course, at least as unionized as the US and has no wage advantage, so the concern is Mexico.

    And no one’s commented on the fact that Ford Motor’s Mexican-built Fusion/Milan cars have amassed a record of reliability that’s right up there with the best of the Japanese brands.

    • 0 avatar

      Yes, Dingell’s a D. I have no idea how that came out with an “R” there. Fixed.
      And no one’s commented on the fact that Ford Motor’s Mexican-built Fusion/Milan cars have amassed a record of reliability that’s right up there with the best of the Japanese brands.
      This is the real killer because it takes out a lot of value-based justification for paying US assembly labor so much more. Which leaves only political justifications… and you’ve done a good job of explaining where that leads.

    • 0 avatar

      Have you seen the employment situation in Mexico? Why do you think so many people are crossing into the US illegally?

      They can make much more money here, enough to live off of and send enough to support their families.

      Last I read, unemployment was ridiculously high in Mexico, and I don’t think any of the automakers have to worry about increasing wages at all in Mexico when there are bodies stacked 4 or 5 deep as far as the eye can see ready to take those $4/hour jobs.

    • 0 avatar

      +1 DC Bruce
      In addition to the wonderful articles composed by the TTAC ‘staff’ it is the insightful commentary provided by TTAC’s B&B that, combined, compel me to repeatedly check TTAC through out the day. Hurray for all of us, and thanks.

    • 0 avatar

      DC Bruce,

      I could not agree more with what you are saying. A lot of people, especially here in Detroit, believe that the entire car buying public should be obligated to overpay for cars so that a small group of privileged unskilled workers can get paid 3 times what they are worth.

    • 0 avatar

      DCBruce – you have hit it. The outsourcing is a direct result of US labor laws. In my state of Indiana, we have have assembly plants for Subaru, Toyota and Honda. All are located in non-union farming areas. The jobs at these plants are highly sought after and are hard to get in their areas because they pay better than anything else around. But they do not pay what the UAW jobs do in the more industrial areas of the state (GM truck in Fort Wayne and Chrysler’s transmission operations in Kokomo).
      I would love to see the figures that compare production costs at UAW plants vs. non-UAW plants. It would not surprise me that there is a 20-25% cost premium in a UAW plant. This figure may eventually reduce itself once the new lower-tier wage rates become more widespread, but until then, it is either go offshore or watch your margin vanish.

  • avatar

    I’m all about flag-waving, but TTAC and every other product is that consumers are looking for value more than country of origin. This is why they shop at Wal-Mart, shop online, and buy Hyundais. Most people don’t care anymore if a car has 100% US content for parts and labor.

    Technology has reduced the skill required to build a car.
    The UAW prices that skill artificially high.
    Foreign skill is as good as American skill.
    Therefore, foreign skill becomes attractive.

    If Dingell achieves his stated goal, then GM, F, and C will die sooner, rather than later.

  • avatar
    Geo. Levecque

    One writer said that wages in Canada where not a advantage, what is the advantage if our Health Care that we have here in Ontario and despite its problems it works for the majority of people including Auto Workers and the Canadian dollar is not longer a weak sister to the US one, at the moment just below Par, its expected to go above Par in the not too distant future, so Manufactures here like the Detroit Three and both Honda and Toyota don’t have the advantage of a lower dollar, as one of my Customers told me the other day, the Ford Plant in Oakville looks pretty beat up, ie grass uncut and not looking its best whereas she was in Alliston, Ontario where Honda is located on 900 acres in the middle of that Town looks well looked after, grass cut, flower beds all about, amazing what some people note, she also mentioned that the Honda plant is thee times the size of Ford in Oakville.
    Mexico is a “hell hole” for any worker, making “peanuts” for a living wage,one of these days there will be a explosion there I expect!

    • 0 avatar

      Interesting point: there was an internal memo at Toyota noting that employees at Cambridge trained up far faster than at any of it’s American facilities.

      Then there’s how Oshawa is GM’s highest-quality plant. No, scratch that, anyone’s highest-quality plant in North America.

      Canadians are just natually superior. Some people think it’s health care but I think it’s because we get our milk in bags.

    • 0 avatar
      Brendon from Canada

      psarhjinian – pretty sure it’s Smarties vs. M&Ms…. the bags of milk is a common misconception (also not to be confused with the Canadian “Rockets” – commonly sold as “Smarties” in the US!).
      Oh, and our love of useless trivia….

    • 0 avatar

      Geo. Levecque, your first sentence had 168 +/- words in it. You need to switch to decaf before you start typing.

  • avatar

    Outsourcing and off-shoring are not necessarily the same thing and describe (generally) two different trends (but in many cases both occur simultaneously, i.e. vertical dis-integration in favour of outsourced supply in an off-shore facility.)

    Outsourcing is backing away from vertical (in-house) production; this has been widely seen at the component level.

    Off-shoring is backing away from manufacturing a) in your home market, and/or b) in the market where the majority of products are sold.

  • avatar

    I’ve read somewhere that the ‘domestic’ manufacturers have plants in Mexico not only because of the low wages, absent unions, and apparent lack of pollution control requirements for the plants (is this true?) is that cars made in Mexico can be sold throughout South America without buyers paying atrocious import duties/fees/taxes.

    Cars ‘made’ in the states are subject to these tariffs and therefore wouldn’t sell down there at the resulting prices.

    Is this true?

  • avatar

    340-4: That’s true. Mexico has a free trade agreement with Brazil (the largest market in SA).

  • avatar

    I love coming up with my own opinions. One of them is that I refuse to force my believes on another. So I think its ok for Mexicans or anybody to make anything for anybody without guilt. Ok, now may the fittest and/or most open minded/hearted live.

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