So Where Are The Jobs Going?

The other morning I was watching MSNBC when a very disturbing graphic flashed onto the screen. The graphic was about domestic production percentages at GM. It seems that GM intends to shift some production of vehicles, which are intended for the domestic market, to low labor cost countries. A quick search online produced a great deal of information about this issue. One particular search result was a Washington Post article, Under Restructuring, GM To Build More Cars Overseas, which is a fair discussion of the issue. Even so, the shifting of production just does not sit well with me since the GM bailout was to save American jobs.

As a business, I could understand why a company would want to reduce costs. Why pay a U.S. autoworker $54 an hour, with benefits, when you can pay a South Korean worker $22 an hour, or a Mexican worker $10 an hour, or even a Chinese worker $3 an hour. Businesses need to remain competitive and to a consumer saving several thousand dollars might just be too attractive to pass up.

The fact that bothers me the most about the movement of production is that the rate change of foreign production increases at an alarming rate. GM expects that in 2010, the percentage of domestic production (U.S. and Canada) is 83.3%. In 2011, that percentage drops to 83.1%. This is only a .2% change, which is not so bad, but that rate of change jumps to 1.1% between 2011 and 2012. The rate then increases to 2.5% for 2012 to 2013 with a further increase to 3.0% for the 2013 to 2014 period. This means that the overall change in (U.S. and Canada) production goes from 83.3% in 2010 to 76.5% in 2014.

GM does indicate that although the percentage of U.S. sales of cars that are built in the U.S. will drop from 67% currently to about 61% in 2012 it will rebound to 66 percent by 2014. The difference between the two sets of numbers comes from a 23% reduction of production in Canada.

I am not sure what will happen in 2015. Does GM intend to stop shifting manufacturing overseas after 2014? Will they continue to shift production from Canada to the U.S.? For every 1% of U.S production moved overseas, GM would have to shift approximately 3.4% of the Canadian production to the U.S. to keep the U.S. production percentage at 66%. At some point it will not be practical to shift production from Canada to the U.S. in order to compensate for the production shift overseas. What will happen then?

Many things can, and will, affect what will eventually happen. The UAW might make significant concessions in contract negotiations. Healthcare reform could be enacted that reduces the overall benefit package cost of U.S. workers. The Canadian government might get involved with incentives to keep production in Canada.

The shifting of production just makes it more important for people to truly understand where vehicles are manufactured. Just because a vehicle was manufacture in the U.S. this year there is a chance that it will not be next year. This is even truer for Canada.

Another Rant About GM

In a previous post I blasted Rick Wagoner concerning how he ran GM. Mr. Wagoner ran GM into the ground, in part, by focusing on SUVs in the American market. So I was taken by surprise yesterday when I come across an article on the New York Times website, http://www.nytimes.com/2009/04/22/business/global/22auto.html?_r=1&scp=3&sq=&st=nyt, that documents how well GM is doing in China’s automobile market by focusing on fuel efficient vehicles. Was I wrong about Mr. Wagoner? Did this article change anything?

After I ruminated on this a bit, I realized that I was incorrect in my assessment. I now think GMs management was even worse then I originally thought. In the first post, I just assumed that Mr. Wagoner, and the rest of GMs management were totally ignorant of the problem. Now I know that on some corporate level GM management saw the problem coming and ignored it.

In addressing the eventual shift in the US market, I am not implying that GM could take the vehicles intended for the Chinese market and sell them in the US. I understand that vehicles built to China’s automobile standards will not meet US emissions and safety standard. Furthermore, I realize that it is not easy, or practical, to take a vehicle designed for China and add a few things so it will be good for the US market. It is just that I would have expected GM to see what was going on in the Chinese market and apply it to the US market.

Yes, I know that the US market was buying SUVs and that GM was filling that market need. Yes, I know that the current financial meltdown exacerbated the problem. Yet other automobile companies are weathering the same set of problems better then GM. GM management did not prepare the company for the eventual change in the market. GM management knew the problem was coming, but decided to risk the company and keep cost down to maximize the profits, and their bonuses. Instead of making sure they had a viable solution, they hoped that the problem would never come, or at least not on their watch.