Costs in the Japanese auto industry

...it's not just OEMs...

Monday I was at the award ceremony for the Automotive News PACE Supplier of the Year competition, for which I've been a judge for the past 19 years; more on that in a later post. On Friday (19 April) I spoke on the Japanese auto industry at an UMTRI conference in Ann Arbor, Michigan. One data point was an overview of the industry; since I begin a new (4-week) term tomorrow (22 April), let me elaborate as indirect class preparation.

The auto industry is not just OEMs, but encompasses dealers and parts suppliers. For Japan, the Economic Census provides an overview of employment of various subdivisions. As in the US, the downstream industry is the largest source of employment. (Note I'm puzzled by the large level of employment at wholesalers; I have no answer.)

	Automotive Assembly	Vehicle Bodies	Automotive Parts
Establishments
2006	51	201	8,799
2007	66	210	8,979
2008	67	221	8,921
2009	72	198	7,996
2010	72	170	7,812
Employment
2006	176,662	39,661	633,297
2007	182,993	18,842	693,322
2008	182,707	18,503	664,257
2009	166,479	15,513	604,644
2010	161,158	13,402	612,193
Annual per worker cash compensation, ¥ million
2006	7.47	6.65	5.13
2007	7.32	5.05	5.25
2008	7.57	4.89	5.47
2009	6.92	4.73	4.92
2010	7.08	4.59	5.10
500+ workers	7.11	4.77	6.39
Source: Census of Manufactures (工業統計表). Wages are cash compensation divided by employment in establishments

Within manufacturing, the parts sector is the largest by about a factor of three. That's consistent with the US, where Thomas Klier and James Rubenstein found about a 3:1 ratio (Who Really Made Your Car? Restructuring and Geographic Change in the Auto Industry, Upjohn Institute Press, 2008). Now Census data represent classifications by those reporting, so miss the full count. In addition, I didn't include categories (e.g., piston rings) that aren't reported under "autos"; Klier and Rubenstein work with a much more comprehensive set of data. Hence the table at right underreports parts employment.

Finally, I include very rough data on compensation; mandatory benefits add at least another 20%. These data, alongside the employment data, provide a sense of the sharp downturn in 2009-2010, under the impact of the Lehman Shock (as it's called in Japanese). Reflecting lower bonuses (in larger firms the norm is 4.5 months or more pay) and cuts to overtime, compensation fell sharply in those years. I also give a row for cash compensation restricted to the largest size establishments; such locations would in almost all cases be unionized (though contingent workers – contract and part-time employees – would not normally be members and would receive lower pay and benefits).

Now as I write this the exchange rate is ¥99.8/US$1.00, or ¥1 is equivalent to a penny at market exchange rates. The average parts worker in a larger establishment, which account for 2/3rds of output, is thus about $64,000. Add in mandatory benefits and that rises to $76,000. Even at the April 21st exchange rate, that is far higher than the US; at the ¥80 level of last year, that would have been ¥95,000. While this would include engineers, at least if they were located in a manufacturing facility, it is a tidy sum. And it has obvious implications: even if the average worker is more productive than their US equivalent, Japanese workers have (on average) priced themselves out of the global market.

For recent data on the US industry, see the Bureau of Labor Statistics auto industry page: http://www.bls.gov/iag/tgs/iagauto.htm

...Mike Smitka...

The Simple Economics of Social Security and the Trust Fund

Post moved to HERE at our companion blog US and Economics.

How do you like your cone? – double-dip?

Part I

Where will growth come from, as the stimulus money runs out? – though the construction portion will keep being shoveled out for months to come. The dollar is weak against the Canadian dollar, the yen and the yuan, but not against the euro and has strengthened against the Mexican peso. So exports? – not likely. And exports simply aren't a big enough slice of our economy (about 10%) and are more sensitive to foreign incomes. Good for exports to China, but not otherwise. It keeps US imports low, too, but that's a reflection of bad news, not a source of good news.

What of the consumer? Unemployment remains high, and long-term unemployment is at record levels. Job losses remain high, so there's uncertainty. For the rich, who tend to save, capital gains and dividends and corporate bonuses remain low.

Investment still faces a housing and now a commercial real estate slump. We have, at least for a couple more years, too many houses and too many strip malls and office buildings for our population and income. Manufacturing is ticking upwards, but from a very low base; car sales may be 20% above their bottom in 2008-9, but remain 30% below peak levels.

Then there's government. The city across the valley from me is likely to go into receivership, lose its charter and revert to town status. Northern Michigan, which I just left, remains depressed. The local marina, which for years provided a big boost to city income, has almost no seasonal slips rented; there used to be a waiting list. Transient rentals and fuel sales were nil on some days the past two weeks. And over everything hangs the fiscal situation of California and Illinois. State and local government continue to lay off employees, even as the Federal government has stopped hiring.
So how do you like your cone? We're an obese society; we had an obese economy. Double-dip goes without asking. But there is a triple-dip crowd. You have to beg for a single dip, and we're not doing that.

Part II

Congress seems to be (wrongly) spooked by deficit hawks, and may go into reverse mode. Ironically, by prolonging the recession(s), that will leave us in a worse fiscal position, because most of our current deficit is the result of slow growth – falling revenues – and not a burst of expenditures.

Unfortunately post-banking-bubble recoveries tend to be slow, because it is structural distortions (too many houses) that have to be unwound, and short of buying up and bulldozing new developments, there's no quick way to do that. (We also have a growing population, so we will eventually have demand, and when retiring baby boomers can sell their houses, that will spill over even into such examples of excess as Las Vegas.)

A new working paper by M. Miyazaki from the International Monetary Fund makes the (with hindsight!) obvious point that the news is worse than that: revenues tend to grow with the economy, not faster than the economy, and so are very slow to recover to earlier levels. (See In Search of Lost Revenue, which is at the non-technical end of the spectrum of IMF working papers: you don't need an economics PhD to read it.)

Now it's conceivable that we could cut expenditures to speed the process. But we seem to have a proclivity for war, and for getting older. While I'd like to see us change the former, I have a vested interest in the latter, as does everyone reading this. And demand for most of the rest of what the government does, federal, state, and local, is a function of population. The US has a small government, in international comparison, so it's hard to find ways to significantly cut expenditures. Plus the last time I looked, we could cut all non-defense, non-aging related expenditures at the Federal level and still have a deficit.

Let's not kid ourselves: if revenue doesn't recover on its own and since expenditures can't be cut, then at some point we need to enhance revenues. A lot. My preferred alternative would be a national value added tax.

But demagoguery aside, there's no urgency; interest rates remain at record lows, and not just on short-term debt. However, we can't wait a decade before doing so. Hence even if Obama does not do so – it's hard to see that happening – the next president must. It will be a disaster if the radical right trumps conservative sensibility and precludes that presidential campaign from being over how to raise taxes, not whether to raise them.

Mike Smitka