Tuesday, December 14, 2010

Made In America: The Myth ?

I mentioned during the Korea discussion that I would address this in detail. So here we go...

First of all, I buy products from many different Manufacturers from many different countries, so I am not trying to guilt you into buying American all the time. We bought my wife's 2004 Honda Pilot when we were looking for a small 8 passenger SUV. And I bought my Yamaha FJR 1300 motorcycle because I was looking for a "Sport Touring" motorcycle. In these cases it was pretty easy to decide between foreign and domestic, since the domestics didn't offer these particular styles of vehicle at the time.

When there is a "True Domestic" offering: I look at all of the options and rate them against my requirements. If the product manufactured by the foreign company dominates, then I buy it happily. However if they are anywhere near close and even if it costs me some extra cash, I make sure I buy from the American company. And here is why...

Where it is assembled really does not matter !!! What matters is where the Corporate Headquarters is, where the Research and Development center is, where the Supporting departments are, where are the expensive components sourced from, etc. Here is why...

Where the car was assembled mattered a great deal back when Henry Ford started, because the vast majority of the car's cost was in the components and assembly labor. And these were near the assembly plant since shipping was expensive. This percentage has steadily declined as cars and other products became more complicated, as global transport costs dropped, as the laws proliferated, as competition intensified, etc. This is because the development, SG&A and other costs rose significantly as the relative manufacturing costs declined.

A couple of the links below indicate that cars take <21 person hrs to assemble, and that Toyota spent ~$1,000,000,000 on the Prius development. (Do you think Henry spent that kind of R&D on the Model T?) And where do you think the WEALTH resides? In the Assembly hours or in Toyota's Intellectual property? And who makes more? The assembly mechanics or development/corprate personnel?

Now if you decide to buy a Honda Accord, please go ahead because it is likely a great car. Just don't go around rationalizing to me that it is "Made in America", therefore you are doing a good thing. The reality is that it is assembled in America, some of its parts are built here, and most of the money and profits go to Japan to develop more wealth in the form of Intellectual property and System improvements.

Then as Toyota, Honda, Subaru, BMW, Mercedes, Hyundai, LG, Samsung, Nokia, Hankook, Bridgestone, Michelin, etc, etc, etc get our US dollars to further their WEALTH creation. Our USA companies like GM, Ford, Chrysler, GE, Whirlpool, Maytag, Motorola, Apple, Goodyear, Firestone, etc lose those dollars and their WEALTH declines until one of the foreign companies buys them and their INTELLECTUAL Property/WEALTH...

If America gets to the point that all we know how to do better than anyone is pass laws, tax, sell coffee, start lawsuits, fix teeth, etc... How much WEALTH left will the USA have to buy those cool things that others know how to produce?

So don't just automatically BUY AMERICAN !!! But please seriously review their newer offerings and give them the benefit of a doubt when things are close. Us Engineers will appreciate it, and the quality of all of our kid's futures may depend on it... Thoughts?

Zimmerman Trends in Mfg
Motor Trend Most Efficient Plants
Answer Labor to Build a Car
CNN Money Prius $1 Billion
Bloomberg BW Auto Development Time
Bloomberg BW America's Auto Industry
Reuters Foreign Ownership Jumps
US Icons with Foreign Ownership


Anonymous said...

I am not all that sure that the point of many foreign corporations is wealth creation. For one thing, people involved with them, management and stockholders get all that wealthy. The idea that CEO's are somehow entitled to wealth beyond the dreams of avarice is mostly an American innovation, not widely shared abroad. And I just looked at Toyota's five year stock chart and it looks just not that great.

European and Asian countries work closely with and are subsidized by the state in ways that are just politically unacceptable here. And that gives them certain competitive edges in the markets that we will just have to accept, and find ways to respond to.

John said...

A clarification that may help:

G2A's Definition of WEALTH: Something unique and renewable that a country or its citizen's possess, that other countries or their citizens value and are willing to pay for.

Examples of Wealth: Agricultural Products, Intellectual Property / Technologies, Advanced Products & Services.

By the way, though mining and petroleum has a large value add. I do not think of it a true wealth since it is not renewable. It is more like taking money out of the bank...

Compensation, stock prices, etc are nice, however the one with the WEALTH will typically wins... Because they can use it to generate more WEALTH.

John said...

G2A's Definition of WASTE: Paying more than required to attain the additional WEALTH.

Examples of WASTE: Excessive Executive compensation, Excessive compensation of Union and other employees, Ineffective Mgmt and Strategies, Excessive Taxes, Excessive dividends, Employees in the wrong positions, etc.

All of the above reduce the money available for reinvestment and future WEALTH generation. The challenge is that often you see WASTE best in the rear view mirror... Or in other people's decisions...

As for Business and Government... General Motors (ie Generous Motors) is an interesting case study. The management and employees wasted regularly and squandered their WEALTH for decades and decades. In the 1980's they started to see this, but no one wanted to change themselves sufficiently enough to stop the slide.

Then GM began to fail and people were still change resistant. Then the government enacts a safety net to give them one more chance to learn and improve. And maybe this is finally taking hold. The cars sure seem better.

Of course, then people are critical of the Government and are threatening to not buy GM cars.

Maybe we should have let them be bought by some Chinese company... Maybe that would have made the nay sayers happy?

Anonymous said...

Glad to see somebody besides me recognize Fred Zimmerman's brilliance.

As to your definitions, I have mine, that I find very useful:
Wealth is the ability to do things for people-- feed, cloth, entertain, etc.
Wealth is created ONLY by people working.
Capital is accumulated wealth, be it equipment, infrastructure, or knowledge.
Capital multiplies the creation of wealth per unit of work.
Paying people to not work destroys capital and thus wealth, as does paying people (bureaucrats and regulators) to work on things that nobody wants.

The only ways foreign investment hurts us, assuming Americans won't make that investment, is that the return on capital goes elsewhere and that, someday, the capital could be removed on a political whim.

J. Ewing