A tale of two systems: many readers don't believe it

A tale of two systems, in which we contrasted the way that German automakers operate in terms of labor relations in the United States with how they operate in Germany brought a substantial reader response, including the following. A response from the editor is here.

Jan. 3, 2012 -— Your article derives momentum from asserting that, in 2010, twice as many cars were built in Germany than were built in the U.S. While at a granular level this is correct, if light trucks -— of which the incarnations are many and varied -— are included in both figures, the U.S. built approximately 35 percent more vehicles than Germany in 2010: 7.6 million vs. 5.6 million. I wonder, was this a simple oversight, or a surgical use of facts in order to support your core premise?

Further, your profitability references for Daimler and BMW do not highlight the fact that both manufacturers have chosen to build profitable vehicles in the U.S. (with VW joining in as well) and that those profits are included in the figures you cited.

Finally, although 2010 marked the beginning of a recovery for the North American auto industry, it certainly wasn't a banner year. However, little by little, U.S.-based auto companies are improving their product offerings and, in my opinion, are becoming globally competitive in most product segments. In light of this, I believe that after some very dark days, better times for the U.S. auto industry lie ahead, built on a sound foundation of good designs well executed in a sustainability competitive business environment. As such, while I do agree that this is "A tale of two systems," I am less certain than you appear to be that one is superior, and respectfully suggest that we both wait and watch before reaching our respective conclusions.

— Patrick Kinsie, Oakville, Canada

Dec. 30, 2011 — The big question is how do Germans build twice the number of cars per man as Americans.

— Brian Oneil, Tavernier, Florida

Dec. 29, 2011 — Car production in the U.S. was 7.7 million. Your article significantly understates this at 2.7 million in a comparison to Germany.

— Eric Perkunder, Seattle, Washington

Dec. 28, 2011 — The basic assumption is that a legitimate use of governmental power is to assure certain classes of workers a middle-class existence. Socialism does this, picking winners and losers along the lines of supporting leadership power bases. The problem with a true free-market democracy is that open competition would serve two purposes: to keep pushing wages down for old technology, and to rush new innovation where profit margins are higher.

Totally missed from the article is some vital information: what percent of the German automakers' actual profits are generated from the American manufacturing base? It is highly likely that the German autoworkers' wages and living standards are being subsidized by profits from American operations. This was true when Daimler bought out Chrysler, and it would be interesting to see if the German wage standards were actually self-sustaining. I suspect that the truly high-margin, top-of-the-line, big-ticket autos are being made in Europe. Without that "cherry-picking," I doubt the European auto business would be self-sustaining. Even Renault and Fiat have substantial manufacturing operations in Eastern Europe, Turkey, India, and other low-wage areas to keep them in business. Certainly VW does, in Eastern Europe. Even Chevrolet and Buick now have more sales and manufacturing in Asia than in America.

The real question is whether Americans want jobs in the $15 to $20 per hour range. I think a lot of Americans do, even if it means we have to rethink "the classic American dream." I have a 34 year-old son with a college degree making a living as an air conditioning service repairman in that labor range. He does not own a home, and is happy to have a trade that people actually need [and] steady employment. He is living a "reduced American dream" — a family with a working wife, one car, almost out of debt, and saving money for his self-supported retirement. This may be the new "norm," what we can actually afford, rather than a living standard that is so [far from] self-sustaining that we have mortgaged the economic future of our grandchildren to pay it off. Europe is teetering now, and will fall first. Will we be far behind?

— Thomas Waters, Emory, Texas

Dec. 28, 2011 — I found the discussion about the differences in labor relations in the U.S. and Germany very interesting. While the article was spot on about how the works councils smooth labor relationships in Germany, the numbers in the article gave me cause to doubt the research. I was very surprised to read that Germany produces twice as many cars as the U.S.

When I did some research, I came across this site, which put the number of cars produced at 5.4 million for Germany and 4.4 million for the U.S. 4.4 million is considerably less than 5.4 million, but a whole lot more than 2.7 million. Could you please explain where your numbers came from?

Also, I feel like the article was lacking a discussion of why it's possible for German automakers to pay much higher wages. One possibility I would like to suggest is that all of them, except for Volkswagen (which I do not believe exports any cars at all from Germany to the U.S., or in any case very few) are luxury brands that can charge premium prices.

I wonder if a comparison between the automobile industry in France and that in the U.S. might be more instructive, since France is a high-wage country producing low- and mid-range automobiles.

— Andy Andrews, Dortmund, Germany

 Dec. 28 2011 — I think this discussion is only the tip of the iceberg. If you compare the U.S. and the German economy, it is not correct to look only to the labor rates. This discussion is also valid if you plan to move plants from Germany to China or to any other country. As you know, the Chinese car market is booming and the pressure to localize is extremely high. In fact, it is more than a labor rate discussion. You have to look to the total cost of ownership. And you have to compare the right figures (for example, cost-of-living index, real GDP, production cost, logistic cost, cost of quality failure and so on) to get some comparable figures. A discussion only based on labor rates is totally wrong and might lead in the wrong direction.

Further on, every consumer is looking for the "best deal he can get." In fact, we like to buy cheaper products with more value-added figures. We trained the consumers since the early 1960s to follow this market rule. To follow the "more is better" approach, companies have to optimize the cost structure to sell products according to this market rule. And to organize the money to support this strategy, they have to make money to gratify the stock markets too.

I believe it's not a union discussion we have to start with, it is more a discussion to handle our own (country) economic system.

— Guenter J. St. PLNY, Luxembourg, Luxembourg

Dec. 27, 2011 — Comparing wages in different countries is meaningless unless you compare the relative purchasing power of the wages a worker is earning. Does the German autoworker have a higher standard of living than his American counterpart, or does he have less due to higher income taxes and higher cost of goods and services? These points should be included when talking about wages earned in different countries for the same job.

— John Timoti, San Clemente, California

Dec. 27, 2011 — I think the difference is that in our northern European economies like Germany, Sweden and Holland, high skilled workers have been a bit scarce since the Second World War. So every time the economy peaked, their wages went up quickly. And because they were well organized, the companies couldn't fire [skilled workers] easily when the economy declined. People feel like their company is family, and are very motivated and proud to work. They become "part of the ship, part of the crew."

Companies had to become flexible in production, so where the wages were highest and the workforce inflexible, you built the most expensive robots and car production sites. [These means] were and are cheaper than using more personnel. When you know that after 10 years it will be very expensive to fire a [much-needed] worker, as a company you will invest in that worker so that he or she will last for 40 years. In the U.S., personnel is much cheaper and there is less need to invest in workers. Each employee [can be discharged on] two-weeks notice, so if he isn't up to the job, you [fire him] and take another. That means that the relationship between a European company and its worker is much different than in the U.S.

In the U.S. the relation between the work force and companies is [workers] hope the companies sell enough so that they keep their jobs.

In Europe workers and companies have to invest in each other to keep the relationship working for a longer period. If the worker doesn't perform, doesn't learn, or doesn't follow the rules the company and the workers have made, he or she will lose a secure, well-paid job. With enough "points" against one, [a company] can get rid of a worker cheaply. The company also has to invest in workers to keep them productive — and we have a higher productivity than in the U.S.

The real problem in our economies is that we are in the world to produce and have too many people. [Fewer] people can produce everything we need, so there is no use for the other people to work. If there are too many people, wages go down. [Since] the rich — the leaders of companies and countries — can afford a big personal workforce, there will be no honest division of wealth.

In the future, we must work less so that we can divide the work over [a greater number of] people. [Increase] per hour production and work [fewer] hours, and our personal and family lives will flourish.

Of course we have to keep the birhtrate under 1.8 child per woman. Only then will the workforce decrease fast enough [in the face of an] increase in productivity.

There is a simple mechanism to reach this goal. Give all the women in the world a good education and bring wealth to more people, [rather than] concentrating it in a few [individuals].

— Jean-Paul Sosef, Rotterdam, Holland

Dec. 26, 2011 — Whether the U.S. could adopt the German model of unionization is not the problem. The problem is even though we have unionization in some parts of the country, [there] is an adversarial [situation] of union versus management. In part, this is due to the years of abuse by the management and the revolt, which necessitated the unions. Now we, the workers, are abused by both sides.

We are not allowed to speak to management without the union there. At the same time the union does little for us when they are there. Sit and listen, but not participate nor take notes. Yet, management has a second person jotting down, and fabricating, all the while.

Management is there to tak'...they are there to, as they have said, "to remind you that you are easily replaced, this job is going to be your life...so do not plan on having one outside of here." Management in the U.S. is not here to negotiate for a better workplace, a safer one...not even for better service for the customer or a better product. They are here to make their money, have the least problems to reach upper management, and not get caught abusing the lower employees or the system. To get as much done for the least amount. Stepping on those one can while making ones way upward. I guess that is the true definition of capitalism in the U.S. I did not learn that definition.

The mention of the attempt to make unionization easier...that doesn't help. It is too easy to intimidate employees. Once a union does come into a business, even a large, old-time one, it is easy for them to ignore the employees..they get their percentage off of the checks...they do little after. They leave it to the unknowing employees to flounder not knowing that once they get their union, it becomes "them" and are left to it without out much help or instruction.

I do not see the U.S. becoming any more than it has become, only less. Even the Germans have shown that their model is German-centered and once leaving their own country they go to the cheapest route. It is in the human nature of it. We want to be greedy...step on the backs of the workers...fire all no matter how it effects their families, the housing market, the whole country so long as the all important "me" is making the money. It is sad, but, true. I watch it daily.

— Lisa Katagiri, Newark, California

Dec. 26, 2011 — Your writing is excellent and on target.

— Peter Paulicks, Las Vegas, Nevada

Dec. 26 2011 — The article about differences between German and U.S. auto unionization failed to address the economics of foreign plant operations for the German companies. Are the foreign plants more profitable? What is level of productivity in Europe vs outside Europe? How about product quality differences? Do the companies use these plants higher profits to cover labor costs (and research and development costs) in Europe?

— Robert Dodsworth, Kimberling City, Missouri

Dec. 26, 2011 —  The article/debate points fail to explain how German companies can profit paying union wages and benefits double that of U.S. firms. Our auto firms have found themselves in bankruptcy precisely for high wages and benefits extracted by unions. In the case of U.S. auto manufacturers, where would the money come from to double employee wages? There certainly isn't enough room in profits.

— Michael Simmonds, Omaha, Nebraska

Dec. 26, 2011 —  Excellent, I wish everyone would read your letter. If they did, more people might realize the root of our problems isn't unions, it is because corporations [can get away with it].

— Charles Ponze, St. Charles, Missouri

 Dec. 26, 2011 —This is a good article. The essentials are correctly stated. Germany is an over-regimented society. The work rules in Bavaria are the same as in the Province of Hessen. In the U.S., states try to maintain their individuality and sovereignty from Washington. Those fundamentals will not change. A German wants security and pretty much gets it. An American wants freedom. But, do not be misled. See what is left over to the German worker, after all taxes are subtracted from gross pay. While the U.S. worker is underpaid, on a cost of living basis, his disposable income is about the same as his German counterpart.

— Peter Engelhardt, Summit, NJ

Dec. 24, 2011 — As an American ex-pat in Munich, your article about the difference in wages paid by German companies in Germany and in the U.S. caught my attention.

There is another factor not mentioned in your article. Germany has a higher corporation tax — but [one] which allows for massive deductions for building domestic and foreign plants.

The degree of automation is much higher in Germany than in U.S. plants due to tax structures. Energy efficient Siemens line drive systems, and Kuka robots ensure the lowest labour and energy costs per produced unit in Europe. That is, while the hourly wage is much higher in Germany than the U.S., the automation rate is also much higher, facilitated by corporate laws which favour constant plant upgrading which cut both labour and energy coss per produced unit. If you take "labour costs per produced unit" into consideration, then the difference is not so glaring. German U.S. plants exploit cheaper labour but have a much lower capital plant investment while German domestic plants have cut labour costs by automation.

South Carolina has an "industry recruiting office" here in Munich. "Open shop laws" mean lower labour costs, but also lower plant automation costs than say in "closed shop" states such as Michigan. Geography also plays a role. It is much cheaper to ship parts through the port of Charlestown to plants in the state than by ship up the St. Lawrence, through the canal and Lake Erie to Detroit. B.M.W., Volkswagen, and Daimler also ship back SUVs made in the U.S. to Germany for sale. Lower transport costs via rail and the port of Charleston also play a role in selecting the southern states.

Of course, Fiat will take a different coure, having taken Chrysler over. If it produces in the U.S. for the U.S. and perhaps for export to Europe, it will be on the Chryler lines it took over and which are being upgraded to European standards. Fiat had its eyes wide open on all the mistakes made by Daimler in its partership with Chrysler. A Chrysler station wagon, or a Dodge Charger already have a lot of European technology built right in, such as Abarth exhaust systems which let them sound good as well as look good. Fiat is also following the strategy adapted by Henry Ford: pay the labour well and you can sell cars to your own workers.

 — Kent Doering, Munich, Germany

Dec. 24, 2011 — Interesting article. I want to add some facts that most often are overlooked and that could be input for some more research and comparison and maybe a follow-up article.

The low wages require the U.S. employees to work many more hours than the Europeans and it is undermining productivity. Research of Alfred Kleinknecht (TU Delft) shows that productivity since 1960 in Europe has grown by 395 percent and in the U.S. by 220 percent, twice as low.

In Europe, the average amount of labor hours a year is around 1,300 to 1,400 hours while, in the U.S., it is not strange to see more than 2,000 labor hours a year (1.5 times more).

The European have converted their productivity growth in more free-time. Given the current exchange rates, a U.S. employee [has] to work 2.4 times more then a European to be able to buy the same product on the world market.

Actually, it is even worse: the best kept secret is that European companies pay out their return not only to shareholders, but first pay their employees (education, healthcare, insurance for when they become unable to work, and pension). If you take that also into account then the shareholder return would be 27 percent higher (19 percent for insurances and 8 percent for pension). If you compare then the average 8 percent shareholder return in the U.S. with the average 35 percent (8 percent plus 27 percent) in Europe (Netherlands as an example), then its shocking to see that the return of European companies is actualy four times higher then the U.S.

I believe an important reason for the lower productivity in the U.S. is the lower education, the system of fire-hire and, as counter-effect, the low loyalty (knowledge drain). While in the U.S. compliance is the key word, in Europe it is commitment. This explains maybe partly the differences.

I am not a specialist neither do I have anything against the U.S. On the contrary, I love the country but I noticed the culture differences and thought  I would give feedback from a European perspective. I hope it is contributing in a positive way.

— Freddie van Rijswijk, Erica, Netherlands

Dec. 23, 2011 — I think you need to compare apples to apples. The German cars you speak of sell for a much higher retail than the average American car. Of course they make a higher profit — it does not take a rocket scientist to figure that one out. The wage is only a small part of the cost of production: retirement costs arrived at by the threat of union strikes, utilities, taxes, land costs, and many other things are included in the final production cost. The biggest threat to the American job is the high cost of maintaining an employee in retirement. Fix that issue and we are ready to make a profit again.

— James Hartzell, Mifflintown, Pennsylvania

Dec. 23, 2011 — This is a very informative article and I as a concerned citizen and union person applaud you.

— Graham B Henry Jr, Baltimore, Maryland

Dec. 22, 2011 — The problem I have with this article is when you talk about the profits of the German companies. You gave a total profit and didn't look at the profit per car sold. If the profit per car sold is that much higher in Germany, then your point still stands. If it isn't, well then, it is just because more cars were sold that were made in Germany. [That would] disprove most of your argument on higher profits.

 — Aaron Jackson, Trophy Club, Texas

Dec. 22, 2011 — This is a very frustrating article. Makes the point and describes the difference in union/wage policy between German and the U.S. but doesn't describe how the Germans, with high wages, make a profit. If wages are higher, then something else must be lower (or prices higher)...but the article [gives] no clue.

 — William Paulin, Prescott, Arizona

Dec. 22, 2011 — I'm startled that you've failed to address the crux of the issue in this article: Why can German auto companies still turn a profit while paying more for labor? Are the German workers more productive? Are there less of them for a given job/role than in American factories? My guess is "yes" to all of the above, because there is no other logical answer. Having toured several German automotive factories and then seen the contrast in the typical UAW worker, I'd take the German (actually, most of them are Turks and Hungarians) workers any day, and pay them accordingly. The answer for American auto makers is likely that they need to increase pay, but also have stricter requirements for workers — then and only then could they follow the German model.

 — Shane Kleinpeter, West Chester, Pennsylvania

Dec. 22, 2011 — This article did indeed present an interesting juxtaposition of two very different approaches to labor relations. What was missing, however, was a connection to the very distinction that the authors sought to explain: why are German car-makers, with twice the wages of their North American counterparts, more profitable? Nowhere in the article was the context of profitably explored: what's the labor cost per vehicle in each country? Are there other costs borne by U.S. automakers (like pensions and health care) that their European rivals don't face? And, let's face it: we're comparing premium-priced, high-margin luxury vehicles (BMW, Mercedes-Benz) to family sedans and mini-vans.

 — Ian Gillespie, London, Canada