Economics 244: The Auto Industry

I begin teaching a 4-week-long auto industry seminar today; David Ruggles, this site's co-blogger, visits at the end of the week. For the syllabus etc go to the Econ 244 course web site http://econ244.academic.wlu.edu. I do not yet have detailed course readings, but will post my own economist's guide to the industry over the next 2-3 days.     ...mike smitka...

Costs in the Japanese auto industry

...it's not just OEMs...

Monday I was at the award ceremony for the Automotive News PACE Supplier of the Year competition, for which I've been a judge for the past 19 years; more on that in a later post. On Friday (19 April) I spoke on the Japanese auto industry at an UMTRI conference in Ann Arbor, Michigan. One data point was an overview of the industry; since I begin a new (4-week) term tomorrow (22 April), let me elaborate as indirect class preparation.

The auto industry is not just OEMs, but encompasses dealers and parts suppliers. For Japan, the Economic Census provides an overview of employment of various subdivisions. As in the US, the downstream industry is the largest source of employment. (Note I'm puzzled by the large level of employment at wholesalers; I have no answer.)

	Automotive Assembly	Vehicle Bodies	Automotive Parts
Establishments
2006	51	201	8,799
2007	66	210	8,979
2008	67	221	8,921
2009	72	198	7,996
2010	72	170	7,812
Employment
2006	176,662	39,661	633,297
2007	182,993	18,842	693,322
2008	182,707	18,503	664,257
2009	166,479	15,513	604,644
2010	161,158	13,402	612,193
Annual per worker cash compensation, ¥ million
2006	7.47	6.65	5.13
2007	7.32	5.05	5.25
2008	7.57	4.89	5.47
2009	6.92	4.73	4.92
2010	7.08	4.59	5.10
500+ workers	7.11	4.77	6.39
Source: Census of Manufactures (工業統計表). Wages are cash compensation divided by employment in establishments

Within manufacturing, the parts sector is the largest by about a factor of three. That's consistent with the US, where Thomas Klier and James Rubenstein found about a 3:1 ratio (Who Really Made Your Car? Restructuring and Geographic Change in the Auto Industry, Upjohn Institute Press, 2008). Now Census data represent classifications by those reporting, so miss the full count. In addition, I didn't include categories (e.g., piston rings) that aren't reported under "autos"; Klier and Rubenstein work with a much more comprehensive set of data. Hence the table at right underreports parts employment.

Finally, I include very rough data on compensation; mandatory benefits add at least another 20%. These data, alongside the employment data, provide a sense of the sharp downturn in 2009-2010, under the impact of the Lehman Shock (as it's called in Japanese). Reflecting lower bonuses (in larger firms the norm is 4.5 months or more pay) and cuts to overtime, compensation fell sharply in those years. I also give a row for cash compensation restricted to the largest size establishments; such locations would in almost all cases be unionized (though contingent workers – contract and part-time employees – would not normally be members and would receive lower pay and benefits).

Now as I write this the exchange rate is ¥99.8/US$1.00, or ¥1 is equivalent to a penny at market exchange rates. The average parts worker in a larger establishment, which account for 2/3rds of output, is thus about $64,000. Add in mandatory benefits and that rises to $76,000. Even at the April 21st exchange rate, that is far higher than the US; at the ¥80 level of last year, that would have been ¥95,000. While this would include engineers, at least if they were located in a manufacturing facility, it is a tidy sum. And it has obvious implications: even if the average worker is more productive than their US equivalent, Japanese workers have (on average) priced themselves out of the global market.

For recent data on the US industry, see the Bureau of Labor Statistics auto industry page: http://www.bls.gov/iag/tgs/iagauto.htm

...Mike Smitka...

auto industry picking up

Smitka and Ruggles are keeping busy with auto industry functions. The posts of Ruggles reflect on occasion discussions at one or another specialized industry conference – publications in auto dealership finance and so on make a goodly part of their revenue from running events that bring vendors and industry participants together. [We really ought to do an entry or two on the publication/conference niche!] He also is active in a variety of consulting activities with (varying across time) financial institutions, dealerships, specialized leasing businesses and even OEMs.

Smitka will finish the Winter term on Friday, and then teach a 4-week seminar on the industry this Spring Term at W&L (see the Econ 244 web site), including taking a dozen students to Detroit for a week. He'll also be in Detroit for the black-tie awards ceremony for the PACE supplier innovation competition, and to speak at an April 19th conference at UMTRI in Ann Arbor.

The upturn of the industry has slowed the ability of Ruggles to post frequently – good news in every way! At the other end, Smitka has been focused in teaching about the Chinese economy and a senior seminar on macroeconomics. With his work focus turning towards the industry, he'll be able to post more frequently the next couple months.

So be patient, and please continue to follow our blog!

Smitka & Ruggles