Posted 1/31/2007 05:52:00 PM by Douglas

Detroit is hemorrhaging money, and it's not likely to stop. Ever:

An enormous gap still separates the performance of Detroit automakers from their foreign competitors - and it isn't all their fault.

The stupefying $12.7 billion loss that Ford Motor Co. reported Thursday for 2006 comes one year after General Motors' equally horrendous $10.6 billion loss for 2005.

But for all the bad decisions these companies have made by not listening to their customers, they aren't entirely to blame. Structural inequities between the U.S. and Japan - notably in labor costs and currency - account for a big chunk of Detroit's problems.

According to the latest calculations, the gap between Japanese and American carmakers' profits average out to about $2900 per vehicle, and the home team does not have the advantage.

Really, isn't it just a matter of time before the Big 3 are gone? What's incredible is that the Japanese carmakers are making money making cars in America! How can that be? Is Detroit really that backwards?

Here's one example of how knotty Detroit's labor problem can be:

If an assembly plant with 3,000 workers has no dealer orders, it has two options. One is to close the plant for a week and not build any cars. Then the company still has to give the idled workers 95 percent of their take-home pay plus all benefits for not working. So a one-week shutdown costs $7.7 million or $1,545 for each vehicle it didn't make.

If the company decides to go ahead and run the plant for a week without any dealer orders, it will have distressed merchandise on its hands. Then it has to sell the vehicles to daily rental companies like Hertz or Avis at discounts of $3,000 to $5,000 per vehicle, which creates a flood of used cars in three to six months and damages resale value. Or it can put the vehicles into storage and pay dealers up to $1,250 apiece to take them off its hands.

How long does it take these geniuses to figure out this won't work? Where's the rest of the money going on an American car?

Health care is the biggest chunk. GM, for instance spends $1,635 per vehicle on health care for active and retired workers in the U.S. Toyota pays nothing for retired workers - it has very few - and only $215 for active ones.

Other labor costs add to the bill. Contract issues like work rules, line relief and holiday pay amount to $630 per vehicle - costs that the Japanese don't have. And paying UAW members for not working when plants are shut costs another $350 per vehicle.

As the line gets more automated, less and less skilled labor is needed. This is a sad fact of life for 200 years now. But paying Union workers not to work is going to kill an entire industry. GM and Ford had a license to print money for most of the 20th century. This is the price for their complacency.