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Article published July 6, 2009

Foreign automakers in U.S. take different tack in slump
Firms steer clear of layoffs as they cut output

Employees who make the iconic Jeep Wrangler went back to their jobs last week after a two-month layoff at Chrysler Group LLC's Toledo Jeep Assembly complex, returning to a new company with new ways of production.

But as the global meltdown of the automotive industry continues, foreign auto companies are taking a different tack with their employees than did Chrysler, General Motors Corp., and Ford Motor Co. Instead of long periods of layoffs, the permanent workers of foreign automakers are still collecting paychecks, albeit smaller ones in most cases.

"The international automakers have two types of employees: permanent employees and contract or temporary employees," explained David Cole, director of the Center for Automotive Research, a respected auto industry think tank in Ann Arbor. "When things get soft, the temporary employees are gone, instantly."

Almost all of the 16 nonunionized plants in the United States owned by foreign automakers have reduced their production in recent months, have cut or eliminated their temporary workers, and have reduced their hours.

They've offered buyout packages to older workers and slowed production lines in some cases to respond to the biggest drop in auto sales in decades.

The moves match cuts that the foreign automakers have made in their other plants around the world, including those in their home countries, analysts and company officials say.

U.S.-based automakers are fighting an uphill battle to compete in a shrinking global marketplace against companies from low-cost countries with restricted markets, such as South Korea.

Policy experts, such as Mr. Cole, suggest the auto industry crisis crippling two of the three domestic automakers is decades in the making and won't be fixed until lawmakers decide whether the United States should continue to be in the business of building things.

"We're the only industrialized economy in the world that, at a policy level, doesn't understand manufacturing," Mr. Cole said. "We think tech is really neat or financial services are really neat, but tech or financial services are only valuable as they relate to something that has value - something that is made."

The world's largest automaker, Toyota Motor Corp., this year posted its first annual loss in 70 years.

In both Japan and the United States, the automaker has eliminated tens of thousands of temporary workers, idled plants, and altered production plans to deal with the economic climate.

But, like other foreign automakers, it didn't lay off anyone, Toyota Motor Sales USA spokesman Mike Goss said.

"We used the time for training and for plant activity," he said.

But the company also cut hours - and pay - by 10 percent for its hourly work force and delayed plans to open a plant in Mississippi.

"It's not just the domestics that have been down," said Kim Custer of the Association of International Automobile Manufacturers, a trade group that represents most of the foreign automakers operating U.S. plants.

When the North American automobile market collapsed last year - sales of automobiles in 2008 dropped in America to the lowest level in more than two decades - the rest of the world followed suit.

"Japan's exports of [automobiles] are down 75 percent," Mr. Cole said. "The international automakers have stopped growing. They're all in trouble, but they're all getting support from the governments in their home countries."

During its most recent quarter, Japan's automobile exports to the United States were down 27 percent, exports to the European Union were off 25 percent, to South America were down 29 percent, and to Central America off 27 percent, according to data compiled by the trade magazine Automotive News.

American Honda Motor Co. was the first Asian automaker to begin building automobiles in the United States when it opened its first plant in Marysville, Ohio, in 1982.

Honda made cuts this year, eliminating almost all of its "contingent" or temporary work force and announcing rolling shutdown days to "keep inventories balanced with consumer demand," spokesman Edward Miller said.

It also offered retirement incentives to its workers similar to - but not as lucrative as - those offered by GM, Ford, and Chrysler to their unionized work force.

"We've kept everyone working to the extent that we could, with the realization that the market's been bad for everybody," Mr. Miller said. "We'll be back to full five-day production on a consistent basis pretty soon."

The workers in the foreign-owned plants add smaller labor costs to their vehicles than do higher-paid workers of American car makers. "With respect to labor relations, the transplants have huge advantages - not tens or hundreds of dollars per vehicle, but thousands of dollars per vehicle," explained Jim Hossack, a consultant with AutoPacific, a West Coast automotive think tank.

The concessions adopted by the United Auto Workers this year as Chrysler and GM faced bankruptcy have "evened the playing field somewhat," Mr. Hossack said. "Are they truly level? No, but they're less unequal than they were."

Foreign automakers are moving forward with plans to increase their production capacity in the United States.

A study released last week said that with the decreased production planned by the domestic automakers and the ramp-up of vehicle-making by the foreign firms, European and Asian automakers are expected to build more cars, pickup trucks, and sport utility vehicles in North America than are the Detroit Three automakers by 2012.

The Grant Thornton study said GM, Ford, and Chrysler will reduce assembly capacity in North America by 35 percent to 7.5 million vehicles by 2012, while foreign car makers will increase capacity by 20 percent to more than 8 million units.

BMW of North America LLC opened its first and only U.S. factory in Greer, S.C., in 1994, employing about 5,000 to make the luxury Z3 roadster for worldwide distribution. Last year, BMW announced a $750 million expansion to the plant, which now makes the X5 and X6, to make the X3.

South Korean car companies Hyundai Motors America and Kia Motors America have been two relative success stories as the rest of the automotive industry has collapsed worldwide. Both nameplates had sales increase in 2008 before falling to the same infection this year that has plagued the rest of the industry.

At the Montgomery, Ala., Hyundai plant, employees are working four-day weeks and being paid for 32 instead of 40 hours, said Robert Burns, a spokesman for the plant.

"This is what's working for us," Mr. Burns said. Workers "maintain their full benefits, and that's a big plus. They just had to adjust their lifestyle a little bit while we wait for the economy to pick up. We just feel fortunate that we haven't had to shut down for 60 days at a time like other folks in the industry."

Kia, which is owned by Hyundai, is putting the finishing touches on its first plant in the United States, a $1 billion facility in West Point, Ga., to open this year and build a midsized crossover utility vehicle. Spokesman Alex Fedorak said the plant received more than 43,000 applications for the 2,500 positions the plant will require.

Although foreign automakers are given largely free access to the U.S. auto market - the largest and most lucrative in the world - many of their home countries aren't as open to U.S.-made products, according to the U.S. Department of Commerce's International Trade Administration.

Impediments include higher tariffs and restrictions on the number of imported vehicles allowed.

South Korea, for example, home country of both Hyundai and Kia, imposes an 8 percent tariff on imported automobiles and additional taxes on vehicles with larger engines, such as the Toledo-made Jeep Wrangler, the U.S. trade administration said.

Germany, home to BMW and Daimler AG, imposes a 10 percent tariff. Japan imposes no tariff. The United States imposes a 2.5 percent tariff on most cars and 25 percent on trucks, except those that come from nations with which the United States has a preferential trade agreement, such as Japan and Germany.

Taxes on automobiles, separate from tariffs, also factor into competitiveness issues, especially given that many nations tax autos based on the size of their engines, their weight, and other factors that tend to be disadvantages to most American autos.

"The tariff and tax system in South Korea can double the cost of a vehicle with a large engine between when it passes through customs and when it reaches a customer," said Lorri Crowley, a spokesman with the International Trade Administration.

Congress has yet to approve a U.S.-Korean free-trade agreement that was negotiated in 2007 by the Bush administration.

The U.S. automakers now are limited by how many vehicles they can sell in South Korea, and they have reached the maximum.

Chrysler sold 4,100 vehicles in South Korea in 2007 - more than Ford and GM combined, Chrysler executives told Congress last fall. Yet, "three local Hyundai dealers in the U.S. sold more cars through their individual dealership in 2007 than Chrysler, Ford, or GM sold in the entire Korean market," Chrysler Vice President John Bozzella told a Senate panel in a hearing last fall.

He said "80 percent of the $13 billion U.S. trade deficit with Korea is autos."

The United Auto Workers also contends it is an unfair playing field. They point to the fact that Japanese automakers control 94 percent of their domestic market while Korean automakers control 96 percent of their domestic auto market, compared to a less than 50 percent market share for U.S. manufacturers here. Such control stems from import restrictions in those countries.

UAW President Ron Gettelfinger told a Senate panel in September: "In 2007, Korea exported 668,000 vehicles to the United States. But U.S. producers were only allowed to export 6,500 vehicles to Korea.

"A total of only 27,985 cars were imported into Korea from all other countries," he said.

Local union officials agree that trade policies have hurt the export abilities of vehicles such as Toledo's Jeep Wrangler.

"If our vehicles were being treated fairly in those other countries, those figures wouldn't be so lopsided," said Ken Lortz, Ohio regional director for the UAW. "We're not asking for protectionism. We just want everybody to compete under the same rules."

Analysts warn that, even as some autoworkers such as those who make the Wrangler go back to work, the worldwide crisis that brought unprecedented cuts to the auto industry isn't done.

"It is not over. This is nowhere near over," warned Jim Hall, a veteran auto analyst and owner of 2953 Analytics in suburban Detroit. He says the foreign automakers with a manufacturing footprint in the United States are feeling significant pain from the worldwide auto downturn.

Mr. Hall said foreign automakers with the largest North American presence such as Toyota, Honda, and Nissan "have become overly dependent on North America for profitability, and as a result, when the U.S. market gets a cold, they now have the plague."

Annual North American sales won't return to the 16 million or 17 million vehicles-per-year mark "until the middle of the next decade," he said. Sales this year are on pace to be at 10 million or fewer.

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