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The Price of Hope in the Mayhem of US Manufacturing
By Wolf Richter www.testosteronepit.com
In what may be a precursor of a monumental shift, Toyota and Honda are planning to export U.S.-made vehicles to South Korea. Honda, which is already selling U.S.-made Accords in South Korea, is considering selling more U.S.-made cars there, CEO Takanobu Ito told reporters in Seoul today. And Toyota announced last week that it would sell U.S.-made Sienna minivans in South Korea. Apparently, the math changed, and now it's cheaper to produce cars in the US and ship them halfway across the world than it is to produce them in Japan.
Is the Fed’s war on the dollar and on real wages finally “paying off” so that manufacturers can shift production to the US from other developed nations? And to what banana-republic levels will the dollar and real wages have to sink before US manufacturing is competitive with developing nations? There are already 49.1 million Americans who live in poverty, according to the supplemental Census test. At what wages will American workers be competitive with Chinese workers?
Back to the Japanese automakers. The strong yen is annihilating the cost competitiveness and profitability of manufacturing in Japan. Toyota’s brutal quarterly earnings announcement yesterday attested to that: revenue down 5%, operating profit down 32%, and net profit down 18.5%. Through October, Toyota’s US vehicle sales were down 8.8% from the same period in 2010, and Honda’s were down 5.3%, while the US market was up 8.6%. The irony of their move to export from the US to Korea is that they both have gotten clobbered by Korean automaker Hyundai-Kia, whose combined US sales jumped 26.5% over the same period, after an already brilliant 2010.
Honda’s and Toyota’s problems have been blamed on the March 11 earthquake and subsequent production shortfalls. Their customers were said to be sitting on the sidelines, waiting for the supply to show up. But the disruptions have been resolved, and US plants have been working overtime for a while. Now hints are cropping up that their customers have bought other brands, particularly Hyundai and Kia, which offer significant price advantages.
Impatience may be one reason. But another reason may be that Toyota in particular has lost its aura of infallibility after a series of recalls, some of which were associated with cover ups. Another recall was issued today—for 550,000 vehicles. And now Toyota is perceived to be in the same quality ballpark as other automakers and is thus forced to compete on price against the Koreans.
And Europe is at the cusp of a nightmare. They’ve been trying to keep sales alive with big incentives. Ford succeeded in pushing up its unit sales by 5% for the quarter, but incurred $306 million in pretax losses due to rising input costs and, more importantly, huge sales incentives with which it tried to keep momentum alive. GM reported a similar story today. During the financial crisis, governments threw in their own incentives. But given the debt crisis, governments may have neither the appetite nor the wherewithal to subsidize the auto industry. So nose-bleed price competition will be the game plan—operating losses, cost reductions, and pressure on wages.
Germany may be losing its own struggle with competitiveness: BMW announced that it would shift more of its production out of Germany. Ten years ago, BMW produced 70% of its vehicles in Germany. Now it’s down to 58%. The medium term goal, the company announced, is to bring this down to 50%. The winners: China, where it has been on a rampage (but.... China Puts The Screws To BMW, and BMW blinks), and you guessed it, the U.S. of A.
So how much more inflation do we need, and how much further do real wages and the dollar have to drop for U.S. workers to win this war of competitiveness? Clearly, they can hold their own against German and Japanese workers. But the threat comes from China and other developing nations—whose wages are still a fraction of those in the US, though they’re rising rapidly. The Fed’s stated policy of inflation and devaluation is a double-edged sword. It might make U.S. manufacturing more competitive, but it wreaks havoc on the real economy as wages don’t keep up with inflation, and as the purchasing power of the middle class gets hammered year after year.
Even the inexplicable American consumer, the toughest creature out there, struggles with these prices as misery spreads into the middle class.... Inflation High On The Hog For The Holidays.
Wolf Richter www.testosteronepit.com
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South Korea does have their own automotive industry right? If not, I guess Honda might stand a chance to have a lot of car sales there. I just do hope they do provide Honda parts there, so that the people from South Korea won't having a hard time ordering one online and let it be delivered from the U.S. to their place right?
Good point on the middle class only thriving during/after world wars......peace is NOT good for longterm defense stock yields.
"Apparently, the math changed, and now it's cheaper to produce cars in the US and ship them halfway across the world than it is to produce them in Japan.Is the Fed’s war on the dollar and on real wages finally “paying off” so that manufacturers can shift production to the US from other developed nations? And to what banana-republic levels will the dollar and real wages have to sink before US manufacturing is competitive with developing nations? There are already 49.1 million Americans who live in poverty, according to the supplemental Census test. At what wages will American workers be competitive with Chinese workers"
Central bankers discover another brilliant way to create more US government-handout dependents (and dependence)
So how much more inflation do we need, and how much further do real wages and the dollar have to drop for U.S. workers to win this war of competitiveness?
That's dumb question. The mercantilists (like Korea) will never, ever allow and American car into their country. If we gave them away they would still find reasons they couldn't get in. We need to stop all trade with mercantilists, become mercantilists ourselves, or perish.
Asians have very strong nationalistic cultures and will always support their own over foreigners. Korea is one of the worst. I have been many times to Korea and 95% of all vehicles are Hyundai, Kia, Samsung and other korean brands
The Fortune 500 companies have screwed the US wage earner and conveniently kept their global profits offshore in the the Euro while the dollar went down the toilet bowl. Now with Europe looking shaky they suddenly want to bring all those fat profits back here and untaxed to boot! (GE best buds with Obummer) Too bad....the invention of the Euro kept 'em really well fed all these years while the poor sots living on the US dollar have lost their shirts.
Forget China. What about Mexico and Guatemala where they get paid less then $1 a hour....and how about Cambodia where the Chinese are now outsourcing their own manufactruring because they pay Cambodians half of what they pay Chinese?
Globalization knows no bounds.
It's a race to the bottom and 99% of us are losing.
You asked, "how much more inflation do we need?"
Until bankers outside of China are able to issue sufficient RMB denominated paper to manipulate the economy, you can't be bothered with numbers and math. During the interim, our glorious leaders will continue to hold that Too Much Is Never Enough.
I had to give Barry O a little golf clap for his speech in front of the UAW. The balls on that guy to stand up there and tell them he ws going to get American made cars sold in Korea.
Koreans are extremely nationalistic and only want to buy/work with Koreans. Something the one world libs shook out of Americans with the love diversity/ love the world/free market B-S.
It's amazing to me that we continue to repeat the free trade lie over and over. It has already been projected that Korea would overtake Japan as the technological and manufacturing powerhouse. And the first thing the retards in charge do is run to them to sign a free trade agreement.
Finally, riddle me this. The last time I was in Korea, I saw a rusty old Camaro near the US base and a couple of random oversized American SUVs in the whole county. In America, I can probably see 1/8th of cars in Cali are Korean made. How the hell is that allowed to happen? Sure looks like they have free reign here with no reciprosity. How does a free trade agreement make that better?
Korea doesn't allow foreign manufactured products into the country if there is a domestic source. A thousand little trade barriers, rules, regulations and red tape stop all importation. Korea does support the "free trade" think tanks, lobbyists, and reps in Washington very, very generously. Same goes for China, Japan, ...
I was stationed in S Korea 1998-1999. I never saw an old rusted out car. Why? Because there was a car explosion. The personal auto was a new thing for the masses. You took your own life in your hands on the road, the people were all new drivers. At the same time, Kia was bankrupt. My first Camp, Giant, was next to a giant Kia parking lot of thousands of unsold KIAs. I met Russians in Seoul that were there to check out KIA to see if they wanted to buy some of the assets etc. Then when I was leaving Hyundai and the gov got together to "save" KIA. I got a newspaper as I was leaving S Korea, new KIAs were advertised for just over $2K USD. Back here in the states, the first KIAs were being imported, junk. Ask a buyer. Now I see new KIAs, ten years later, stylish, competitive pricing, and appear to be well engineered. What a sucess story. The Koreans really pulled that one out of the fire. I also noted an odd thing, Samsung products [oem harddrives, memory, etc] cost more "in country" than in the USA, and were overpriced in comparision to other brands that were not Korean. The Korean buyers, however, bought Korean, not on price. I think Americans used to do that as well, some time ago.
S.Koreans and Germans share a similar work ethic. The quality of their products reflects this. S. Korean steel is and S. Korean ship building are among the top 3 in the world.
China is a very different story and neither China's size nor its access to a cheap labor pool are ever going to be able to match the producers of top quality in the world. I see China more as a Mexico on steroids by comparison.
In Japan and Korea, there aren't any tariffs on the sale of American cars, per se. But in Japan, there's a tax you have to pay when you register the car based upon engine displacement. This obviously hurts American cars, since NA-aspirated engines tend to be larger than turbo'd engines. In Korea, if you register an American-made car, you pay more. There are lots of "gotchas" like these all over the place that aren't covered by "free trade" agreements. Because the surcharge isn't on trade of the vehicle, it's on the use.
Think of how California raises revenue these days. There are stipulations in the California Constitution that prevent the legislature from raising taxes without holding a referendum/proposition vote. And these are usually defeated, even when the tax supporters roll out pictures of kids dying in the streets because the tax wasn't raised. So what do the pols do? They raise fees instead. Business franchise fee, vehicle license fee, use fees for camping in state parks, red light and speed camera fees, etc etc. These aren't taxes, per se, at least in the eyes of the law. But they accomplish the same thing - more revenue for the Beast.
I've got a buddy who works on cars for a living. He tells me "everything is junk, other than Volvo; Subaru; U.S. made Trucks; Hyundai's".
He's says for the money, you aren't going to get a vehicle as reliable as a Hyundai. Folks, we have a new bench mark standard. The Koreans followed the lesson taught to the manufacturing world by the Japanese some 30 years ago: Make better stuff. Make it last. Put everyone else out of business after you capture their market share.
There's a lesson in that, somewhere...
Whats the point of building yet more cars when conventional petroleum production peaked in 2006? Why build more cars to use a diminishing gasoline supply? Is it inertia or stupidity?
Stupidity's Inertia!
My next Toyota better come with a Geiger counter in the glove box.
and lead lined boxer shorts.
The real problem is Toyota/Honda/Nissan have produced the same old-ass cars with no inspiration or imagination for the past 10 years without any redesign. Hyundai/Kia hired the guy from Audi and gave him full reign to change whatever he wanted for the entire lineup of cars/suvs/vans for both companies and gave him a shitload of money to do so. And then they did the unthinkable and catered to folks with technology. I believe they were the first to offer mp3 players in the car and iPod hookups and Bluetooth wireless calling.
Take a look at the Nissan Altima. Same tired look as it was 10 years ago. So if you're in the market for a new car, do you buy a new one for $30k or buy a used one that has the same features and looks the same for half the price?
1 America has already paid for the Tax Breaks, Incentives and Subsidies to move 6 million manufacturing jobs to china in the last decade.
2. now America must give up ground to be on an equal footing to compete with the same countries we gave our tax base too..
3. so that the World can be as one!
FUCK THEM AND FUCK THAT!
The same people who on all those derivatives, all 500 Trillion or what-the-fuck-ever number.. are the same assholes who are selling America.. the working part of America.. down the river.
It is time to bring those treasonous fucks to justice and write down all that derivative, leveraged and debt created debt.. and start with a fresh, clean set of books.
enough is enough.
or!
You cant fix stupid and we are all fucked, some more..
You choose what the American people are capable of grasping.
The original Jap fuel pump lasted 240,000+ miles. The Chinese replacement fuel pump lasted 1/4 mile. China parts are overpriced at any price.
Mighty Hyundai gets stronger and stronger every month. A year or so ago I read an article about them in Fortune magazine. These guys are driven! Fast and quality, it is hard to bet BOTH of those right.
We are lucky to be selling Korean bearings there in Peru, where Hyundai is gaining market share quickly. Some of their bearings are proprietary... Only Korea makes them.
Hyundai is also a leader in green vehicles, I just saw my first hybrid Sonata today. Do not count out that small country where their workers: REALLY WORK!
Nice article Wolf, as always!
Yep going to the auction today to get a 2011 sonota gls 39K miles for $14,700.
I wanted to get a ford, but the closest in mpg is a fiesta (tiny) in size is the fusion (ugly and maybe 30mpg)
I hate to do it but there's no competition for the sonata at that price NONE
.
I see the Hyundai model that looks like Honda Accord everywhere in Socal.
Ricky will make things better
From the article... "And to what banana-republic levels will the dollar and real wages have to sink before US manufacturing is competitive with developing nations?"
A modern auto manufacturing plant needs about 20% of the workers that a 1960s plant required due to productivity gains caused by computers and robotics.
This begs the question: How important is the cost of labor in a modern auto plant when compared to other costs?
For instance, Mississippi, Alabama, and other states who's economies were struggling even in the best of times, offer huge incentives for foreign auto manufactures to locate in their state, often the land for the plant is donated, huge tax incentives are granted (sometimes no taxes for X years), freedom from union organizing is guaranteed due to 'right to work' laws, etc. All these benefits are offered to foreign auto manufactures just so they will locate a plant in a depressed rural area and offer a few hundred jobs to locals, usually supervised by foreign managers.
Meanwhile, the auto maker makes no guarantee that the plant will remain open long term. If a better deal is on offer in another state the auto plant can be moved quickly leaving only an empty structure and an empty parking lot...and several hundred unemployed workers.
Of course, some jobs are better than no jobs as long as the wage offered is high enough to sustain life... Or, that is what we are being told.
A middle class was necessary when the US was locked in a struggle with the Soviet Union for dominance of capitalism over communism. The US had to demonstrate that capitalism was a better system, so the middle class was put display as proof. Capitalism won the battle. Proof is no longer neccessary, so, is the middle class still necessary?
The Soviet Union didn't exist when Henry Ford decided to pay is workers $5/day (despite the objection of his board or directors).
Henry Ford was a union-busting bastard (as in shooting peaceful strikers) and there was hardly no middle class before the unions came to Ford.
midtowng... I am not a huge fan of Henry Ford and I don't think that I gave that impression. Henry hated bankers, was a Hitler fan in Hitler's early years, disliked Jews (putting it mildly), and hated unions (as you said).
But, Henry did do some good. Henry recognized that for his Ford Cars to sell that workers needed to make enough money to buy them, thus, the first $5 per day wage in America ($5 was a lot of money then).
Henry also questioned, along with his pals Firestone, Edison, Hurley (shipping), DeLoach, et al, whether the 'new inventions' being made available to the public would bring ruin to American culture/society. This group seriously questioned whether their inventions would be good or bad for America.
You might find this case, which is summed up at this Wiki Link, interesting... The Michigan Supreme Court ruled against Ford... So, part of the blame lies with the court ruling... not too unusual, eh?
"is a case in which the Michigan Supreme Court held that Henry Ford owed a duty to the shareholders of the Ford Motor Company to operate his business to profit his shareholders, rather than the community as a whole or employees."
http://en.wikipedia.org/wiki/Dodge_v._Ford_Motor_Company
Duo... "The Soviet Union didn't exist when Henry Ford decided to pay is workers $5/day (despite the objection of his board or directors)."
You are correct... But, the great flowering of the American middle class happened after WW2. The Dodge Brothers suit agains Henry Ford in the Michigan Supreme court occured in 1919, prior to the first flood of easy credit for Americans which occured in the 1920s and led to the bust of 1929. During the 1920s easy credit for housing didn't exist (most mortgages were baloon). Auto financing was difficult to secure. Student loans didn't exist. Revolving credit didn't exist (except for 90 days same as cash for the wealthy and businesses). etc. Leverage existed in the bucket shops pushing stocks...and how did that work out?
Once Churchill addressed the American Congress, March 1946, and declared that 'an Iron Curtin' has decended in Eastern Europe, the Soviet Union was officially demonized.
Only then did the great American consumer class appear, prompted by FHA/VA easy credit for homes in Levittown, etc, auto loans to 'see the USA in a Chevrolet', the first wave of credit cards for those without security, etc.
I repeat my original question: Now that the Soviet Union and communism are no longer a threat to capitalism (I use the term capitalism loosely), is a 'show case' middle class necessary?
The pie might be nominally the same size, but why should the oligarchs share it with a middle class that is no longer necessary?
so the middle class was invented to scare the shits ot of the soviet union...
Nice construct...and holy shit scared it made the soviets. But the fact is the Bolsheviks were Oligarchs in their own statist game as the US oligarchs are today in global kleptocracy. So to push your analogy, one bunch of Oligarchs chased out another bunch to run the world. Who cares what song they sung! The name of the game is being at the top of the heap! History repeats itself.
The same game happens every century...since trojan war days!
falak pema... "so the middle class was invented to scare the shits ot of the soviet union..."
Yes and no. The aim was for Voice of America and other media information about how great the American middle class was doing to filter into the Soviet Union. The aim was to make the average Soviet citizen feel that they were being screwed by a communist system that couldn't provide all the consumer products that capitalism was providing it's citizens.
The attitude in the Soviet Union became 'we pretend to work and they pretend to pay us'. Aparently it worked. Of course other factors were involved in bringing down the Soviet Union but we both know that.
My belief is that capitalism did what it does best and that is sell, sell, sell. We sold the idea that the US middle class was a permanent feature of the US and we put the middle class on display just as a retailer puts their merchandise on display. Shopping season is over, the sale has been made, the Soviet Union no longer exists, the merchandise display, the middle class, is taken down.
You are correct... Our oligarchs have out foxed their oligarchs. But, the game isn't over. Once the Soviet Union sank a host of other challenges arose for the US oligarchs... The Euro, China and the SCO, juggling fiat currencies, the peoples fear of fiat and the strength of PMs, etc... but the games going on now do not require an American middle class on display.
BTW, I am simply stating what I believe has happened... I have been as screwed as the next American citizen as the middle class sinks beneath the waves and I certainly do not applaud any past bankers/pols that have used Americans in this game, only to discard them when a phase of the game has concluded.
I believe you are correct. The oligarchs threw the working class a bone during the Cold War because they were scared of communism.
Now an alternative economic system no longer exists, so they want that bone back.