## Study Examines Short-Term Economic Impact of Worst-Case Scenarios for Contraction of Detroit Three

##### 18 November 2008
 Projected job losses—direct, indirect and spin-off—under two contraction scenarios. Click to enlarge. Data: CAR

Researchers at the Center for Automotive Research (CAR) in Ann Arbor, Michigan, estimated the short-term (1-3 years) impact on the US economy would be substantial were all—or even half—of the three Detroit-based automotive manufacturers’ US facilities to cease operations. CAR has carried out the majority of national level automotive economic contribution studies completed in the United States since 1992.

The immediate impact to the economy would be felt well beyond the Detroit Three companies, negatively impacting the US operations of international manufacturers and suppliers as well. Nearly 3 million jobs—239,341 jobs at the Detroit Three; 973,969 indirect/supplier jobs; and more than 1.7 million spin-off (expenditure-induced) jobs—would be lost in the first year if there is a 100% reduction in Detroit Three US operations, according to the study.

The 100% contraction scenario also results in a reduction of US personal income by more than $150.7 billion in the first year, and generates a total loss of$398.2 billion over the course of three years.

Our model estimates that a complete shutdown of Detroit Three US production would have a major impact on the US economy in terms of lost wages, reductions in social security receipts, personal income taxes paid, and an increase in transfer payments. The government stands to lose on the level of $60 billion in the first year alone, and the three year total is well over$156 billion.

—Sean McAlinden, CAR chief economist and the study’s leader

CAR modelled two scenarios: the Detroit Three automakers ceasing all operations in United States (100% contraction scenario); and a 50% reduction in overall Detroit Three employment and production in the US economy, an event that probably would involve a contraction by two of the domestic automakers. The circumstances are such that either of these scenarios is possible, and indeed one or the other is probable, within the next 12 months, according to the study.

The researchers generated the estimates of economic impact through the use of an economic/demographic forecasting and policy simulation model constructed by Regional Economic Models, Inc. (REMI). The model captures three types of employment impacts: direct, indirect and spin-off. The model was calibrated using public and proprietary data on automotive industry employment, wages, price and capacity. Simulations estimating economic impacts on the US economy were run for three years after the assumed initial change in Detroit Three operations.

The contraction scenarios explored in this memo should not be interpreted as representing the economic activity that would be lost if the automotive industry never existed in the United States. The two scenarios represent short-term shocks that would affect all auto producers in the United States and that would be mitigated over time by gradual increases in domestic production by international automakers and surviving Detroit Three capacity.

—CAR Research Memorandum

The CAR authors assume in the 100% contraction scenario that not only does domestic production by the Detroit companies fall to zero in the first year, but that domestic production (in the US) by the international producers also falls to zero due to a major wave in supplier bankruptcies (“supplier shock”). The collapse of a domestic market for suppliers coupled with the reality that few auto suppliers serve export markets would result in manufacturing utilization rates below 50%, forcing suppliers to restructure or liquidate, according to the report.

The scale of the contraction of the Detroit Three would overwhelm any attempt by the international producers to keep their existing suppliers in business or to find alternative suppliers, here or elsewhere. US consumers would be forced to rely on only imported vehicles as a source of new vehicle purchases in the first year. However, we do not assume that the international automakers in the US lay off their employees at any time. We also assume that by the third year, the international producers are back at full operational capacity and have expanded to at least take up some of the lost Detroit Three production (20 percent of former Detroit output).

For the second scenario, CAR assumes that Detroit Three production and employment falls by 100% in the first year but recovers to 50% in the second and third years. CAR assumes essentially the same first year supplier crisis for all automakers in the United States, with production by the international automakers falling to about 50% in the first and second years. CAR also assumes that the international producers would recover fully by the third year and that the surviving Detroit companies would restore production to 50% of the former combined level by the second year and maintain this level in the third year.

The 50% scenario results in a first year total employment impact of a loss of nearly 2.5 million jobs in the US economy, comprising 239,341 jobs at the Detroit Three; 795,371 indirect/supplier jobs; and more than 1.4 million spin-off jobs. The employment picture recovers in 2010 (1.5 million lost) and 2011 (1.0 million jobs lost), due to the resumption of US production by the surviving Detroit Three producer and international automakers, and the process of dislocated workers finding new employment.

In economic terms, the 50% cut in Detroit Three US operations would reduce personal income by more than $125.1 billion in the first year, with a total loss of$275.7 billion over the course of three years.

Debate over the shape of a bailout package for the Detroit Three began this week in Congress.

Resources

>One way that GM could survive may be to close shop in >USA and produce elsewhere.

Then there is no reason to bail them out.

so lets say I buy a $20,000 car from one of the big 3 -- My guess (and I'm guessing) is that it cost about two thousand dollars to pay the assembly line worker. So if the big 3 renegotiated their contracts with the UAW such that the cost to employ an auto worker was cut in half, the big three would save a thousand dollars per$20,000.00 car. I can't think of a single car I would buy from Ford, GM or Chrysler for $19,000 that I wouldn't also be willing to buy for$20,000. Even if the UAW decided to work for free and every $20,000 car the big three is currently selling suddenly cost$18,000, I still can't think of a car that would suddenly be worth buying.

I know its fun and easy to bash organized labor, but you should really resist the temptation to do so because they aren't the problem here.

Can anyone find the labor cost in a car?
Take any midsized car like an Impala.
It would be interesting to know how much they would
be saving.

Someone at 1:36:12 forgets that those UAW assemblers put the vehicle together from parts made in other UAW plants. So everything going into final assembly costs more.

I will guess the UAW burden is about 20% of cost billed to the dealer. But from years of cost analysis I know the costs can be argued for decades.

But there is no sense worrying about what labor costs are as long as they cannot or will not be reduced. That is the gist of the bail-out v. bankruptcy argument.

A bail-out have almost any effect depending upon how sensibly it is planned and done. A bankruptcy cuts costs, period.

Bob: I have never seen labor costs per model. The industry publishes labor hours per vehicle. That isn't what you want. The labor cost per model will depend upon what plant assembles it; they may have senior workers at maximum earnings or a more junior mix.

And costs per unit depend upon how many units you are making. Key cost points are adding or stopping a second or third shift, and going to overtime.

Some models are going to need more hand detailing. I would say the older the model the less automated and the poorer the tolerances.

Productivity increases of 3% are a reasonable guess. If a model is 5 years old it is costing about 20% more than its replacement for direct labor.

Look you guys. You might laugh at Stalin's idea for collapsing America from within but we think it entirely possible. First, we need better quality properganda. We need more people making biting comments about the financial crisis. Then we need to warn about the impending technology crisis. After that the spiritual crisis e.g. all the g*y marriage, ab*rtion and opi*te of the masses issues. Finally a healthy dose of mad cow and bird flu catastrophe is needed.

By following this formula and regular pithy, denigrating remarks on this pivotal computer web page - we shall overcome the great satin. And sleep in comfort forever.

Most of you commenting know squat about the biz side of auto. UAW labor at OEM is about 8% - 12% of the cost. Go look at Harbour hours and do the math - it's really simple for you engineer types and even a screw turner like me gets it. BTW, you will find out the UAW/CAW plants DOMINATE the Harbour productivity rankings, so think about that transplant lovers.

Most other parts are NON-UNION or Mexico. You could look that up too, the industry level data is on the net - search for union density.

You are entitled to your own opinion but not your own facts.

Bob Tasa:

Yes, bailing out the big-3 current USA's losing operations would be a waste of $$B. Supporting some of the transition cost, to go from ICE to Electrified vhehicles production, looks better but not with the current managers and 71/hour workers. Bankruptcy (of the Big-3 USA based operations) may be the only way out. GM and Ford operations could continue in other countries and supply part of the USA market with their off shore plants. Unless Chrysler can build affordable electrified Vans and Jeeps, closing shop may be unavoidable. Other more efficient manufacturers could build electrified vehicles locally at lower cost than GM-Ford-Chrysler. Alternatively or as a complement, USA may have to import 10+ million electrified vehicles a year or most of the components and sub-assemblies. The$$B bail outs would be better used by investing in large highly automated advanced batteries plants across USA. There is a huge future market.

Trying to extend Big-3 business as usual or the status quo with $$B or$$$B will not cure the deeply rooted problem. A shock treatment is required. Waiting 6 or 12 months will just make it more painful. Bob: Incidently the Impala seems to take about 17 hours for assembly. That is surprisingly good among the rankings. At$70/hour it runs just under $1200/car. I'll use$70/hour. GM says they are at $69 just now. And I'll be doing some other rounding too. Precision won't be found here. If GM is paying$70, Toyota says they are paying $48. Yet GM says Toyota is paying$53. Readers should by now be seeing how this cost game works.

If GM doesn't know Toyota's costs to within 10% then how can I?

The Impala figure is from the Harbour Report. I was interested in what Factory Rat said and found the report on Google.

Nomenclature: Productivity is product per worker hour. It has nothing to do with wage levels. The statistic is HPV for vehicles - hours per vehicle.

Factory Rat is a little off about productivity. The UAW/CAW plants do well on productivity and some do very well. GM has almost caught up. Honda and Toyota are at the top.

Considering that GM produces a much wider range of models a higher HPV is to be expected. The ideal for anyone is to make one model, one color, no options.

Now getting even more general about General Motors. They have about 60,000 hourly workers in union contracts. At $70/hour and 2080 hours per year we get$145,600/year. This is $8.736B GM is paying yearly. This years GM expected to produce about 4M vehicles or$2184/vehicle. They won't produce that many, let's call it $2200/vehicle. So that anonymous guess of$2000 for the assembly line was pretty good.

Back to total guessing. How much do the components cost? Some are made in Canada, others in Mexico, and some in GM plants right here in the US. And some in non-union plants in the US.

I'll take the factory rat figure; the low end was 8%. And again guessing, $12K in parts/vehicle assembled equals$960. We have arrived at $3160/vehicle for union labor. Leave it at$3100.

Remember that Toyota number of $48/hour? That is a 70% of GM's labor cost or$2170/vehicle. Advantage Toyota of roughly $1000/vehicle. Even if we take the old GM cost of$73/hour or $53/hour for Toyota we won't move the GM UAW handicap very far from$1000/vehicle. And that seems low.

So what is going on? Possible answers will follow?

continuation of GM/UAW costs.....

If GM is paying $1000 more per vehicle for union labor then why do we hear numbers far higher? Reason 1. All this is an estimate. Does GM want the cost to be high or low? Does the UAW want the price to be high or low? Things to consider: GM borrowed a lot of money to fund that UAW medical fund which becomes effective in 2010. GM will consider repayments of that money as a UAW cost. The UAW will not; they will say it is history. GM has to pay UAW workers it lays off. GM would say that is a union cost. But the UAW will say "Those people are ready to work. If you don't use them then don't say they are a cost of producing. They are a cost of poor management planning." Some of these costs will fall in 2009 and end by 2011. And the UAW has made some concessions in work rules. GM pays on-site union representatives. GM would consider that a union cost. The UAW is unlikely to want that in HPV. Whether it is I can't say. Better numbers are no doubt available. But life is too short. At$1000/car the UAW costs GM $4B more a year. The last time I looked GM was losing many times that$4B amount. The debt has them now, and the economic downturn, and tight credit, and dealers contracts that can't be changed, and executive overhead, and, and, and....

So I'll go back to my statement of yesterday. Costs don't matter if you can't reduce them. Bankruptcy will reduce costs. A bail-out is a lump of political jelly whose taste we don't know.

About 30$per hour FIXED LEGACY costs GM is paying per hour (over what Toyota plants is paying, because 10-years old Toyota plants do not yet have retirees) is close to 1000$ per vehicle, in good years. In 2007 GM lost about 1400$per vehicle – 2/3 because of legacy obligations to retirees. Now, with double amount of dealerships (State laws prohibit retiring of dealerships), fixed legacy costs the same as in good years, and inability to fire employees (“job banks”), GM is bleeding probably 2500$ per vehicle, because of stupid LEGACY OBLIGATIONS to the UAW.

Both sides, UAW and GM management are responsible for creation of such time bomb, sure to explode during recession.

One could ask why GM totally went into truck/SUV market? Japs did not have it at the moment, and it was 5-years window of opportunity to GM to be profitable due to ability to command high profit margin on such vehicles. No conspiracy theories, just plain profit and survival.

Now, it is surprising how GM plants are close in productivity with new Jap’s plants in US, how close GM vehicles are in initial quality with Japs (Germans are far behind), and what small amount US taxpayers would pay to take these legacy obligations on the payroll (about half billion per month; compare with 700 billions US spent on freaking ass-hamping Iraqis in last 5 years). 10% is what makes it black or red ink at the bottom.

Labor costs are not the whole problem - they really are a minor part. Management is terrible also. Vehicle mix is awful and ability to change is poor.

The fact is in a severe recession - very few people need new cars. They have been discounted and free financing for years. They can't seem to survive a 5% decrease in sales, let alone a 50% decrease. Someone needs to go away. I have a prediction - car sales will continue to decline. Wow - I'm a genius. None of the detroit 3 in current form can survive a sustained 50% decline in sales - therefore bankrupty is the ONLY option. Anytime we try to soften the cyclical blow, we distort reality and waste resources (right wing "theory" - called capitalism).

The comments to this entry are closed.