Labor Isn’t The Problem at the Car Makers

I learned something new today. All the squawking about labor costs in car manufacturing is a red herring. And I also learned that pretty much every North American car company blew chow in FY 2008. All the big US car companies (the big three and the New Domestics) but one lost money per car in the fiscal year that ended 3/31/2009. Only Honda made money, about $150 per car. Not much on something that costs between well over $20k. (BTW, the New Domestics is a phrase for those companies like Honda and Toyota that have a lot of manufacturing here in the US). The big three lost about $4100 per car sold over the same fiscal year. Ouch, that’s gotta hurt!

So, why do I say labor isn’t the problem? Because labor costs are only about 10% of a new car price! Even if you zero’ed out all labor costs, the Big Three would have still lost money per car sold.

So, where are the rest of the costs? Materials, marketing, manufacturing (plant costs etc) and engineering. One of the hidden costs is in OEM tooling. these are the fixtures and the like that a supplier has to use or make in order to supply the car maker with the door panels, trim gizmos, wiring harnesses, pretty much everything that makes a car an individual entity.

These costs aren’t talked about, but they are large. The cost of the tooling gets charged back to the car manufacturer one way or another, and this is where the story gets interesting.

Turns out that those companies that base their purchasing on parts cost don’t save money, and those that choose their parts supplier based on relationship costs save money. For companies like Honda (lowest cost per tool at just over $107k), they invest much more in engineering, putting money in early. This results in better tools that have better durability and more cross-platform applicability.  Earlier supplier input and all that stuff results in a much lower total relationship cost. Chrysler is at the back of the pack, spending about $135k per tool. Seems like when you’re down it’s bad news all around.

There are a couple of lessons here.  First off is the obvious: Investing up front pays off in costs you don’t have to pay later. (This also reminds me of the Corning TQM program mantra, there is no higher cost than doing work twice. Planning and covering the details minimizes these risks.) Sometimes buying the cheapest part gets you just that: the cheapest part with follow on costs that aren’t on the part price tag!

Also, cost reduction strategies are better than price point targets. Going by price ignores all those other associated costs. Really, like all things taking a wide program view and minimizing total program costs will really work better than ignoring program costs and looking at a part price point only. You get a better program that is more efficient and minimizes risk, as opposed to an inexpensive part that has tons of uncontrolled associated costs. Once again pretty obvious stuff if you think about it. Obvious yet ignored by many, many organizations.

I guess it’s easier to just bitch about labor costs and ignore the true percentage of automotive labor content than to really learn where the controlled vs uncontrolled costs are and do something systematic about program efficacy and cost control.

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4 thoughts on “Labor Isn’t The Problem at the Car Makers”

  1. You know, I have to tell you, I really enjoy this blog and the insight from everyone who participates. I find it to be refreshing and very informative. I wish there were more blogs like it. Anyway, I felt it was about time I posted, I

  2. These uncontrolled costs are shown in recalls. By shaving a few cents of the cost of some components they get to do it again at a much greater cost. If you follow the recall trends how many do you see from the likes of Honda while it seems to just the course of business to the big 2.5 and now Toyota.

  3. Toyota has it’s own recall problems, but tool engineering doesn’t seem to be the root cause of it. They have the second lowest cost per tool, just behind Honda, by a few percent.


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