The Price of Hope in the Mayhem of Manufacturing

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In what may be a precursor of a monumental shift, Toyota and Honda are planning to export U.S.-made vehicles to South Korea. Honda, which is already selling U.S.-made Accords in South Korea, is considering selling more U.S.-made cars there, CEO Takanobu Ito told reporters in Seoul today. And Toyota announced last week that it would sell U.S.-made Sienna minivans in South Korea. Apparently, the math changed, and now it’s cheaper to produce cars in the US and ship them halfway across the world than it is to produce them in Japan.

Is the Fed’s war on the dollar and on real wages finally “paying off” so that manufacturers can shift production to the US from other developed nations? And to what banana-republic levels will the dollar and real wages have to sink before US manufacturing is competitive with developing nations? There are already 49.1 million Americans who live in poverty, according to the supplemental Census test. At what wages will American workers be competitive with Chinese workers?

Back to the Japanese automakers. The strong yen is annihilating the cost competitiveness and profitability of manufacturing in Japan. Toyota’s brutal quarterly earnings announcement yesterday attested to that: revenue down 5%, operating profit down 32%, and net profit down 18.5%. Through October, Toyota’s US vehicle sales were down 8.8% from the same period in 2010, and Honda’s were down 5.3%, while the US market was up 8.6%. The irony of their move to export from the US to Korea is that they both have gotten clobbered by Korean automaker Hyundai-Kia, whose combined US sales jumped 26.5% over the same period, after an already brilliant 2010.

Honda’s and Toyota’s problems have been blamed on the March 11 earthquake and subsequent production shortfalls. Their customers were said to be sitting on the sidelines, waiting for the supply to show up. But the disruptions have been resolved, and US plants have been working overtime for a while. Now hints are cropping up that their customers have bought other brands, particularly Hyundai and Kia, which offer significant price advantages.

Impatience may be one reason. But another reason may be that Toyota in particular has lost its aura of infallibility after a series of recalls, some of which were associated with cover ups. Another recall was issued today—for 550,000 vehicles. And now Toyota is perceived to be in the same quality ballpark as other automakers and is thus forced to compete on price against the Koreans.

And Europe is at the cusp of a nightmare. They’ve been trying to keep sales alive with big incentives. Ford succeeded in pushing up its unit sales by 5% for the quarter, but incurred $306 million in pretax losses due to rising input costs and, more importantly, huge sales incentives with which it tried to keep momentum alive. GM reported a similar story today. During the financial crisis, governments threw in their own incentives. But given the debt crisis, governments may have neither the appetite nor the wherewithal to subsidize the auto industry. So nose-bleed price competition will be the game plan—operating losses, cost reductions, and pressure on wages.

Germany may be losing its own struggle with competitiveness: BMW announced that it would shift more of its production out of Germany. Ten years ago, BMW produced 70% of its vehicles in Germany. Now it’s down to 58%. The medium term goal, the company announced, is to bring this down to 50%. The winners: China, where it has been on a rampage, and you guessed it, the U.S. of A.

So how much more inflation do we need, and how much further do real wages and the dollar have to drop for U.S. workers to win this war of competitiveness? Clearly, they can hold their own against German and Japanese workers. But the threat comes from China and other developing nations—whose wages are still a fraction of those in the US, though they’re rising rapidly. The Fed’s stated policy of inflation and devaluation is a double-edged sword. It might make U.S. manufacturing more competitive, but it wreaks havoc on the real economy as wages don’t keep up with inflation, and as the purchasing power of the middle class gets hammered year after year.

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