Car Business

Car Business

On 5 December 2008 the first of several Congressional hearings about the automobile industry was conducted. The televised hearing was typical Congressional theater that had pompous Congressional finger-wavers in full throat about the awful Automobile CEOs who dared to come to the peoples Washington DC in their Corporate jets to beg for public money to survive. There were several things that struck me as important during the hearings. The first thing that struck me during all of the bashing of the domestic automobile industry was what was not addressed. There was never any analysis of how the foreign automobile makers had managed to capture so much of our domestic market other than foreign car makers all made far superior cars and the management of the foreign car makers were as close to Greek Gods as one could possibly get. Not once was it pointed out that most of the imported cars had an average of 19% VAT advantage over American cars. Here is how it works. Value Added Tax (VAT) countries like the EU, China, Canada and Mexico are rebated their VAT when their product is exported to a non-VAT country, like the USA. The typical VAT on a complex product, like an automobile, can be as much as 10%. So when a foreign VAT manufacturer exports to the USA, it enjoys a 10% discount that reduces the production cost, and therefore, the price of the car for sale in the USA. But wait, there is more. When a non-VAT country, like the USA, imports into a VAT country, a VAT of 10% is added to the import price at the border, voila, a typical 19% disadvantage to the USA when trying to sell cars on the foreign market (the foreign car maker gets 10% back while the USA gets tagged 10% when trying to sell in the foreign country, a 19 to 20% total disadvantage to the USA manufacturer.) This has nothing to do with quality, style or gas consumption, it a clear unfair trade practice. Another advantage foreign car companies get when they build a factory here in the USA is that the states fall all over themselves giving tax abatements, infrastructure, and God only knows what else that permits a Toyota to build a very modern, new and highly efficient manufacturing facility to compete with GM that has 90 year old inefficient plants that pay all kinds of taxes and is never in line for tax abatements. I could list many other disadvantages that our domestic manufacturing has to endure at the hands of our Government, but I think you get the idea. The most striking thing about the hearing was the universal condemnation that was heaped upon the domestic automakers for paying good wages and benefits to the employees. Think about it, our elected Government representatives, berating GM, Ford and Chrysler for being so dumb as to pay good wages and benefits to our citizens that are not in line with third world wages. What was not discussed at the hearing was the fact that current labor costs, inflated or not over foreign costs, contribute about 10% of the price of a automobile manufactured and sold in the USA (go online and conduct the research, it’s true, labor makes up about 10% of the price of a domestic car). Think about it, if one cut the labor costs to zero, there would still be a 10% disadvantage to the domestic car manufacturer’s due to VAT alone. This wage comparison thing got me to thinking about Henry Ford and how he managed to put together his magnificent company that brought personal freedom to all of America’s citizens by manufacturing affordable and reliable automobiles to the masses. Back when Henry Ford got going with his assembly line, the labor on the line was very hard and Henry could not hire people fast enough because of the attrition rate of people quitting. It was reported that for every 1,000 people working, Henry had to hire 960 more just to keep up with the attrition. The current rate of pay was $2.38 per day with no such thing as benefits other the benefit of having a wage-paying job. On January 5, 1914, Henry Ford announced to the nation that he was implementing a new minimum wage of $5.00 per day in addition to a profit-sharing plan for his employees. Henry was hailed as a friend of the worker and branded as an outright socialist. The result of the unilateral wage increase was that the company’s profits doubled in the next year. Henry Ford said of his wage increase, “The payment of five dollars a day for an eight-hour day was one of the finest cost-cutting moves we ever made.” One has to wonder why we must continuously learn the same lessons over and over again like paying Coolie wages does not result in a viable business, regardless what brilliant and enlightened Government people think. One other thing Henry Ford got right. He said that another reason he arbitrarily raised wages was so that he could sell more cars as a result of people having enough money to buy a car. Brilliant. Lets do the math, when we all are making Coolie wages, how are we going to buy a $25,000 automobile, notwithstanding sending our kids to College and paying the ever increasing taxes? Brothers and Sisters, wages and benefits paid to our laboring autoworkers is not the reason for the current problems in our domestic automobile business.