I’ve long argued that if Detroit were to be nationalized (and it was, not that I’m arguing it was a good idea) the US government should make Detroit make it worth the taxpayers’ while and return production from low wage countries, such as Mexico, to the United States. This would have two effects: more US citizens would be hired and the government’s trade deficit would be reduced. Hey, if you’re going to make a private enterprise a government arm, then make that government arm contribute something positive to the country. Much of Detroit’s portfolio is made in Mexico: the Ford Fusion, the (yet to be released) Ford Fiesta, The Ford F-Series, the Chevrolet Silverado/GMC Sierra, the Chevrolet Aveo/Pontiac G3 and the Chevrolet HHR to name but a few. This has long been a practice of Detroit and some transplants (e.g., VW with the Jetta and Beetle; Toyota with the Tacoma). Exploit low wage countries for maximum profits in higher wage countries. Well, Honda didn’t get the message.
Columbus Business First reports that Honda’s Greensburg, Indiana, plant is gearing up production of Honda Civic saloons for export to Mexico and 22 other Caribbean and Latin countries. “Manufacturing products for export broadens the experiences of our associates, contributes positively to America’s and Indiana’s international trade, and shows our commitment to the continued growth and evolution of our business in Indiana,” Rick Schostek, vice president for Honda Manufacturing of Indiana.
Now, considering Honda are one of the few car companies in this downturn to still make a profit, I’m guessing they’ve calculated this move very carefully to make sure they’ll turn a profit. Which goes to show you that you CAN make a car (and this is a small car, one of the least profitable segments there is, according to Detroit) in a high wage country and still turn a profit in a low wage country. Kind of reminds me of when Detroit said they couldn’t meet 1970’s emission laws in the United States without the use of a catalytic convertor; until Honda proved them wrong about that, too.
Of course. Honda hires engineers. GM hires Harvard Law dropouts and other MBA-type engineering disasters.
Ford has a big presence in Latin America, and builds in Mexico to avoid tariffs in Latin America. Thanks to NAFTA, they also avoid tariffs here as well. That decision had more to do with it than labor costs.
Blame NAFTA for another failure.
Er, “That had more to do with the decision to build in Mexico than labor costs”.
They wish they hired Harvard Law dropouts.
That would be a marked improvement over the Cooley graduates that they do hire.
(And yes, the friend I mention in the linked to posting works for GM.)
I believe Honda eventually adopted the use of a catalytic converter for all their cars. And in the end catalytic converters were adopted industry-wide. Maybe Detroit was right about that after all.
It’s not the wages, it’s productivity. Honda has apparently made their associates assembling Civics in Indiana productive enough to make their output profitable.
I am familiar with this plant, as it is in my state. This plant was located in a rural area with little industry. Honda is paying a slight premium for the area, but not as much as you might think. So, wage and benefit costs are nowhere near what the Detroit boys pay.
Also, this new plant went online just as the economy tanked, so I would imagine that it makes sense to use the capacity and export rather than to lay off. If the dollar were a lot stronger, it would be a tougher decision.
I don’t think that Detroit companies can build in the US at anything other than full union scale, no matter where they locate the plant. And with all the laid off workers, they have to call back the old expensive ones rather than pay the lower new-hire rate.
I think that it is unfortunate, but it is tough to make money in the lower end of the market at UAW rates.
Much of Detroit’s portfolio is made in Mexico, the Ford Fusion, the (yet to be released) Ford Fiesta, The Ford F-Series, the Chevrolet Silverado/GMC Sierra, the Chevrolet Aveo/Pontiac G3 and the Chevrolet HHR to name but a few.
The Aveo/G3 is made in Korea. Ford assembles F-150s at the Michigan Truck Plant in Dearborn and in Kansas City, and builds the Super Duty F-Series trucks in Kentucky. Like Ford, GM builds pickup trucks south of the border in Mexico but it’s a small percentage compared to the output of their pickup assy operations in Oshawa Ontario, Fort Wayne, Flint and Pontiac.
Actually Cammy, Honda does have a plant down in Mexico (it’s been there at least 15 years). It’s just not a major factor in US/Canada auto supply. It’s quite unusual to run across a lot Honda from that plant, I suspect it supplies mostly Mexico and Latin America.
Part of the reason is that Honda (actually all Dai-san, but they are the extreme) like to have their suppliers near the plants. Greenfield is close enough to home base –“engaged” Ohio– to use the same suppliers. The Canadian plant isn’t too far away (about 6-8 hours by road). Word is that Management thought the Alabama Minivan plant was a little too remote (which is why the latest one was built closer).
tced2
Detroit 1970’s emission laws couldn’t be reached without a catalytic converter and Honda proved you can. That’s the point.
AndrewDederer
I never said that Honda didn’t have a plant in Mexico. What I was asserting was that you can build a small car in a country like the United States and sell it profitably in a country like Mexico.
Ronnie Schreiber
I’m afraid that the Chevrolet Aveo is made South of the border.
http://green.autoblog.com/2008/08/11/chevrolet-adds-north-american-aveo-production-in-mexico/
tced2 :
September 22nd, 2009 at 3:52 pm
It’s not the wages, it’s productivity. Honda has apparently made their associates assembling Civics in Indiana productive enough to make their output profitable.
That’s a very good point, and one I was thinking of as well.
Has Honda, Toyota and Hyundai been able to avoid total unionization of their workforces in the US?
The emissions standards in the 70’s were met with CVCC and no catalytic converter but for some reason Honda started using it later – To meet more stringent emissions requirements in the 80’s and later? Honda didn’t put those converters in to add cost – they were added to meet emission regulations.
I’m confused.
This article seems to imply that workers in America are American, not Mexican.
Perhaps that’s so in Indiana, but certainly not in the Southwest.
“It’s not the wages, it’s productivity. Honda has apparently made their associates assembling Civics in Indiana productive enough to make their output profitable.”
Isn’t that because assembly lines are all automated these days ??!
NYT interactive map showing which models are assembled in the USA
http://www.nytimes.com/interactive/2009/06/19/automobiles/20090619-auto-plants-4.html
Columbus Business First said “for export to Mexico and 22 other Caribbean and Latin countries.”
Making a profit in Mexico is not a foregone conclusion, could be the loss leader. Making a profit in 22 other Caribbean and Latin countries is probable since there is no vehicle assembly there…
Honda does have a plant in Mexico. It is in Guadalajara. It originally started as a parts plant including a paint shop that only does bumpers. They now build Accords there, but in very small quantities (like 100/day). Honda Indiana is only running 1 shift, and they are looking for ways to utilize their full capacity.
Dodge builts A LOT of Ram trucks in Saltillo. Many of those are exported to the USA.
It is my understanding that Ford will build the Fiesta in the Wayne, Michigan plant that used to build Expedition/Navigator. They’ve moved Expedition/Navigator to the Super Duty plant in Louisville, Kentucky and I believe they used the Dept. of Energy retooling loan to convert the Wayne plant.
It’s not the wages, it’s productivity.
Exactly. Productivity determines wages. Higher productivity does mean, however, that you need fewer people to do it, so people have to be let go and find other jobs. (Eventually this helps the economy, but people don’t like changing industries or jobs, understandably.)
The UAW fought productivity increases, the personnel losses that would come from productivity increases, and any wage cuts.
Yes, Honda had an advantage, because if the number of workers needed to staff a plant went from 2,000 to 1,000, they were starting from 0 workers and could hire 1,000, instead of GM starting from 2,000 people at a plant and needing to cut down to 1,000 workers as it increased productivity.
But it’s still the root of the problem.
Honda may simply be filling some excess capacity it has at its Indiana plant. If the fixed costs of the plant are absorbed by selling Civics in the domestic market, Honda can price the export Civics at its marginal cost (i.e. excluding the overhead costs of the plant) and still make a profit.
Cammy’s argument would be more compelling if the price of the export Civics was at the same price as the domestically sold Civics, or if the U.S. plant was devoted entirely for export production.
As for Honda’s profitability, it essentially broke even in the last quarter, and lost almost $2 billion in the prior quarter.
make Detroit make it worth the taxpayer’s while and return production from low wage countries such as Mexico to the United States.
How would losing more money make it worth the taxpayers’ while?
This would have two effects. More US citizens would be hired and the Government’s trade deficit would be reduced
No, bad economics. Fewer US citizens would be hired overall. More UAW members would have jobs, but fewer US citizens would have jobs in sectors of the economy where the US has a comparative advantage. US wages would be lower than if the production moved to Mexico.
The Government’s trade deficit would be increased, because the US would be making more of something made inefficiently and with low productivity here, and less of other things that are more efficiently made here.
Your rallying cry is apparently that we should send Google and Microsoft and the software industry to other countries, instead focusing on making cars.
I fear the politically correct mind-set mob if made aware of car plants purposefully placed within the USA vice below the southern border would accuse those involved and those approving of that action as being “racist” and being “full of hate against ‘brown people’.”
No, bad economics. Fewer US citizens would be hired overall. More UAW members would have jobs, but fewer US citizens would have jobs in sectors of the economy where the US has a comparative advantage. US wages would be lower than if the production moved to Mexico.
Nonsense.
johnthacker
I get the whole comparative advantage thing, but automobile manufacturing is not a low value added, low tech, low wage business.
It is an industry we should want and be glad to have. We are and will remain a car based society (at least for the forseeable future), and there are millions of cars to be sold and billions of dollars to be made well into the future.
There is nothing inherently wrong with America that says we can’t build cars. It’s the horrible mismanagement of the Detroit 3 car companies that led to the downfall. Most of the transplants, staffed by American workers, are doing pretty well for themselves.
If it was so disadvantageous to build cars here, there wouldn’t be a single transplant and all the Japanese and Korean companies would be exporting from home or from China or Mexico.
BDB
I read somewhere, maybe it was here, that one of the reasons for FIAT’s interest in Chryco was the Mexico plant. FIAT can use that to build and export to Latin America and avoid tariffs.
I actually admire Honda as a company. Created by a brilliant engineer, built by engineers, and still to today run by engineers. This focus on the product over short term profits and market share as helped Honda grow a legion of dedicated buyers. Honda often takes care of its buyers even when it does have defects. Take the 94-97 Accords had a rear main seal defect that would actually not go bad until 60k+ miles. Honda still did a complete recall on this (one blew out on my Dad while on vacation – he got a recall notice the next week in the mail and sent them the bill along with the timing belt service he had done at the same time – Honda paid it all). I don’t recall any other MFGR who would do something like that. Even the transmission issues – Honda granted a 100k transferable warranty on all affected cars – take that my friend’s Mercury Cougar has had 3 trannys go before he reached 110k miles – all out of warranty.
Honda’s laser focus does has its drawbacks though. Honda is often conservative to their own detriment. For instance Acura has never really grown b/c of Honda’s unwillingness to invest in the brand to get its own identity outside of value and safety. Now Acura is focusing on being the most fuel efficient luxury car maker (mpg has not really been the #1 concern of luxury car buyers). Styling is another severe letdown especially as of late with the bucktooth Acura grills and the Crossover (and that funny Facebook flap).
Comedian, that was some awesome stuff. I have’nt laughed that hard on TTAC since cicero was on his game. That was a great comment section after the article!
Assembly cost of a car are not that high. It is $1000,- to $1500 in total including the paintshop, which is expensive where ever you go.
Either we put plants in Mexico and employ Mexicans there, or we put the plants in the US and employ the Mexicans here.
The fixed costs of plant, equipment and tooling for a full scale auto factory are enormous. I’m sure Honda did the math and figured that it made sense to make more use of excess capacity in Indiana than it did to expand factories in Mexico and/or South America.
Companies often do foolish things by simply chasing labor costs. Honda isn’t perfect, but they do stupid much less often than most of their competitors do.
Honda has shown that small cars can be competitively made in the USA with the right workers, wages, productivity, and work rules.
However, GM / Chrysler invested in Mexican plants BEFORE bankruptcy allowed them to compete with Honda on that level.
Leaving Mexico might be very expensive. There’s the cost of moving (or selling – say hello to MORE North American plant overcapacity!) the Mexican plants – not to mention the probable nasty political fallout.
Also, I’m certain Mexican labor law mandates some pretty hefty severance to workers (which is taxed at insane rates – which means it’s just a kickback to the Mexican government).
Honda’ big overcapacity is in it’s Japanese plants (which are REALLY taking it on the chin). They make no distinction between export and domestic Civics, (pricing issues, that is the Yen are the big reason in favor of supplying the US from domestic plants as much as possible.
Bringing Indiana online lets East Liberty (the old Ohio Civic Plant) concentrate on CRVs Elements and RDXs, which gets another cash cow (CRV) into the dollar zone. Alabama is building Pilots and Ridgelines as well as Minivans (which probably means Canada is building MDXs and Pilots on one line and Civics (including all coupes –vice East Liberty–) on the other. Marysville can cover TLs and Accords (which means the Inspire line in Tochigi is likely hurting for work).
The pattern seams to be, get North America balanced, then adjust the home plants (which are more flexible if more costly). They are in damage-control mode, but fortunately didn’t do much to inflate their market share these last couple years.
Cammy, I understand how and why your knowledge of the engineering history of the American auto industry is limited and has blind spots and holes, but I find it upsetting when you try to bluff your way through with “common knowledge” rather than acknowledging those deficits in your knowledge — and this is not the first time you’ve done it. Chrysler met U.S. emission standards without catalytic converters on many of their cars for about as long as Honda (~3 years) after the 1975 GM and Ford catcon rollout. And they did it using very different techniques, so it wasn’t a copycat effort.
I’m also curious why Mexico is a target for your ire in this post, but Canada is not. Will you please explain? Thanks.
“Even the transmission issues – Honda granted a 100k transferable warranty on all affected cars ”
Not true. Only some models had free extended warranty. Not the MDX. Not the 5 speed Odyssey. Not mine. Pampered and over maintained but still failed. I learned the hard way when my Honda transmission puked. Paid throught the nose. Thanks, Honda. I WILL remember.
Well, Ford wasn’t nationalized, so that would end your Focus, F150, Fiesta argument right there. But beyond that I see your point, if you’re going to nationalize why not just go all-out commie and through in some protectionism too. Chinese style local-content quotas, and huge tariffs (Obama’s already started with the tire makers). That oughta show those free-market lovin NAFTA bastards what for. Let the government control the means of production Comrade!
Also, Cooley is an excellent law-school.
Daniel J. Stern : Chrysler met U.S. emission standards without catalytic converters on many of their cars for about as long as Honda (~3 years) after the 1975 GM and Ford catcon rollout.
Yes, but, didn’t Chrysler do this by using an existing technology (i.e. secondary air injection)? Honda developed a new technology (CVCC, essentially a stratified lean-burn system).
In the end I would submit that stratified lean-burn taught Honda more about the design fuel efficient engines than air injection taught Chrysler.
@Morea:
Chrysler did it with their Electronic Lean Burn system starting in ’76 (they managed to do it with other strategies in ’75), but that’s not terribly relevant — they did it, so Cammy’s glib assertion that “Detroit said it couldn’t be done” is not correct. (And some of them had secondary air injection, but others didn’t.)
While Chrysler’s ELB was constrained by the state of electronics technology of the day and did not spring forth as a perfectly-developed technique, it did work. Moreover, it formed the basis for a large proportion of the engine management strategies — hardware and software — used successfully by a substantial chunk of the auto industry through the mid ’90s.
Thanks. I always like to learn more about the history of engine technology! Certainly electronics have played as big a role in emissions control as lean burn has (tho’ they are of course not mutually exclusive technologies.)
Fiat hopes to bring MultiAir to Chrysler vehicles. This is another interesting emissons/performance engine technology.
Morea,
You can read about Chrysler’s own independent lean-burn system here:
http://www.allpar.com/mopar/lean-burn.html
“Lanny Knutson wrote in the Plymouth Bulletin (reprinted by permission):
A new electronic spark advance module called Lean Burn was introduced by Chrysler [in 1976] on all its 400 and 440 engines. Six sensors monitored the engine RPM, manifold vacuum, water temperature, ambient temperature, intake air temperature and throttle position, sending the data to a small computer unit mounted on the air filter housing. A pioneering version of what is now under the hood of nearly every contemporary car, Lean Burn was designed to avoid the driveability problems usually arising from manually leaned carburetors. Although it gained approximately one mile per gallon, the primary purpose of the system was controlling emissions inside the engine. For a time, it permitted Chrysler to avoid use of expensive power-robbing catalytic converters. In 1977 Lean Burn was extended to the 360 engine. [It was later put onto the 318 and Slant Six before.]”
Thanks windswords!