Last time we discussed substantially higher business costs in the U.S. compared to nearly everywhere else and how our domestic auto industry’s foreign-based competitors are taking full advantage of lower costs at home to eat up U.S.-market sales and share.
But isn’t market success mostly about product? Yes, but world-class product is mostly about cost. I’ll try putting this simply enough so that even all the experts, analysts and critics with zero business experience can understand it:
Say you make and sell gismos. You add up all your annual costs – wages and benefits, materials and supplies, tools and equipment, taxes and fees, regulatory and legal costs, marketing and advertising, facilities, security and other outside services – and divide by the number of gismos you make in a year. The result is your total cost per gismo. Your gismos are well received, so they bring somewhat more than that. The difference is your profit, the oxygen all business must breathe to survive and continue to employ people.
But now you have a tough new competitor. His gismos are as good, maybe better, but his price is lower than your cost? How can that be? For starters, he’s located in a lower-cost state: lower rents, taxes and wages, younger workers so lesser (if any) health care and retiree costs, and fewer expensive regulations. And he buys most of his tools, equipment, materials, and supplies from lower-cost countries. Because his cost per gismo is much lower, he can price them lower, spend more to market them and clear more profit in the process.
How can you compete? Cutting your payroll and structural costs as much as possible may get you partway there, but you’ll ultimately have to outsource work, relocate facilities and operations to lower-cost states (or countries) and shop overseas for lower-cost tools, equipment, materials, and supplies. Or shut the doors and go home.
Now suddenly there’s a much lower-cost gismo maker in a country where wages and facility costs are ultra-low, taxes are low, employee benefits are zero, regulations on business barely exist and local materials and supplies are cheap. And his legal costs are near-zero, since his government will not tolerate a multi-billion-dollar lawsuit industry (a uniquely American curse), sucking the life out of its business. And his government does everything possible to ensure that he succeeds, including keeping its currency weak vs. the U.S. dollar. His costs are so low he can even afford to manufacture some U.S.-market gismos in America (at least in low-cost states), undercut everyone by 20-30 percent and still rake in major profits.
Does anyone still not understand why American business and industry continues to export jobs, operations and supply bases overseas? This unfortunate reality affects every U.S. business with global competition, but our long-suffering auto industry is a poster child for it.
Michigan Manufacturers’ Association President John MacIlroy recently placed our U.S. automakers’ cost disadvantage relative to foreign competitors at a staggering 22.4 percent, made up mostly of five major components: legacy costs, healthcare costs, excessive regulation, an excessive tax burden and the excessive cost of tort litigation. He calls this one leg of the “Iron Triangle of Reality” that is bringing down these and so many other U.S. businesses. The other legs are global pricing and unrelenting global competition.
U.S. automakers built their businesses on generous benefits to attract and retain top talent. Now when they can no longer afford such generosity in the face of low-cost foreign competition, they are criticized for providing it in the first place (even as Wal-Mart is criticized for not providing it).They can’t break retirement pension promises to those who have labored lifetimes to earn them, but they have no choice but to modify plans for current workers.
Healthcare is another issue. U.S. automaker salaried workers and retirees have long paid more than a quarter of their healthcare costs while UAW colleagues, by contract, have paid virtually nothing. That will change as union folks join the co-pay party, and all will pay more in the future. But Congress has to come to this explosively expensive party, and soon! Not with taxpayer-supported free care for all but with a subsidized program for workers that reduces the back-breaking burden on employers without diminishing quality or accessibility.
GM spends more on healthcare than it does on steel, more than $1500 per car. With fewer workers and retirees, Ford’s healthcare costs are lower and Chrysler’s lower still, yet still substantial. Why should foreign-based companies that bear no such costs at home be allowed to compete freely here with U.S. companies that do? Why shouldn’t they contribute to U.S. employee healthcare costs in their most lucrative market? Some have suggested “healthcare surcharges” (not tariffs) on products imported from countries with government-provided care to help support a U.S.-worker healthcare program without further burdening taxpayers.
The awful “ations”
The other major costs that U.S. business cannot control are the terrible trio of taxation, regulation, and litigation. Because all three are driven partially by geographic location but mostly by a company’s numbers of U.S. facilities, employees and vehicles built and sold, GM suffers most from excessive “ation” costs, Ford less and Chrysler least, but still a lot.
Yes, Germany and other European countries have high corporate taxes, and Japan’s is fairly high. But they don’t have state, county and city on top of federal taxes, plus real estate, payroll and inventory taxes, “single business” taxes, taxes on healthcare (for those that can still afford to provide it) and much more, limited only by the creativity of tax-hungry governments at all levels. The total burden varies from city to city and state to state, so companies can move to lower-cost locations to lower their burdens. But the lowest-cost locations are in other countries.
Yes, foreign makers must meet increasingly expensive federal regulations on the U.S.-market vehicles they sell. But they don’t have the additional heavy burdens of regulations on facilities and employees and every other aspect of their businesses that U.S. companies do. Regulations, like taxes, come from all levels of government – local and state on top of federal. All are imposed for noble reasons, and almost all are over-killed for PR and political reasons.
Chrysler’s Tom LaSorda at the February 2006 Chicago Auto Show said legal costs for U.S, automakers were estimated at $500 a car…15 years ago! Others have placed today’s legal costs at double that. Yes, foreign-based companies get sued, but less successfully and (for that reason) far less often. Will fortune-seeking ambulance-chasers get great cooperation from off-shore makers and their business-friendly governments? Will they struggle with mountains of depositions and documents in German, Japanese or Korean? Obviously, U.S.-based business provides no shortage of much better, easier, and more lucrative marks.
But where is our U.S. media’s recognition of this reality? Automotive News Publisher and Editor-in-Chief Keith Crain, for example, recently editorialized that there’s nothing much U.S. government could do to help even if it wanted to, which it doesn’t. “It would take some real creativity on the part of Congress to craft a bill that would benefit just U.S.-owned car and truck companies and their U.S.-owned suppliers,” he wrote in his May 22, 2006 column.
Really? So our all-powerful federal, state, and local governments are collectively powerless to reduce excessive business taxes, back off on wasteful and unnecessary regulations, reign in greed-driven tort lawyers, and find creative ways to help with legacy and healthcare burdens for all U.S. business, not just automakers and suppliers? Or to stop playing politics with U.S. jobs and pretending domestic automakers’ problems are their own fault?
Adding GM’s $1500 per-car healthcare cost to the $1000 legal cost, it’s not far fetched to estimate that the other three could total another $1500. That’s $4000 or more per vehicle in uncompetitive cost that could be far better allocated among additional product investment, advertising, and marketing…and, oh yes, some reasonable level of life-sustaining profit.
