U.S. automakers in price squeeze
Source Charles Brown
Date 04/06/04/10:45

June 4, 2004


The U.S. auto industry is facing the same dilemma that other troubled
industries like clothing makers have for decades: They can't raise prices
despite rising costs, a just-released comprehensive study shows.

Like those other beleaguered industries, automakers have to respond by
continuing to send more work and jobs overseas, say experts.

Clothing and appliance makers have been dealing with overseas competitors
for years and responded in the 1980s and '90s by moving work to low-wage
countries like China, Taiwan or Mexico. Today, U.S. automakers are facing
the most intense competition ever from foreign automakers like Hyundai or
Toyota, limiting the ability of General Motors Corp. or Ford Motor Co. to
raise prices.

While the cost of nearly everything from health care to food has gone up the
last decade, the auto industry has been able to raise its prices by only 0.1
percent since 1994. By comparison, the price of personal-care products rose
10 percent since 1994; food prices rose 25 percent and college tuition
prices rose 61 percent. Health care, a multibillion-dollar expense at
Detroit's three automakers, rose by 43 percent.

Meanwhile, automakers are putting thousands of dollars in new technology,
like DVD systems or safety equipment like air bags, into each of their
newest cars and trucks, but can't charge much more for their products than
they did a decade ago. That's the conclusion of the study done by the
international consulting firm AlixPartners and presented last week to 75 top
auto executives.

The study, which also tracked profits, production and other trends at 22
automakers and nearly 150 auto suppliers worldwide, again shows that the
U.S. auto industry, headquartered in Detroit, is undergoing massive
shake-ups and cost-cutting in the face of global competition from China,
Japan and Korea. Automakers like GM and Ford are following decades-old
cost-cutting paths taken by appliance makers like Whirlpool or clothing
designers like Polo, say business experts.

To be sure, this is good news for U.S. car and truck buyers, who are able to
buy new vehicles with better safety features, better technology and more
gadgets than ever and not pay much more for them. This pricing pressure was
evident this week when GM announced $5,000 rebates on 2003 and 2004 models
through August, while Ford offered $5,000 rebates on its 2004 Freestar

For automakers, suppliers and their millions of retirees and employees, this
pricing pressure means dramatic changes that result in lower wages, smaller
benefits and fewer North American jobs. GM, as one example, has shrunk from
213,000 employees in North America in 2000 to 190,000 as of Dec. 31, 2003.
Its Asia Pacific workforce has grown from 11,000 to 14,000 in the same

"The U.S. automakers have to do more with less. The industry has become
globalized so they can't just be competitive with U.S. automakers; they have
to be as efficient as automakers in other countries. It means the auto
industry has to transition, so the number of workers in the United States
shrinks, including blue-collar workers in the plants, to call centers and
accounts payable," said John Hoffecker, head of AlixPartners auto practice
in Southfield, which oversaw the study. "The automakers have to reduce costs
every year by taking out people or leaning on suppliers for lower prices or
buying more parts overseas, the way toymakers or bikemakers did in the

He said this dramatic change in the auto industry -- where more parts are
made overseas in lower-cost countries like China or India -- is the same
thing other industries went through.

"Whenever an industry goes through this kind of transition, there are
challenges and changes and shake-ups. The good news is our country has
always handled this in the past. It's the natural evolution of industry in
this country," said Hoffecker.

Hoffecker's study notes that China, with a population estimated at 1.3
billion people, has roughly 151 million people working in manufacturing and
willing to do the same manufacturing that is done in the United States.
That's more manufacturing workers than in developed nations like the United
States (34 million), Japan (22 million) and Germany (14 million) combined.

Manufacturing workers in China make about 3 percent of what U.S.
manufacturing workers make, or about $250-$300 a month, according to the
same study.

"With apparel, a lot of clothing makers realized they must go abroad and
make it in Bangladesh or some other undeveloped country if they want to get
their clothes sold in Wal-Mart," said Peter Morici, a University of Maryland
business professor and a former economist at the International Trade

The elimination of textile or apparel jobs has devastated some cities in the
south, namely in North and South Carolina. An investigation by the Charlotte
Observer newspaper found that in just one year, 2001, about 23,000 textile
jobs were eliminated in the Carolinas, or about 11 percent of the industry's
Carolina workforce.

Morici and other experts said the auto industry likely won't move overseas
as fast as the apparel industry. This is because building new cars and
trucks is "more complicated and requires more skills and more machinery than
making underwear," said Fred Crawford, a New York-based apparel and retail
expert with AlixPartners.

"But that said, the move overseas will happen, it just may take longer,"
Crawford said. "Early on, workers in China could only make knock-off shirts
of bad quality. But after a decade, they got to a point where they could
copy anything done here."

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