Does America Still Work?

Interview with Dan Luria, Economist and Management Consultant.

He thinks too many American companies are taking the low road.

photo of Dan Luria

Interviewed by Jeffrey Madrick

Q: How much progress have the auto companies made in the last five or ten years in terms of improving management methods, working with unions and employees and being as productive as any other company in the world?

Luria: I think they've made tremendous strides. Quality is clearly higher than it was, particularly in final assembly. Productivity is much, much higher. Ford and Chrysler made dramatic advances in the first part of the 1980s and GM has also done so in the first part of the 1990s.

Q: A lot of this has come as a result of being able to outsource the products they make: that is, in being able to buy parts and components, and to contract out processes to low-cost producers throughout the country and even in foreign countries.

Luria: Well, that's true, certainly true that all of the auto companies, and particularly Ford and Chrysler, now get much more of the value of each car from outside suppliers, but it's not obvious that those outside suppliers -- by virtue of their lower wages -- are necessarily lower cost producers.

Q: Then why do they do it?

Luria: Well, they do it in some places, because they believe mistakenly that they can get lower costs on the outside. Sometimes they can in fact get lower costs on the outside, and from their standpoint, it's really a question of how to use their scarce capital in the most productive way.

Q: Well, we've been talking to Chrysler and the CEO of Chrysler, Robert Eaton. Have they done a good job at their Kenosha plant, both in making the light truck engines that are made there now and prospectively in making a new engine they currently buy from Mitsubishi?

Luria: Chrysler has made a very real commitment to its core businesses, which it defines as assembly plants, stamping plants and power train plants -- power trains being engines and transmissions. The Kenosha plant was inherited in the takeover of AMC and made a series of engines which were not highly regarded in the industry, including the current, four-liter jeep engine. What's new at Chrysler is the commitment to make the new generation of truck engines in Kenosha instead of getting them offshore from Mitsubishi.

Q: Why are they making that decision?

Luria: Well, there's a number of reasons. One is that it makes a lot of sense to make engines, transmissions, most major parts in the United States now, because the dollar is relatively low compared to the yen and the mark. But it's also true that in engines and transmissions where there are very high capital costs, where each worker has a lot of equipment to work with, that wage costs don't really make a lot of difference. So if you're going to have plants that have all of this capital investment in them, then you want the absolute best work force you can get and the best work force is still found in metropolitan areas in the northern states, particularly in the upper midwest.

Q: What do you mean by the best work force? The most experienced?

Luria: It is the most experienced, and lest one think that people who work at GM and Ford and Chrysler and make twenty dollars an hour on the assembly line are simply lucky to be there and are no different from workers in supplier plants making seven dollars an hour, it's just not true. It's harder to do the work, the work is more complicated, the math requirements are greater. All of the auto companies have very, very complex screening processes to try to get the best applicants. Workers in high wage, capital intensive industries and companies are better workers. They've been invested in more. They bring more human capital. They're more skilled. A very high proportion of the new hires at Chrysler and Ford and GM in the 1990s have been workers with college education.

Q: Let me return to the issue of outsourcing. Chrysler outsources a lot of its parts, a lot of the components of the automobile, and some of the manufacturing processes as well. Why don't they do that in-house? Can't they apply the same methods and make the same productivity gains?

Luria: Well, Chrysler has made a decision that its relatively scarce capital can be best spent -- that is to say it will produce profit most efficiently -- if they focus on designing new models and on running world-class assembly, stamping and power train plants, and don't worry too much about having in-house expertise in the rest of the car.

Q: But aren't many of these outsourcing decisions made in order to find cheap labor elsewhere in the country or non-union labor.

Luria: Well, these decisions are made in order to get the parts cheaply, and it's true that in the last fifteen years the cheapest sources -- the best sources of cheap parts have typically been non-union supplier plants. But what's really happened is that in 1978-79 about fifty percent of independent auto parts suppliers were unionized. Today the figure is closer to twenty percent, so in some ways, from the standpoint of cost, the auto makers have simply been the beneficiaries of the bad luck of the labor movement.

Q: Well, couldn't you say that auto makers instigated some of the bad luck with the labor movement?

Luria: Well, in the following sense. When auto companies put out a part or a sub-system for outside quote, they're looking for the lowest quote they can get from a supplier -- a supplier they believe will be able to deliver the parts on time and with acceptable quality. But having said that, they then mercilessly go after getting the lowest price they can get, often even requiring that current suppliers give them regular three or five or seven percent price cuts year in and year out. And it's true that, given the option of going with non-union, cheap labor, often in new so-called "greenfield" plants, heavily tax abated by local and state governments hungry for jobs. It is certainly the case that what often happens is that faced with these price pressures, suppliers will opt to transfer production from their higher productivity union plants to lower productivity, non-union plants.

M: Are enough companies doing what Chrysler has tried to do in Kenosha and is even Chrysler doing enough of that throughout the rest of its business?

Luria: Not enough companies are doing what Chrysler is doing in Kenosha. And Chrysler deserves to be congratulated for making this kind of investment in a mature plant in a traditional industrial city with its current unionized, high-wage workforce. More companies should do that, and in many cases, companies that are not choosing to do that would be better off if they did. Many companies that choose instead to close those plants and move production to Mexico, for example, find that when they really try to take full account of all the quality problems that gives them, the cost of all those executives having to fly down to Mexico to address production problems -- when you add in all those logistical kinds of costs -- it turns out that essentially traveling the so-called low road is often no cheaper. But it's also the case that much of the economy is composed of simple commodity parts, and it's harder to find a winning recipe to make simple commodity parts with well-paid labor.

Q: Let me get back to that, but let's stay on this issue. Should a lot more companies, then, be trying to apply these same principles -- let's call them the Kenosha principles -- to what they do?

Luria: They should. Many more companies ought to understand that given an adequate level of capital investment, that even very high-priced labor can be a bargain.

Q: Why aren't they doing it?

Luria: They're not doing it for really three reasons. First, the very fact that they have the option of taking the low road, of going out and operating with unskilled labor and low investment in "greenfield" locations away from the cities and away from the influence of trade unions is a very, very hard temptation to resist. The second reason is that companies are very interested in making sure that their scarce capital resources are spent in the best possible way, so they are constantly looking for which activities are peripheral to their businesses -- ones they can simply stop doing.

Q: Is all this refusal, this inability, this unwillingness to apply these principles to reinvest and to try to keep high-wage workers, is it hurting the country?

Luria: Absolutely. The main reason why wages in manufacturing are falling in real terms for most of the workers -- discounting for inflation -- the reason why most manufacturing workers are today less well off than they were even twenty years ago is because of this strategic choice on the part of most manufacturing managers to choose a strategy of low wages and low investment. It's clearly bad for the country.

Q: Do many of them who make this choice literally have no other choice?

Luria: That's a difficult question. There are products which would be very, very hard to try to figure out how to manufacture, in ways that would permit high wages. To give you a simple example, it would be very hard to figure out how you would make a standard household broom in a way that would justify paying somebody twenty or twenty-five dollars an hour to make it. But for many other products, perhaps products accounting for half to three-quarters of everything which is manufactured, there clearly exist recipes that include high wages and high investment as an alternative to the low road.

Q: Is it simply becoming fashionable in corporate circles to take what you describe as the low road. Is it just the thing to do -- look for low wages and low investment production facilities, rather than high wages, good managerial techniques, high investment?

Luria: Here's how I think I would answer that. Doing the right thing is risky, and if the right thing involves making big investments in equipment, in old plants, in older workers, those are all things which carry risks. They carry risks because if a downturn comes in the demand for that product, you are now saddled with very high fixed costs. You've made promises that you have to keep. So there is a conservative bias against taking those risks, which leads to a preference for the low road.

Q: What's going on out there in corporate America? Why aren't more corporations willing to take on these high investment projects.

Luria: Well, there are two reasons that companies are more averse to risk than at any time in the past. As the economy becomes more globalized, the possibility that a mistake will be quickly capitalized on by a competitor is much more real now as a threat than it used to be. Second, there's tremendous pressure from stockholders and from Wall Street to show profits quickly. And any company that invests a lot of money in its facilities and it's work force is likely during the period that investment is made to show poorer financials than they otherwise would. And there are some very good American companies that have suffered tremendously in the capital markets because of doing the right things. Kummins Engine comes to mind.

Q: What did they do?

Luria: It's a company which has made a decision to be a high-road company. And as a result, it's found it so difficult to be treated with any respect in the capital markets that it's had to sell pieces of itself to its major customer, simply to remain viable.


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Solitary NationApril 22nd