News & Events

Thomas Comments on Auto Industry and the Economy

This week's Q&A is with Barrett Thomas, an assistant professor in the Department of Management Sciences at the UI. Thomas has a Ph.D. in Industrial and Operations Engineering, with expertise in vehicle routing.

Q: The Bush administration often states how our nation's economy is continually improving, but then something drastic like Ford Motor's plan to cut 30,000 jobs and close numerous plants takes place. This is the second major cutback by a major U.S. automaker in less than five months. In your opinion, how strong is the U.S. economy right now? Are these major cutbacks a reflection of hard times?

A: First of all, we never want to see anybody lose their job. Yet, even in a strong economy, there are going to be companies who lose their footing and need to make changes to regain their competitiveness. New companies always are trying to enter the market and change the way that business is done. That's what has happened in the auto industry. Competitors, particularly the Japanese companies, have been more innovative and have passed their U.S. counterparts, if not in market share, in profits.

At the same time, companies such as Ford and GM are American icons. Because of this iconic status, Ford and GM are often seen as bellwethers of the U.S. economy. When these icons make large job cuts, the public takes notice and concludes that the whole economy is in trouble. Yet, the truth is that Ford and GM are no longer the whole picture in the U.S. industry. Toyota, Honda, Nissan, Hyundai, BMW and Mercedes (even before the merger with Chrysler) have U.S. manufacturing plants. In fact, The Washington Post recently noted that Toyota assembles in North America 65 percent of all the vehicles it sells in the U.S. market. With these companies now producing cars in the U.S., employment in the U.S. auto industry has, until the most recent round of cuts, been fairly steady over the last decade. Further, according to information from National Public Radio, the manufacturing jobs at Toyota, while non-unionized, pay about $27 an hour versus $31.35 an hour at GM.

Q: Ford seems to be pointed in the right direction with their future plans of manufacturing more hybrid vehicles and fewer SUVs, which have had slumping sales for quite some time. Will American auto manufacturers be able to catch-up and compete with foreign manufacturers like Honda who have a head start and a reputation for quality vehicles?

A: With gasoline prices likely to continue rising, hybrid automobiles will become an increasingly important market for automakers. Yet, hybrids alone will not solve the problems at Ford and GM. It's important to remember that, in 2004, hybrids represented less than 1 percent of total auto sales in the U.S. At the same time, we also must remember that it was American automakers who were at the forefront of the last hot automotive trend: SUVs. Times change. The companies that will be successful in the future are those that have the ability to rapidly respond to changing economic conditions and to the accelerating pace at which consumer preferences evolve.

Part of the reason behind the plant closures at GM and Ford is to shed fixed assets in an attempt to help the companies become more nimble. At the same time, Ford and GM are going to need to work closely with their unions to relax the rigid work rules that have developed over decades of contract negotiations. Rigid work rules make it difficult to move employees around the factory for the purpose of best utilizing the labor that is available.

Q: Why won't the U.S government assist major auto manufacturers in times of need in the same fashion it bailed out the airline industry?

A: As the question suggests, the government recently has bailed out the airlines industry, notably after 9/11 and most recently allowing a number of airlines to turn their unfunded pension liabilities to the Pension Benefit Guaranty Corporation, a federal insurer. Yet, in remarks reported in Thursday's Wall Street Journal, President Bush indicated that he was unwilling to bailout the auto industry. Although the president did not state reasons for his stance, it seems likely that free-market supporters would not support such a bailout, and with the current budget situations, fiscal conservatives would oppose the spending. At the same time, the state of the airline industry indicates that bailouts are certainly not a ticket to a business turnaround. The success stories in the airline industry are not those companies that have relied on bailouts. Those companies are in bankruptcy. No amount of government subsidy can save a company that is not willing to adapt to the demands of the contemporary marketplace. Rather, the leaders in the airline industry are innovators Southwest and Jet Blue.

Q: Having Super Bowl XL, which is predicted to generate around $300 million, is huge financial benefit to the city of Detroit. This event aside, how devastating is GM's cutback, and now Ford's, to this city which is so dependant on this industry?

A: It goes without saying that these will be devastating to many families. Further, the cities in which plants are closed also will face at least temporary if not permanent economic damage. However, the recovery may begin with those companies with whom the U.S. automakers are trying to compete. For instance, both Nissan and Toyota already have engineering and design centers in Michigan. For many years, many Michigan-based suppliers of automotive parts have been supplying Japanese manufacturing plants based in the U.S. and Canada. Toyota also is planning to build a new engine manufacturing plant in the U.S., and Michigan is the frontrunner.

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