I keep hearing over and over that “The U.S. automakers deserve to die off because they make crappy cars and bad decisions“. People think that’s why they can’t make a buck and are at risk of bankruptcy. But I have another side of the story that not many people are aware of:
The Biggest Differences Between U.S. and Japan Automakers
For the Japanese automakers like Toyota and Honda, the single biggest lesson they learned from the American automakers was this:
Don’t be too generous with employee retirement benefits.
The biggest problem right now with GM, Ford and Chrysler are their payrolls and pensions. The big three provided incredible retirement benefits to its employees for decades, and now they’re feeling the crushing weight of billions of dollars owed to hundreds of thousands of retirees each year.
But the Japanese makers don’t have that problem, but not simply because they had the foresight to avoid union contract deals like bloated salaries and the infamous “jobs bank” that paid workers 95% of their salary to do nothing until work is available. No no no, my friends. Here’s the dirty little secret about why the Japanese automakers are more solvent than their American counterparts:
The Japanese government pays most of the retiree’s pension and health care.
That’s right, Toyota, Honda, Nissan, and company don’t have to worry about paying their workers the most costly of all the benefits because their government covers them.
If GM had the U.S. government to subsidize the retirement benefits of its 400,000+ retirees, then I bet they would have loads of cash to use for capital investments, product re-engineering, and new vehicles (that people want). But they’re stuck paying for the decision of CEOs decades earlier who made deals with the UAW which they have to spend billions to cancel through employee buyouts (if the employee even accepts).
As a personal example, imagine if you didn’t have to worry about paying your mortgage and medical benefits (I use mortgage as an example because it’s a big chunk of most people’s month expenses). Think what you could do with all that extra money. You could upgrade your home, pay off other debts, go back to school, spend more on your child’s education, and so on.
But I’m not making an excuse for the domestic automakers. Rather, I’m merely pointing out a kink in the argument that shows the Japanese have some big advantages over U.S. automakers, other than a product mix better suited for the times:
Most of their U.S. workers aren’t even retired yet. In a 2006 NY Times article (for which I got most of the background info for this article), “Toyota’s American arm has just 258 retired production workers (G.M., by contrast, has more than 400,000 retirees)”. And as far as health care:
While G.M. paid $5.4 billion last year for the health care of its 141,000 workers, 449,000 retirees and their dependents, Toyota said in its 2005 annual report that its obligations to cover the health care expenses for its retirees “are not material.”
Wow. When one company can avoid billions in costs compared to its rival, then it has an immediate leg up on the competition. I’m not saying I want America to have nationalized health care and pensions, just that it’s not just the product mix keeping the big three down.
Only recently did the UAW make concessions to the Big 3 to make new retirees pay part of their health care costs. But thanks to contracts with all the rest of the retired work force, GM, Ford and Chrysler have to constantly try to renegotiate or offer insanely expensive buyouts to get out of their obligations. That’s one of the reasons GM and Ford can’t just cut brands like Saturn, Pontiac or Mercury; not only would they have to buy out dealer contracts, but they would also have to buy out all the generous retirement packages of its union workforce at those brands.
Unless they go bankrupt. Then they have the freedom to restructure without dealing with most of their contractual obligations.
Hmm, maybe we should just let them go under.
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