Rational Exuberance and Revival of the U.S. Automotive Sector

TITLE: Rational Exuberance and Revival of the
U.S. Automotive Sector

AUTHOR: Balkrishna Rao, Ph.D. (Purdue University, U.S.A.)

Comeback of Manufacturing

In this era of globalization, the robust U.S. economy affects the economic workings of the rest of the world in one way or another. With the dot com boom a relic of the past and the real-estate boom showing signs of flagging, this country will need a boom in another area to galvanize consumer spending. In this vein, the feasibility of inducing the next boom in the manufacturing sector should be mulled over by the U.S. government. The manufacturing sector referred to in this article encompasses the quintessential aerospace and automotive divisions together with all other industries, such as pharmaceuticals, semiconductors and computers that use manufacturing operations.
This sector has been the backbone of the American industrial revolution in the past and has greatly contributed to this country’s superpower status. It accounted for about 14 % of the U.S. GDP and 11 % of total U.S. employment as of 2003 down from 22 % of total employment in 1977 [1]. The global lead maintained in the past by the U.S. manufacturing sector has resulted in a pool of workers with enhanced productivity. In fact, the labor productivity in manufacturing doubled during the 1977-2003 period [1]. Therefore, considering the excellent infrastructure and manpower residing in this sector, it might be possible to tap into its potential for a bright future. China’s graying population is another incentive because manufacturing will make its comeback in America with China facing labor shortage in the future. Manufacturing is also a giant in terms of inciting immense activity in a wide variety of other areas that span from raw materials right down to healthcare and finance [1]. And this boom will be distributed across the width and breadth of America. And as we proceed with the 21st century, progress in this sector will be of import because of its application in many scientific endeavors and production of various finished products. Moreover, the size of the U.S. manufacturing sector makes it an apt candidate for a pilot program to test the efficacy of a subsidized national pension and healthcare plan for improving both its work culture and intrinsic value. Considering its past profitable performance, a properly resuscitated manufacturing sector should be able to account for about 20 % of U.S. GDP which is close to Japanese and German manufacturing’s share of total GDP in 2004 [2-3]. This rebound in the manufacturing sector will boost the U.S. economy and a strong U.S. economy will have positive ramifications for economies around the world. This success could pave the way for a larger national pension and healthcare system built on the earnings of a thriving manufacturing sector. This larger system could in the long run cover all sectors of the U.S. business enterprise inclusive of manufacturing.
Is it possible to stimulate the manufacturing sector with the U.S. already reigning the realm of services industry? Much of the manufacturing sector is sagging under the burden of health-care and pension outlays they owe to their current and retired work force. If the U.S. government could undertake these healthcare and pension liabilities then the U.S. manufacturing sector could compete with its Asian and European counterparts on an even keel. The absence of this financial burden will help manufacturing companies to enhance innovation for getting involved in cutting-edge technologies for coping with the looming energy and environmental crises and that in turn will aid in counterbalancing the run-of-the-mill manufacturing operations outsourced to Asian countries. Freedom from these stupendous liabilities will allow manufacturing companies, with emphasis on the automotive division, to concentrate on another serious issue “quality” which has bedeviled entrepreneurs since the Japanese forayed into the manufacturing sector.
According to a research effort published by McKinsey & Company [4], globalization is prodding businesses in the developed countries to encourage workers with innovative skills. With routine chores being outsourced to emerging economies, companies, including those in the manufacturing sector, need to nourish “tacit” (innovative) workers and encourage the transformation of low-skilled laborers into the innovative realm. The encouragement of tacit workers and special training programs for the low-skilled workforce can be achieved in the manufacturing sector with ease by relieving the industrial firms of their legacy costs. The special training programs developed by the manufacturing firms for elevating the low-skilled workforce will do good to the community in general allowing these companies to score in terms of a social context. In this regard, the Ford Motor Company’s recent initiative to adopt innovation is noteworthy considering the financial woes troubling the automotive sector. By embracing innovation, the intrinsic value of any commercial setup (for all sectors inclusive of manufacturing) is augmented and this can enhance share value without taking recourse to mechanical schemes such as share buy-backs. A model for innovation that could be followed by the manufacturing sector is that of 3M. It has been very successful in developing, and continues to develop, a wide array of new products by encouraging its workforce to think outside the box. Even Google has adopted this initiative by allowing its workforce to use their imagination, for a certain portion of their official working time, to pursue new ideas. In this era of globalization, prescient adoption of disruptive technologies in developed economies such as the U.S. would neatly balance the routine tasks outsourced to a global workforce in the rest of the world. Besides embracing disruptive engineering technologies, the manufacturing sector should integrate itself with information technology which is revolutionizing the global business enterprise and will continue to do so in the future. Innovation-based initiatives should be encouraged in relevant U.S. business sectors, and not just manufacturing, considering the ever increasing global work force available in the rest of the world for varied tasks.
Over and above the shoring up of manufacturing efficiency through innovation and quality-consciousness, the absence of legacy costs can facilitate the sector in expanding its work force and also improve wages. This underwriting of the massive expenditure by the cash-strapped U.S. government might be termed as “rational exuberance”. But this exuberance might just jump-start an ailing, but important, sector of the U.S. business enterprise that will keep the economy rolling.

Bequeath Legacy-Costs?

The first step in achieving this exuberance would be the raising of a staggering amount of seed money for under-writing the pension and health-care costs. Unlike countries such as natural-resource-rich Australia and oil-rich Norway that can channel their budget surpluses from an almost single source into national pension funds, the U.S. government will have to consider various sources of capital. The capital squeezed out of the disparate sources could be put together to raise the huge sum. The lines that follow describe some possible disparate sources.
One source could be a suitable portion of the overwhelming foreign investments flowing into U.S. debt securities. If U.S. treasury bonds and notes do not appear appealing then new bonds, called manufacturing bonds, could be issued by the government for this cause or a combination of these new bonds and traditional U.S. treasuries could be used for raising the capital. Another source for this initial capital could also be the corporate and personal income tax revenues collected by the U.S. government. Yet another source could be based on the Australian scheme with the U.S. government indulging in trading commodities needed by hungry emerging economies in South Asia and South America. Besides trading natural resources, the U.S. government could also look into trading technology with these countries. The U.S. private sector, another potential source, could be enlisted for help in this endeavor. There are certain companies in the manufacturing sector whose profitability has progressed at a decent clip. Examples of such companies exist in the computer and semi-conductor industries, where manufacturing prowess are harnessed to fabricate microprocessor chips and related hardware. This despite the tremendous outsourcing experienced by semiconductor industries to keep themselves profitable. Recently, industrial tycoons such as Bill Gates and Warren Buffet have unleashed their valuable business acumen and gobs of money into global philanthropy. Their philanthropic organizations could be beseeched to contribute generously for this cause. Oil companies could be entreated to generously funnel some of their high profits for this noble cause. The aerospace industry is another profitable group that could be encouraged to help its manufacturing brethren at this time of critical need. A source already existing would be the stock of capital invested in government organizations such as the Social Security Trust Funds and Medicare for the present manufacturing workforce which could be pooled together for this task. Of course, the U.S. government would have to stand guaranty for the anxious workforce whose active funds would be transferred. Any attempt to raise this staggering amount of seed money will also require the U.S. government to redeem locked sources of useful capital. Certain non-performing government assets could be liquidated for raising a portion of the initial capital. Even symbiosis with developed countries like Canada could be considered for this purpose.
The debt incurred through a combination of the disparate sources mentioned above could be honored at a suitable period in time by taxing the then thriving manufacturing sector. Tax rates on both corporate revenue and workforce income could be increased for a suitable period of time to level this debt. These increased tax rates could be phased out at a time when the debt is relieved. An alternative to increasing the tax rates could be a value-added-tax (VAT) wherein a small tax could be added at those stages of fabrication where manufacturing processes are employed. The VAT could be applied to a wide swath of manufactured products from industries that encompass semiconductors, computers, pharmaceuticals, automotive vehicles, aerospace etc. Here again the VAT should be discontinued after leveling the debt. Beyond all these redemption plans, there is always the possibility that the new manufacturing sector armed with innovative techniques and products and quality-consciousness will reap rich rewards for the U.S. economy by exporting its wares to the rest of the world.
The important task of raising the massive amount of seed money could be achieved through a non-profit federal body created for this purpose. This body should also be authorized for financial activities to maintain a substantial stock of capital for future needs through investment options that it deems fit. These options could include hedging strategies, commodities-trading, investing in hedge funds, equity, investments in emerging economies and investments in OECD countries, to name a few, to maximize the returns over long-term. Even investments in this country in booming non-manufacturing sectors could be employed to maintain the cash flow. Such a federal body could also look at the investment strategies employed by some government pension funds, e.g. Singapore, Australia, Norway and even CalPERS, the pension and healthcare system of the state of California, to subsidize wholly or partially the legacy costs of their workforce. If properly invested, the returns in the long-term could be used by this federal body to negate legacy costs for the U.S. business enterprise at large. The second stage of the exuberance endeavor would involve the funneling of this seed capital to traditional government organizations such as the Pension Benefit Guaranty Corporation (PBGC), Medicare and Medicaid for covering the pension and healthcare liabilities of the manufacturing workforce. These organizations, which have existed for a substantial period of time, possess the non-financial wherewithal necessary for dispensing the capital to the companies comprising the manufacturing sector. Their use would minimize the costs associated with the tedious task of directing the cash flow to the individual companies. The roles of these organizations might have to be expanded in this new context to accommodate member companies which are not receiving their benefits. The Pension Benefit Guaranty Corporation (PBGC), which currently offers pension protection to numerous Single-Employer and Multiemployer based companies, incurred a loss of about $ 23 billion for 2005 [5]. Despite its loss-making status, the PBGC could be used only as a means for capital dispensation and with time, maybe, a thriving manufacturing sector might haul it out of the red. Similarly, expenditure for healthcare should be managed through the dispensation systems already in place for Medicare and Medicaid. The ideas outlined in this article are just some of the myriad alternatives to save a critical sector in poor health. A thorough analysis of all the sources is beyond the scope of this article.

Jump Starting the U.S. Automotive Sector

The automotive and aerospace divisions have been two of the major representatives of the U.S. manufacturing sector with the latter being well-heeled. The automotive bloc has accounted for about 1.6 % of the total U.S. GDP in 2003 [6]. Therefore from an economic viewpoint it stands to gain from a revamp. For its revival, the advent of rational exuberance should be followed by the U.S. automotive division infusing “quality”, in addition to innovation, into its cherry-picked brands. Improving the quality of a few selected automotive brands will make this division competitive and, maybe, even supplant the products coming from their foreign counterparts. This notwithstanding a beneficial dollar exchange-rate that makes Japanese cars cheaper. The case for fewer brands is corroborated by the sweeping success of the Japanese carmaker Toyota which has 4 brands as opposed to 15 and 8 by General Motors and Ford respectively [7]. This large variety of automotive vehicles manufactured by the American big three has crimped their bottom lines to some extent. Another example for limited brands from the U.S. manufacturing sector is the aerospace company, Boeing. It has worked on a piecemeal basis on its limited fleet of commercial airplanes which has contributed to its strong position in the business of commercial aviation. This notwithstanding the fact that there are just two global companies catering to the world’s need for commercial aviation. With the looming energy crisis, quality will become a significant issue affecting fuel efficiency. Moreover, innovative technologies such as alternative fuel systems will be dependent on quality for these products to compete head-on with their foreign counterparts. This is because high quality automotive vehicles using standard or innovative technologies will consume lesser fuel and require lesser maintenance. Innovation without quality will result in novel U.S. technologies being put to extremely good use in the hands of a foreign competitor who has a workforce that believes in quality. In this regard, as mentioned previously, U.S. automotive companies will have to encourage their tacit workforce and develop training programs for the lower-skilled ones. But the entire workforce, both tacit and low-skilled, will have to be encouraged to be quality-conscious. The latest wave of car models churned out by the American big three have excelled in the aesthetics of appearance. It should be easier to cherry-pick a limited number of these brands that have been well received by customers and continue working on them with innovation- and quality-based efforts to fortify their market share. In such a scenario, a U.S. automotive company’s limited brands, with some using innovative alternative fuel technologies, would work so well that both domestic and foreign customers would help them gain top rankings in terms of global production and operating margins. A flourishing automotive division will in turn spawn innovative business opportunities for automotive parts makers such as Delphi. The combination of government’s-rational-exuberance, innovation (new fuel systems and other novel technologies), fewer brands and quality can aid in the timely revival of the U.S. auto industry to capitalize on the demand foreseen both in the U.S. and in emerging economies such as China and India.

[1] U.S. Department of Commerce, “Manufacturing in America: A Comprehensive Strategy to Address the Challenges to U.S. Manufacturers,” (Washington, D.C., 2004).
[2] “Economic Structure: Japan,” The Economist, April 6, 2004.
[3] Economic Structure: Germany,” The Economist, May 18, 2004.
[4] B.C. Johnson, J.M. Manyika and L.A. Yee, “The Next Revolution in Interactions,” The McKinsey Quarterly 4, (November 2005).
[5] Pension Benefit Guaranty Corporation, “Performance and Accountability Report,” (Washington, D.C., 2005).
[6] U.S. Department of Commerce, “U.S. Automotive Parts Industry Assessment,” (Washington, D.C., 2004).
[7] “Extinction of the Predator,” The Economist, September 8, 2005.

Author Profile
Balkrishna Rao, Ph.D.
Research Associate
School of Industrial Engineering
Purdue University
West Lafayette, IN 47907-2023
Email: balkrish@ecn.purdue.edu

The ideas documented in this article were laid out during my exciting stint at Purdue University as a research associate where I had a chance to apply principles of nanotechnology to manufacturing. Also, I graduated with a Ph.D. in engineering from Purdue University specializing in automotive and aerospace manufacturing.

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