Q: How much progress have the auto companies made in the last five or ten
years in terms of improving management methods, working with unions and
employees and being as productive as any other company in the world?
Luria: I think they've made tremendous strides. Quality is clearly higher than it
was, particularly in final assembly. Productivity is much, much higher. Ford
and Chrysler made dramatic advances in the first part of the 1980s and GM has
also done so in the first part of the 1990s.
Q: A lot of this has come as a result of being able to outsource the
products they make: that is, in being able to buy parts and components, and to
contract out processes to low-cost producers throughout the country and even in
foreign countries.
Luria: Well, that's true, certainly true that all of the auto companies, and
particularly Ford and Chrysler, now get much more of the value of each car from
outside suppliers, but it's not obvious that those outside suppliers -- by
virtue of their lower wages -- are necessarily lower cost producers.
Q: Then why do they do it?
Luria: Well, they do it in some places, because they believe mistakenly that they
can get lower costs on the outside. Sometimes they can in fact get lower costs
on the outside, and from their standpoint, it's really a question of how to use
their scarce capital in the most productive way.
Q: Well, we've been talking to Chrysler and the CEO of Chrysler, Robert Eaton. Have they done a good job at their Kenosha plant, both in making the
light truck engines that are made there now and prospectively in making a new
engine they currently buy from Mitsubishi?
Luria: Chrysler has made a very real commitment to its core businesses, which it
defines as assembly plants, stamping plants and power train plants -- power
trains being engines and transmissions. The Kenosha plant was inherited in the
takeover of AMC and made a series of engines which were not highly regarded in
the industry, including the current, four-liter jeep engine. What's new at
Chrysler is the commitment to make the new generation of truck engines in
Kenosha instead of getting them offshore from Mitsubishi.
Q: Why are they making that decision?
Luria: Well, there's a number of reasons. One is that it makes a lot of sense to
make engines, transmissions, most major parts in the United States now, because
the dollar is relatively low compared to the yen and the mark. But it's also
true that in engines and transmissions where there are very high capital costs,
where each worker has a lot of equipment to work with, that wage costs don't
really make a lot of difference. So if you're going to have plants that have
all of this capital investment in them, then you want the absolute best work
force you can get and the best work force is still found in metropolitan areas
in the northern states, particularly in the upper midwest.
Q: What do you mean by the best work force? The most experienced?
Luria: It is the most experienced, and lest one think that people who work at GM
and Ford and Chrysler and make twenty dollars an hour on the assembly line are
simply lucky to be there and are no different from workers in supplier plants
making seven dollars an hour, it's just not true. It's harder to do the work,
the work is more complicated, the math requirements are greater. All of the
auto companies have very, very complex screening processes to try to get the
best applicants. Workers in high wage, capital intensive industries and
companies are better workers. They've been invested in more. They bring more
human capital. They're more skilled. A very high proportion of the new hires
at Chrysler and Ford and GM in the 1990s have been workers with college
education.
Q: Let me return to the issue of outsourcing. Chrysler outsources a lot of
its parts, a lot of the components of the automobile, and some of the
manufacturing processes as well. Why don't they do that in-house? Can't they
apply the same methods and make the same productivity gains?
Luria: Well, Chrysler has made a decision that its relatively scarce capital can be
best spent -- that is to say it will produce profit most efficiently -- if
they focus on designing new models and on running world-class assembly,
stamping and power train plants, and don't worry too much about having in-house
expertise in the rest of the car.
Q: But aren't many of these outsourcing decisions made in order to find
cheap labor elsewhere in the country or non-union labor.
Luria: Well, these decisions are made in order to get the parts cheaply, and it's
true that in the last fifteen years the cheapest sources -- the best sources of
cheap parts have typically been non-union supplier plants. But what's really
happened is that in 1978-79 about fifty percent of independent auto parts
suppliers were unionized. Today the figure is closer to twenty percent, so in
some ways, from the standpoint of cost, the auto makers have simply been the
beneficiaries of the bad luck of the labor movement.
Q: Well, couldn't you say that auto makers instigated some of the bad luck
with the labor movement?
Luria: Well, in the following sense. When auto companies put out a part or a
sub-system for outside quote, they're looking for the lowest quote they can get
from a supplier -- a supplier they believe will be able to deliver the parts on
time and with acceptable quality. But having said that, they then mercilessly
go after getting the lowest price they can get, often even requiring that
current suppliers give them regular three or five or seven percent price cuts
year in and year out. And it's true that, given the option of going with
non-union, cheap labor, often in new so-called "greenfield" plants, heavily tax
abated by local and state governments hungry for jobs. It is certainly the case
that what often happens is that faced with these price pressures, suppliers
will opt to transfer production from their higher productivity union plants to
lower productivity, non-union plants.
M: Are enough companies doing what Chrysler has tried to do in Kenosha and
is even Chrysler doing enough of that throughout the rest of its
business?
Luria: Not enough companies are doing what Chrysler is doing in Kenosha. And
Chrysler deserves to be congratulated for making this kind of investment in a
mature plant in a traditional industrial city with its current unionized,
high-wage workforce. More companies should do that, and in many cases,
companies that are not choosing to do that would be better off if they did.
Many companies that choose instead to close those plants and move production to
Mexico, for example, find that when they really try to take full account of all
the quality problems that gives them, the cost of all those executives having
to fly down to Mexico to address production problems -- when you add in all
those logistical kinds of costs -- it turns out that essentially traveling the
so-called low road is often no cheaper. But it's also the case that much of
the economy is composed of simple commodity parts, and it's harder to find a
winning recipe to make simple commodity parts with well-paid labor.
Q: Let me get back to that, but let's stay on this issue. Should a lot more
companies, then, be trying to apply these same principles -- let's call them
the Kenosha principles -- to what they do?
Luria: They should. Many more companies ought to understand that given an adequate
level of capital investment, that even very high-priced labor can be a
bargain.
Q: Why aren't they doing it?
Luria: They're not doing it for really three reasons. First, the very fact that
they have the option of taking the low road, of going out and operating with
unskilled labor and low investment in "greenfield" locations away from the
cities and away from the influence of trade unions is a very, very hard
temptation to resist. The second reason is that companies are very interested
in making sure that their scarce capital resources are spent in the best
possible way, so they are constantly looking for which activities are
peripheral to their businesses -- ones they can simply stop doing.
Q: Is all this refusal, this inability, this unwillingness to apply these
principles to reinvest and to try to keep high-wage workers, is it hurting the
country?
Luria: Absolutely. The main reason why wages in manufacturing are falling in real
terms for most of the workers -- discounting for inflation -- the reason why
most manufacturing workers are today less well off than they were even twenty
years ago is because of this strategic choice on the part of most manufacturing
managers to choose a strategy of low wages and low investment. It's clearly
bad for the country.
Q: Do many of them who make this choice literally have no other
choice?
Luria: That's a difficult question. There are products which would be very, very
hard to try to figure out how to manufacture, in ways that would permit high
wages. To give you a simple example, it would be very hard to figure out how
you would make a standard household broom in a way that would justify paying
somebody twenty or twenty-five dollars an hour to make it. But for many other
products, perhaps products accounting for half to three-quarters of everything
which is manufactured, there clearly exist recipes that include high wages and
high investment as an alternative to the low road.
Q: Is it simply becoming fashionable in corporate circles to take what you
describe as the low road. Is it just the thing to do -- look for low wages and
low investment production facilities, rather than high wages, good managerial
techniques, high investment?
Luria: Here's how I think I would answer that. Doing the right thing is risky, and
if the right thing involves making big investments in equipment, in old plants,
in older workers, those are all things which carry risks. They carry risks
because if a downturn comes in the demand for that product, you are now saddled
with very high fixed costs. You've made promises that you have to keep. So
there is a conservative bias against taking those risks, which leads to a
preference for the low road.
Q: What's going on out there in corporate America? Why aren't more
corporations willing to take on these high investment projects.
Luria: Well, there are two reasons that companies are more averse to risk than at
any time in the past. As the economy becomes more globalized, the possibility
that a mistake will be quickly capitalized on by a competitor is much more
real now as a threat than it used to be. Second, there's tremendous pressure
from stockholders and from Wall Street to show profits quickly. And any
company that invests a lot of money in its facilities and it's work force is
likely during the period that investment is made to show poorer financials than
they otherwise would. And there are some very good American companies that
have suffered tremendously in the capital markets because of doing the right
things. Kummins Engine comes to mind.
Q: What did they do?
Luria: It's a company which has made a decision to be a high-road company. And as
a result, it's found it so difficult to be treated with any respect in the
capital markets that it's had to sell pieces of itself to its major customer,
simply to remain viable.
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