ECONOMIC ANALYSIS: Rising costs, lower prices sting domestic carmakers

March 13, 2006

As predictions go, it's not a particularly difficult call. The trends are unmistakable, and the precedents in other industries are clear. Yet the silence on the part of workers, executives and even analysts on the issue bespeaks the pain, anger and denial that lurk just beneath the surface.

The situation is this: In a very short span of time, perhaps as little as two or three years, the era of the highly paid automobile industry production worker will come to an end. The industry will likely remain healthy, although some individual companies will not. The jobs themselves will not disappear, although the downward trend of the last two decades in employment will continue.

But the production jobs in the Big Three automakers, as well as in many first-tier suppliers, with their respectable base pay, premium benefits, highly structured work environments and company-paid retirement plan available after 30 years, are about to see what can only be called a radical change.

In a situation that closely resembles the airline industry, Ford and General Motors are playing the part of United-high-cost producers saddled with crippling labor agreements, locked in a cut-throat price war with more nimble competitors with much lower costs. If the companies are to survive-and that is far from certain-they have to cut their production costs 30 percent or more. And that will undoubtedly involve walking away from commitments that thousands of workers, retirees and even communities have grown to depend on.

It's been a tough recession for the Big Three automakers, certainly. But you could say the same thing about almost any recession since 1974. Indeed, the Big Three have lost sales and market share in every economic downturn since that time. And while the long-term trend in market share of Detroit automakers has been downward, the pattern up until now has been a recovery in both sales and market share in the wake of each recession that largely made up what was lost.

But recessions have been less frequent in the last two decades and, in between downturns, something has changed. Perhaps the most vivid signal of that change occurred in the mid-1990s, just as the Ford Taurus was being dethroned as the top-selling car by the Toyota Camry. Not only was the next model year's Toyota bigger, with a larger engine and a completely new design, it was also priced almost $1,000 less than the old model.

The era of passing higher costs to the customer came to a dramatic end that year. Yet the mind-set of those on both sides of the bargaining tables in Detroit did not. In the latter half of the 1990s, the price index for new automobiles-which corrects for quality and improved features-registered zero growth, even as wage costs rose and health and retirement benefit costs skyrocketed.

But in the new decade, the news became even worse-when corrected for quality, new-car prices have been trending down since 2000. It's the same kind of cost squeeze that has ravaged other industries in the past, resulting in bankruptcy, restructuring and even the demise of companies once thought to be unsinkable.

Despite the rhetoric of workers and executives, salvation is not one "hot" selling product away. The pride of industry leaders is taking a beating with every percentagepoint decline in Big Three automakers' market share, certainly. But the death blow of the status quo in the domestic auto industry will come from costs, not volume.

For Midwest states like ours, it is a daunting prospect. For Michigan, a state that has lost jobs for six straight years, it threatens an entire way of life. Is there a silver lining for Indiana? That will have to wait until next week.

Barkey is an economist and director of economic and policy study at the College of Business, Ball State University. His column appears weekly. He can be reached by e-mail at pbarkey@ibj.com.
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