Fifteen Years of Change in U.S. Automotive Manufacturing

The 2000 Numbers
1. # of motor vehicles produced in the world: 58,374,162;
2. # of motor vehicles produced in the U.S.: 12,799,857 (21.9%);
3. # of workers employed in U.S motor vehicle and automotive parts manufacturing = 1,313,400;
4. # of cars produced per worker: 9.7.

The 2015 Numbers
1. # of motor vehicles produced in the world: 90,683,072;
2. # of motor vehicles produced in the U.S.: 12,100,095 (13.3%);
3. # of workers employed in U.S motor vehicle and automotive parts manufacturing = 910,000 (30.7% drop from 2000);
4. # of cars produced per worker: 13.3.

More Numbers
1. # of automotive plants in Mexico: 21 (17 now, 4 more under construction/in planning);
2. # of Mexican motor vehicles manufactured in 2014: 3,368,000;
3. # of automotive workers in Mexico in 2014: 550,000;
4. # of motor vehicles per worker: 6.1;
5. Average automotive worker pay in U.S.: $37.62/hour (6th highest behind Germany, France, Japan, Italy & Canada);
6. Average automotive worker pay in Mexico: $8.24/hour;
7. # of countries with free trade agreement with U.S.: 20 (0 in Europe);
8. # of countries with free trade agreement with Mexico: 45 (28 in Europe).

What The Numbers Tell Us
1. Businesses make decisions which best benefit them financially;
2. While U.S. manufacturing is more efficient in U.S. plants (higher cars/worker), that advantage is more than offset by lower wages in Mexico;
3. Free trade agreements between Mexico and most European countries save car companies thousands of dollars for every car shipped from Mexico to Europe vs. from the U.S. (10% EU import tax);
4. Free trade agreement between Mexico, the U.S. and Canada means there is no financial penalty for car companies to ship vehicles north from Mexico;
5. Free trade agreements between Mexico, the U.S. and Canada mean that European car companies would save hundreds to thousands of dollars per vehicle shipped from Mexico to the U.S. versus from European countries.

Now What?
Things have changed substantially in the automotive industry, and much of that change is irreversible. Okay, that’s pretty obvious to most of us, but I decided to write about this because of the presidential campaign.

Both Donald Trump and Bernie Sanders have considerable support from those who want a change in the status quo. These two candidates are “outsiders” which is a big advantage in this presidential campaign. There may even be some crossover in their support. I would not be surprised to see Sanders’ supporters voting for Trump in November, or vice versa.

Why are outsiders so appealing this year? It is because there are large groups who feel left behind by today’s economy. For Trump’s supporters, there are many who want to turn back the clock to an era when the U.S. reined supreme in manufacturing, military power, and ingenuity. In short, they want to feel the same energy and promise they felt during their youth in the 60’s, 70’s, 80’s, & 90’s.

Yes, even the 70’s with Watergate, the oil embargo, high inflation and recession. When faced with such challenges, this country pulled together and found solutions. We built the Alaska oil pipeline and expanded oil production in many parts of the country to reduce our dependence on foreign oil. The Space Shuttle program not only produced a reusable space vehicle by 1981, it greatly expanded our scientific leadership and that research led to countless advances in everyday products.

I believe Bernie Sanders’ supporters also want to turn back the clock, but in a different way. His popularity with young voters highlights the fears they harbor over their futures. Many are struggling with high student loan debt, unaffordable rent, poor job prospects, and they have no illusions that their employers will look out for their needs when times get tough – a lesson they learned from the Great Recession. They want to turn back the clock to a time when we took better care of each other. They’re scared, and who can blame them?

So, why did I start off by talking about the auto industry? During the “good old days,” manufacturing supported a large number of good paying, secure jobs even for those without a college degree. If you were born at the beginning of the Baby Boomer wave (about 1943 – 1953), you could find lifelong work in a factory with a only high school diploma, and thus, no student loan debt. I decided to examine the auto industry because it is the quintessential example of the American Dream, and therefore, of what made America great.

Your eyes may have glazed over at the numbers I presented at the beginning of this post. Sorry about that, but they’re important. Manufacturing has changed significantly in the past few decades. Many of those good paying jobs have been shipped overseas because labor is one of the largest costs for most businesses.

U.S. factories that have been built or retrofitted recently employ many fewer workers than the factories of old. In just fifteen years, productivity has increased by 37% as measured by # cars produced per worker. Today’s modern factories – both in the U.S. and abroad – employ a small number of highly skilled workers who can program, adjust and maintain the equipment, and a larger number of people who do the same simple job over and over again.

The higher productivity comes from replacing the latter group with automated equipment if the financial calculations show that it’s beneficial. For example, if a manufacturer could replace 5 workers by purchasing Robot X, they are likely to do so if the wages and benefits saved over three years is less than the cost of the equipment and maintenance. The company will buy the machine and lay off 5 workers. Businesses do what is best for their owners – the shareholders.

The American auto industry was built largely in the upper Midwest. With wide scale adoption of central air conditioning in factories, manufacturing shifted to the states in the southern U.S. Weather and wages were the main drivers of this change. Fewer days of icy roads, lower cooling costs in the south than heating costs in the north, and a potential workforce which had little experience with high union-negotiated wages. Remember for modern factories, workers generally perform just one task repeatedly, so leaving the Midwest’s skilled manufacturing workforce wasn’t an issue.

The states in the southern U.S. are now losing out to Mexico because of trade barriers. Tea Partiers are quick to remind us that the United States did not always have an income tax. This is true. In the old days, this and every other country collected duties, tariffs and excise taxes as the primary source of income. For many countries, these barriers to free trade have dropped significantly, and as measured by Percent of Gross Domestic Product, revenue from excise taxes and customs duties have dropped 49% and 25%, respectively, when comparing the last ten years to the previously forty.

Mexico has much to offer car companies wishing to build manufacturing and assembly factories in the Americas. Wages are low ($8.24/hour versus $62.63 in Germany), but the free trade agreements are also a major draw. A key factor: Mexico has a trade agreement with the EU and the United States does not. Cars manufactured in Mexico can be shipped duty-free to the U.S., Canada, many Latin American countries and the 28 member nations in the European Union.

By contrast, on a $45,000 vehicle manufactured in the U.S., a car company would pay a $4,500 import tax to bring it into the European Union. In the opposite direction, a German produced $45,000 vehicle shipped to the U.S. would be subject to a $1,125 tariff. It’s no wonder so many factories are being built in Mexico.

During our current economic recovery, U.S. auto manufactures are positioning themselves to build small cars in Mexico and trucks and SUVs in the U.S. Americans are buying a lot of vehicles because they put off their usual purchases during the recession and the anemic beginning to the recovery. Now that they feel better about the economy, and with gas prices so low, we are buying larger vehicles and not worrying too much about fuel efficiency.

This works for U.S. car manufacturers because there are higher profit margins on trucks and larger cars. But what happens during the next recession or the next large spike in gas prices? We’ll stop buying the gas guzzlers and start buying the smaller cars. In other words, U.S. manufacturing jobs will be lost and Mexican manufacturing jobs will be gained.

So our economy is changing. What should we do about it?

Option 1: Prepare the next generation for the new economy. Reengineer schools, vocational programs and universities to produce graduates who are prepared to succeed in the industries that are and will do well in this country. It would also be good for the country if recent graduates were not overburdened by student loan debt so they would consider making purchases like homes which help the economy grow.

Option 2: Turn back the clock to when things were great in this country. With so much more manufacturing in other parts of the world than was true in the second half of the last century, this will be difficult. We could end our free trade agreements and put very high tariffs on every import. That would promote manufacturing in this country, but with great pain caused by product shortages and very high prices. I don’t think this will work.

I’m afraid the only way to truly turn back the clock to a time when most manufacturing was in the U.S. and we were the world’s largest exporter is to eliminate manufacturing in other countries. It seems to me that Option 2 calls for World War III.

I vote for Option 1.

About tonyj126

I'm a 50+ married man who always seems to have a large backlog of work to do, but also a lot of flexibility in my schedule. Much of the work I do is volunteer or taking care of extended family members. I suffer from, as my priest calls it, "the sin of self-sufficiency," which means I can figure out how to do most things myself, and consequently, reduce the need for community to solve problems. As a logical extention (at least to me), I find myself called to comtemplate the country's and the world's woes and offer my observations. I hope someone out there will find them useful.
This entry was posted in Economics, Make America Great Series, U.S. Politics, Uncategorized. Bookmark the permalink.

1 Response to Fifteen Years of Change in U.S. Automotive Manufacturing

  1. Thanks for this blog post regarding US automotive manufacturing; I really enjoyed it and am definitely recommending this blog to my friends and family. I’m a 15 year old with a blog on finance and economics at shreysfinanceblog.com, and would really appreciate it if you could read and comment on some of my articles, and perhaps follow, reblog and share some of my posts on social media. Thanks again for this fantastic post.

    Like

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