Buying "American"

by Russ Roberts on May 11, 2006

in Cafe Conversation, Trade

The Wall Street Journal reports (in a no-charge article for non-subscribers) that buying American isn’t what it’s cracked up to be:

Few sports cars have captured the nation’s imagination
like the sleek Ford Mustang, a 21st-century reincarnation of an
American classic. The Toyota Sienna minivan, by contrast, speaks to the
utilitarian aesthetics of Japan: refined interiors, arm rests and lots
and lots of cup holders.

Yet, by a crucial measure, the Sienna is far more
American than the Mustang. Statistics from the National Highway Traffic
Safety Administration that were publicized in "Auto Industry Update:
2006," a presentation by Farmington Hills, Mich., research company CSM
Worldwide, show only 65% of the content of a Ford Mustang comes from
the U.S. or Canada. Ford Motor Co. buys the rest of the Mustang’s parts abroad. By contrast, the Sienna, sold by Japan’s Toyota Motor Corp., is assembled in Indiana with 90% local components.

Calling a car "American" or "foreign" has no meaning. But that doesn’t stop "American" car companies from trying to use emotion to affect buyers:

There’s more than a little irony in this, considering
Ford has launched a campaign to regain its footing with an appeal to
patriotism (catchphrase: "Red, White & Bold"). "Americans really do
want to buy American brands," asserted Ford Executive Vice President
Mark Fields in a recent speech. "We will compete vigorously to be
America’s car company."

As the Mustang shows, though, it’s no longer easy to
define what is American. For 20 years now, the dynamic car makers of
Asia — led by Toyota, Nissan Motor Co. and Honda Motor
Co. — have been pouring money into North America, investing in plants,
suppliers and dealerships as well as design, testing and research
centers. Their factories used to be derided as "transplants,"
foreign-owned plants just knocking together imported parts. Today, the
Asian car makers are a fully functioning industry, big and powerful
enough to challenge Detroit’s claim to the heart of U.S. car
manufacturing.

So if there’s no such thing as an American car company or a foreign one, what’s an "American" company to do?

On Thursday, the Level Field Institute, a grass-roots organization
founded by U.S. Big Three retirees, is scheduled to hold a news
conference in Washington. Among the points the group is expected to
make is its belief that comparing relative North American component
content is an ineffective way to determine who is "more American" among
auto makers. A better way, says Jim Doyle who heads Level Field, is to
look at the number of jobs — from research and development to
manufacturing to retailing — each auto maker creates per car sold in
the U.S.

Mr. Doyle says the institute’s study shows that Toyota in 2005 employed
roughly three times more U.S. workers, on a basis of per car sold in
the U.S., than Hyundai Motor Co. Each of the Big Three manufacturers in
the same year employed roughly three times as many U.S. workers, on a
per-car-sold basis, as Toyota. "What’s better for the American
economy?" Mr. Doyle asks. A GM car "built in Mexico with 147,000 jobs
back here in America or a Honda built in Alabama with 4,000 or 5,000
jobs in America?"

A challenge to our readers: why is this job creation measure irrelevant?

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{ 26 comments }

Sean Woods May 11, 2006 at 11:22 am

What effect do higher labor costs (as a result of organized labor) have on Ford's incentive to buy foreign parts? I feel like Ford has to look for cheaper parts as a result of high-cost labor, prompting them to look overseas.

Ford parts that I have owned (usually electrical switches and other components) are inferior to those on my friend's Toyota. (I have replaced five or so Ford parts; he has replaced none.)

spencer May 11, 2006 at 11:36 am

Both measures are significantly biased because they do not include value.

counting components makes an engine block — one piece — the same as a brake pedal.

The same can be said for counting employees — it makes one Ph.D. chemist employeed by ford in Detroit equal to a
janitor in Alabama.

the correct measure is to use value added
by all the employees of domestic suppliers vs the value added by the employees of foreign suppliers — employees of both the auto companies and the vendors should be included.

Randy May 11, 2006 at 11:55 am

I'll take a stab at the question. Its irrelevant because it doesn't matter whether Americans or foreigners make our cars. What matters is that they are made by whoever has a comparative advantage in making cars, thus freeing up labor resources for other uses.

Dudley May 11, 2006 at 12:00 pm

Let me get this straight, the LFI is saying that it's better for the economy if "American" car companies produce a car less efficiently than Toyota does now. Brilliant! With management like that it's no wonder GM and Ford are on the brink. Nevermind the burden on consumers of buying higher priced cars and nevermind the resources those inefficient manufactures will use up. What's really important is how many people we employ. In that spirit, I'm going to open a hot dog stand and hire 500 people to work it. I'll be the most American company in the country. I'll be creating 500 American jobs!

Will someone tell Lou Dobbs I'm available to be on his show anytime he needs a true American hero?

happyjuggler0 May 11, 2006 at 12:06 pm

Toyota uses fewer man hours to assemble a vehicle than the Big Three.

Toyota also uses fewer parts to make its cars.

In a hypothetical example with made up numbers, assume both Toyota and GM use American workers for 100% of assembly, and their parts makers do the same. Now assume GM uses twice as many parts per car as Toyota, and 50% more man hours than Toyota to assemble a car. Assume both companies' parts suppliers use the exact same number of employees per part manufactured.

Using x to represent the number of employees that went into producing Toyota parts and overall assembly, we can see that GM uses twice as many employees for parts simply because it has twice as many parts. 2x so far. Now we also know it uses 50% more labor hours to assemble a car, so 2x times 1.5= 3x. All with 100% Americans.

happyjuggler0 May 11, 2006 at 12:07 pm

Ok, Dudley says it better than I did.

Noah Yetter May 11, 2006 at 12:33 pm

Any given enterprise contributes the most to the economy when it produces a product that consumers want to buy, and does so at a profit. The number of jobs it creates, where those jobs are, where the raw materials come from, etc. are all irrelevant.

Taylor Stevenson May 11, 2006 at 12:39 pm

A competition to see who can build a car the least efficiently defies logic. The wasted labor could be doing something useful. Curing cancer perhaps?

Timothy May 11, 2006 at 12:59 pm

Dudley and happyjuggler hit it on the head. The "Big Three" are simply using more hours to produce their cars. They're also creating an inferior product, by and large, which explains their falling market share and stagnating sales. Thusly, they're using more people to produce less value and are inefficiently using resources. Without all the protectionism from Congress they'd be run out of the market and rightly so.

bbartlog May 11, 2006 at 1:15 pm

That was an easy question to answer :-)

Ford also has astonishingly bad marketing. Pretty much every ad I've seen from them over the past five years has either fallen flat or been thinly-veiled self-admiration by the management of Ford. The fundamental problem may still be their inefficient production, but their incompetent marketing has surely helped put another nail in their coffin. I do not believe the company will survive as an independent entity.

Bowtie65 May 11, 2006 at 1:28 pm

They're not taking into account the other way Toyota creates jobs: By freeing up consumer capital. If Toyota sells comparable cars cheaper, the money their customers save is put to use in creating new jobs.

Dittos on Dudley and happyjuggler0's comments.

eddie May 11, 2006 at 2:22 pm

While Dudley is running his paltry hot-dog stand, I'll be hiring the under-employed youth to go around smashing windows, simultaneously creating jobs both for hordes (dare I say "gangs") of American youth (giving them valuable job experience to boot!) *and* legions of American glaziers! Not only that, but I'll launch a franchise operation ("GlassBusters!") so that American entreprenuers can invest in their own businesses… soon we'll be putting Americans to work smashing and restoring windows in American cities across the entire nation! It'll be an economic miracle!

Morgan May 11, 2006 at 2:55 pm

eddie:

I was going to lay out my plan for full employment, but I can't follow that.

Jacko May 11, 2006 at 3:02 pm

Economies are driven by consumption, not production. That’s why we’re most interested in companies’ sales, not how many folks they employ. Until we take up the Soviet model, manufacturers gain little respect for employing more workers than others. Further, protecting producers ultimately threatens consumer welfare (who is paying higher than market pricing). When consumers are threatened, the country is finished.

Right now the Big Three are in financial difficulty. Mr. Doyle is making the ludicrous (and irrelevant) argument that we should buttress their unprofitable model because they employ more Americans. Actually, they are in financial difficulty arguably BECAUSE they do that at the expense of giving the consumer a good quality product at a ‘fair market’ price. Union members would be much richer today if they had (like management) long ago negotiated incentive programs based on how well the company met customer needs rather than guaranteeing their existing production practices. They are now in the unhappy position of trying to sell the wrong vehicle at the wrong price without the full benefit of technological and process innovation.

I say shame on their management and workers alike. We consumers don’t want their products. And we’re the Americans that matter.

faultolerant May 11, 2006 at 3:12 pm

It is, indeed, a sad state of affairs when the UAW does its very best to destroy the hand(s) that feed it. Without the UAW the very jobs they want to "protect" would be much more stable, the products they sell would be better priced and everyone would be better off – consumer and producer alike.

GM and Ford *can* do some things right (aside from their abysmal advertising!). Cadillac is selling cars that people want – Buick and Pontiac aren't. Why are Buick and Pontiac still around? (Thanks, UAW!)

Ford can build the Mustang, but keeps Mercury alive. Why? (Thanks, UAW!)

Maybe it will take the complete collapse of US auto manufacturing before the dolts in management and the anti-job, anti-business UAW are finally eradicated.

asg May 11, 2006 at 3:32 pm

What I want to know is why the study counted "parts made in the U.S. or Canada." Canada isn't a foreign country? If what matters is whether an alternator is made domestically or abroad, why doesn't Canada count as abroad?

save_the_rustbelt May 11, 2006 at 3:32 pm

Ford and GM want Americans to "buy American," at the same time they are agressively working to void labor contracts in the parts production sector and ship all of the work overseas. WAtch for the Delphi explosion, coming soon.

"Buy American" has no real meaning in mnufactured goods.

All of the former manufacturing employees can work in the 1500 new Wal-Marts, at half the wages.

Just the way the politicians and economists want it. So who needs a middle class?

Slocum May 11, 2006 at 3:40 pm

When bashing the Big 3 management and the UAW, keep Caterpillar in mind. Caterpillar is strong, growing AND employs lots of UAW labor in the midwest, BUT Caterpillar's management has consistently refused to pay wages and make deals that they could afford in the short term but that would cripple the company in the long term, and they've taken long strikes to hold to that. The Big 3, on the other hand, have agreed not only to lavish pay scales but also to things like the 'job banks' that make it impossible to trim labor costs at all, and the result is that they find themselves at the edge of bankrupcy.

faultolerant May 11, 2006 at 4:31 pm

Save-The-Rustbelt:

The biggest problem (IMHO) with the UAW (and the concessions of the Big3) is that a line assembly worker is simply not worth $70 an hour (or more) in pay and benefits.

I come from a union family and have many family members in the UAW and Teamsters. Even many of them recognize they're overpaid for the work they do. I have more family employed at the Ford Plant in St. Louis than with professional degrees, so I'm sympathetic to the union cause….but the reality is that *most* unions are anti-worker and anti-business under the guise of promoting both.

Unions now exist for their own sake and are a drain on society. Sad to say, but the UAW and Teamsters just don't give a flying damn about the line worker – they folks they're nominally supposed to represent.

It's asinine to blame the consumer for wanting a quality product at the lowest possible price. No one is willing to knowingly overpay for a given item – and that extends to cars. The Big3 have given away the store to the UAW and the UAW still demands more and more.

When BMW, Toyota, etc. can build world-class vehicles, in the US, with the US infrastructure, and do it for a much lower cost (mostly because of UAW mandates and bad Big3 management) then you really have to expect the Big3 to take the financial pounding they deserve.

Does the line worker "deserve" to lose his or her job? Absolutely not. They've done nothing purposefully wrong. However, the world economy (and it's here whether we like it or not) says it will happen. Delphi is going to implode. GM won't be far behind and Ford will totter right behind them. More's the pity. I expect that I'll be driving a "Cadillac by Toyota" fairly soon. Will that be a good thing? It will be emotionally negative, but, likely, economically positive in the aggregate.

Will GM/UAW workers be hurt in the process? Probably yes. Unfortunately, they've been benefitting inappropriately by accepting (and demanding) unsustainable wages and benefits. I mean, just look at that travesty of a "Job Bank" the UAW foisted on the Big3. (Not that the Big3 didn't acquiesce and bear the blame, too). How can any reasonable, thinking person support a requirement to pay – at FULL salary – an army of people to do absolutely phreakin NOTHING!?

Caterpillar is a good example of how union and management can work together. That's one of a very few – again, unfortunately. It's sad to say, but I honestly think the unions have – by and large – set this table themselves, and they'll have to eat what comes of it.

The US can either compete in the global economy or get left behind – and frankly, the markets couldn't care one whit what any of us feel about it. When a Mustang is 65% US parts and a Toyota is 90% – that's telling. I've ONLY ever bought Ford & GM products (Mostly Cadillac and Lincoln). I've been pleased with them, so it wasn't just misplaced patriotism (or whatever pejorative you wanna call it). It doesn't mean, however, that Ford&GM can expect my business forever. They have to compete with the best product at the best price – and they're just not doing it.

Again, IMHO, get rid of the UAW at Ford & GM and you'll see a much more competitive set of companies. Although, senior management needs to go with the UAW.

save_the_rustbelt May 11, 2006 at 6:34 pm

faultolerant:

I told college classes 20+ years ago that the Big 3 and the UAW were going to committ economic suicide, the only question was the timing.

I'm a union alumni (laborers) and we worked our butts off and there wasn't much whining about working conditions – and I grew up in UAW territory and those guys are way out there past the Twilight zone.

The Big 3 will slide until they are niche manufacturers, which may be the best place for them. a lot of innocent people and communities are going to get whacked in the meantime.

Kevin May 12, 2006 at 12:33 am

My overarching answer is, what matters is what's good for the consumer. You have to view economics from the consumer's point of view.

If you insist on viewing economics from the producer's point of view, you depart the path of wisdom.

The purpose of an economy is not to provide people with JOBS. It's to provide people with STUFF.

An economy is organized around deliverying the goods to the consumer. Weighing everything from the producer's point of view is not economics; it's just politics.

Russell Nelson May 12, 2006 at 12:57 am

Are we clear on the fact that a job is the thing you DO NOT want, but which you put up with in order to get the resources to live your life. Jobs are bad, getting resources is good.

quadrupole May 12, 2006 at 4:14 am

Kevin

The most succict statement of your point is that a healthy economic system is about how a person serves their fellow man, not how their fellow man serves them.

Drucker made that point when he stated that the purpose of business was to provide customers with the products they wanted. Profit is how you keep score. If you can't make a profit, you aren't really providing people with what they want, because those resources are valued more for other purposes. A profit is the sign that you have directed resources to a more valuable use.

John Dewey May 12, 2006 at 10:46 am

rustbelt: "All of the former manufacturing employees can work in the 1500 new Wal-Marts, at half the wages. … Just the way the politicians and economists want it."

Some displaced factory workers probably went to retail. But retail doesn't account for all the non-professional growth:

U.S. job gains/(losses) 1999-2004

production occupations (2,427K)
retail sales 531K
construction/extraction 364K
healthcare support 336K
installation/repair 107K
protection services 100K
transportation 59K

Construction includes increases in electricians, plumbers, and heavy equipment operators as well as in immigrant-dominated occupations. Healthcare support includes not just orderlies but also dental assistants and medical transcriptionists.

If displaced factory workers want to restore high wages, they should acquire professional or technical skills. Their world has changed forever, and not because "politicians and economists want it" to change.

umed saidov May 15, 2006 at 11:03 am

It is all a question of priorities. If by purchasing "American" cars the customer would like to support the American car industry, then Toyota would be considered more American than a GM car built in Mexico. However, if you look at the bottom line (whatever car makers retain as a profit,where it gets taxed and ultimately to which country profits are repatriated) then buying a GM car could be seen as more patriotic. Albeight in this case you are serving the interest of a narrow circle of people (shareholders of the GM and related parties).

In making such decisions (just to compare apples to apples) one should weigh the monetary/economic effects of the purchase on the US economy and hope that wealth re-allocation mechanisms in the country would take care of redistribution of profit among the members of the society.

Wallace Smith December 14, 2006 at 2:10 pm

Sales of previously owned homes rose 0.5 percent in October over the previous month — the first increase since last February, according to a report from the National Association of Realtors. It's now at a seaasonally adjusted annual rate of 6.24 million sales. However, sales are still down 11.5 percent from the 7 million-unit level of last year.

Inventories of unsold homes increased 1.9 percent to 3.8 million units in October. That represents a 7.4-month supply, the largest months' supply since April, 1993.

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