Thank you Larry (Yost). Good afternoon ladies and gentlemen. I am honored to be joining all of you in this forum today. The Detroit Economic Club, in its 70th year, does a superb job at aligning students along with leaders from business, government and the community to confer on everything from matters of local interest to international issues and world events.
Today, the topic of my discussion combines a critical world event with a matter of great local interest. If you live in Southeastern Michigan, you undoubtedly have felt the tremors relative to the structural change transforming the automotive industry. The epicenter of that change is here in the heartland of the automobile world. But, the fault lines undoubtedly circle the globe.
But the issue for you and me is Detroit. Ladies and gentlemen, like it or not, Detroit is in the cross hairs of world automotive competition.
If you look at the American auto industry in terms of vehicle production, with a Seasonal Average Adjusted Rate (SAAR) hovering at 17 million units for 2004, you could assume that it is business as usual for U.S. automakers. But the significance of SAAR takes on a different meaning when you understand that there is a new generation of manufacturers that have become a part of the landscape.
Whether this change is viewed as a success or a setback, depends on whether your job is in Detroit, Michigan; Flint, Michigan; Marysville, Ohio; Smyrna, Tennessee; Mobile, Alabama; San Antonio, Texas; Tuscaloosa, Alabama; or Spartanburg, South Carolina. As demand in the U.S. for import vehicles has grown, a growing number of foreign automakers are building vehicles and components in the U.S. But they are bypassing Michigan to build factories in southern states. This influx of foreign companies, who have operations in our nation, have the latest state-of-the-art facilities and processes and more often than not, young workforces that are not unionized.
Overseas-based assemblers invest in manufacturing here because the U.S. is currently the largest and most lucrative market; has moderate political dynamics; and has strong prospects for continued market growth. They also realize the potential to capture incremental worldwide sales and provide insulation against currency fluctuations.
In 1997, Detroit's Big Three had a combined 73 percent of the U.S. car and truck market. That translates into nearly three out of every four vehicles. Six years later, that combined market share has fallen to 60 percent or, only six of 10 vehicles manufactured by The Big Three! The loss of manufacturing jobs from Michigan is due in a large part to the rapidly changing dynamics of the auto industry.
It could be argued that if Detroit's Big Three did not create the innovative products that launched the craze of minivans, pickups and SUVs for the last 20 years, the job loss tallies could have surged even higher. Now, the Asian and European builders also have minivans, trucks and SUV products and they are making them right here in the U.S. in their southern and southwestern facilities.
The traditional worldwide trade borders have been erased and the world landscape for automotive manufacturing has changed. The result is global competition that is far more brutal and relentless than we have ever experienced.
The economic reality of global competition is affecting everyone of us in this room, and the people we represent. What is at stake? The absolute survival of Detroit's auto industry as we have known it.
Never before in my nearly 40-year automotive career have I seen General Motors, Ford, and the Chrysler Group all losing market share at the same time. Despite the heavy incentives, the traditional Big Three continue to lose market share as we speak. In the past six years, Japanese auto makers have increased their share by 17 percent, the Europeans by 52 percent and the Koreans by a whopping 72 percent. And while the competition has been experiencing double digit increases, the home team has dropped by 6 percent. The ships are passing in the night.
This is not a cyclical change. It is a harsh and real structural change. And it has been occurring quietly, right before our eyes, over the last twenty years.
Think about it. In the course of ten years, we have lost the U.S. nameplates of Eagle, Plymouth and the icon Oldsmobile. There is a message here folks.
The Big Three and its key partners are in trouble. Therefore, we are all in trouble. The suppliers, vendors, servicing organizations, affiliated unions and communities aligned with these great companies have been dragged into harms way. Take a look at some of the great Michigan automotive communities of Detroit, Flint, Dearborn, Highland Park, Saginaw and Pontiac just to name a few. And when we step outside of Michigan, the same is true for cities like Buffalo, New York; Edison, New Jersey; and Cleveland, Ohio. Automotive manufacturing has been the very heartbeat, the engine, of Michigan's economy. But it needs immediate attention and repair along with a new prescription to bring it back to health. I have seen sicker dogs get well, but this is a new cancer, and it needs a new remedy.
The prescription will require a massive restructuring and all of our people will be impacted. I personally approach the recovery of the automotive sector with optimism, as our history of accomplishments leads me to believe that we can, and will, once again prevail if we work as a unified team.
Twenty-five years of hard, smart teamwork, from 1980 through the present, have allowed the Detroit home team to be at, or close to world parity and leadership, on key issues previously considered shortcomings: quality, productivity, design and technology. Detroit has proven that it can globally compete on these four critical factors. Today, our Detroit team is facing a new number one enemy: cost competitiveness on a global scale. If not dealt with immediately, it could be the fatal blow to our proud industry. We are competing for market share as well as the jobs and quality of life they represent.
Relentless and often time ruthless international competition makes it nearly impossible to raise prices or pass along increased costs. In the meantime, the automakers are demanding the lowest price that they can get anywhere in the world. They want U.S. made quality with the pricing of low-labor-cost countries (LLCCs). Manufacturing customers are leveraging global prices, as the economic benchmark.
In spite of escalating domestic production costs, the prices of manufactured products have actually been declining in recent years. Even though this is viewed positive by the customers, manufacturers are caught between the proverbial rock and a hard spot. Manufacturers are unable to raise prices while domestic production costs are rising.
Where is the brunt of the global competition coming from? Following are the populations of the key 21st century automotive competitors in alphabetic order:
1. Brazil with 176 million people
2. China with 1.3 billion people
3. France with 60 million people
4. Germany with 80 million people
5. India with over 1 billion people
6. Italy around 100 million people
7. Japan approaching 150 million people
8. South Korea with 50 million people
9. Mexico with 103 million people, and
10. The United States with 290 million people That is a total of 3.3 billion people. On any given day, these countries and their citizens, every man, woman and child are consumers of goods and services from the global market place. And, on any given day, 45 percent of these populations are at work in the labor force competing for jobs that will feed the voracious appetite of the global marketplace.
Our competition is motivated, reliable, educated, youthful and ready and willing to go to work every day. They are mastering the elements of manufacturing productivity and flexibility.
As the population of the United States is approximately 290 million citizens, approximately 137 million of them are actively engaged in the labor force. When you crunch the numbers, the United States represents less than 9 percent of the workforce among the nine other major competitors. Clearly, our labor force can no longer dictate economic terms. We must adjust now.
By far, the biggest competition is coming from China, Mexico, Brazil, South Korea and India. With populations totaling more than 3 billion people, 87 percent of the supply of labor from our largest competitors is located in those five countries.
In the '90s, automakers and parts suppliers began a surge of sourcing to these countries to save money and take advantage of local opportunities and reduce their cost structure. Automotive investment in China reached $30 billion in 2003 alone.
Assemblers in these LLCCs know how to continuously add value, lower costs and consistently turn out high quality products. They have been discovered by each and every automaker. With today's Internet technology and the application of real-time data, they can be used in effective sourcing patterns from half-way around the world.
To compete globally, even Detroit's Big Three is making a massive shift in sourcing. General Motors has publicly stated that it expects its annual Chinese parts purchases to rise to $10 billion by 2009, up from under $3 billion just last year. Some projections show Ford spending up to $10 billion by 2010. Other projections show Chrysler resourcing $6 billion in the next five years to China and Korea.
Ladies and gentlemen, that is another $26 billion of goods, services and jobs flowing away from our present sourcing pool, in the next five to six years. We have all been forewarned. Therefore, it is time to be forearmed.
In the past three years alone, the U.S. automotive industry has lost nearly 190,000 jobs. 30 percent of those jobs were from OEMs and 70 percent of them were lost by automotive suppliers. Stop and think about it for a minute. If that data trend for jobs remains constant, the impact will be staggering.
Cars and trucks in some form, will be one of, if not the largest, industry on the face of this planet for decades to come. So the question remains, "What does the American auto industry need to do to prosper for the next decade?" And possibly, more important to the members of this audience the question is, "What does Detroit have to do to get out of the cross hairs and rekindle its once-vibrant automotive industry?"
All parties involved must come to the table to create a positive and real economic change for the home team and it has to be done now.
There are some strong pockets of hope around Detroit. For example, Ford Motor Company's recent investments in the new Rouge assembly; The Chrysler Group's sustained investments in the Greater Detroit area at Jefferson North and their Detroit engine and axle plants; General Motors recent improvements at its Warren Tech Center, and; American Axle & Manufacturing's investment in its Detroit manufacturing and metal forming complex.
The new mood of collaboration among Detroit's automotive powerhouses, key suppliers, the United Auto Workers, the City of Detroit and the State of Michigan is hopeful. But it is doubtful that we have another decade to solve this puzzle. There must be a sense of urgency, unity and purpose.
All key team members are going through an agonizing change process.
Detroit's original Big Three--General Motors, Ford Motor Company and the Chrysler Group of DaimlerChrysler Their key suppliers--such as Delphi, Visteon, Lear, Dana, Magna, American Axle & Manufacturing, Johnson Controls and others The unions that represent their workforces, mainly the UAW, IAM, and the Teamsters Along with all the other firms and institutions that they are linked with ... must come together rapidly to adjust to real-world market and economic conditions and find solutions for global competitiveness. Detroit and its auto industry need a new business plan. It needs to be a balanced plan of advanced technology, teamwork and training built on trust and focused on real-world economics.
Just as this city did so brilliantly and boldly in the '40s to overcome the world military problems, we need the equivalent in a business plan. Consider it a manufacturing "Arsenal of Democracy" focused on world competitiveness in the auto industry. This is a totally new era and a totally new threat requiring a total new solution. This time it is an economic threat that affects the very quality of life of our cities.
My passion for manufacturing and the automotive industry has inspired me to advocate our plea to the U.S. policymakers as a part of my role as chairman of the National Association of Manufacturers (NAM). In February of this year, I appeared before the National Governors Association in Washington D.C. with fellow American manufacturer Jeffrey Bleustein, chairman and chief executive officer of Harley-Davidson.
We addressed the NAM's recent study entitled "How Structural Costs Imposed on U.S. Manufacturers Harm Workers and Threaten Competitiveness." It has been sent to every governor in the U.S., and I welcome each of you to view it on the NAM website at nam.org. The study concludes that external overhead costs--costs out of the control of manufacturers--conservatively add 22.4 percent to the price of production for U.S. manufacturers relative to our foreign competition.
These overhead costs include:
Corporate tax rate and tax code--a disadvantage of 5.6 percent Employee benefits including health care and pension costs--another 5.2 percent Rising energy prices--that have been merely jawboned for the last two years--another 3.8 percent disadvantage. Along with, Tort litigation, that adds nearly $1 per hour of expense and Excessive government regulations--The regulatory compliance burden on U.S. manufacturers is the equivalent of a 12 percent excise tax.
This all adds up to a 22.4 percent disadvantage burdening U.S. manufacturers. That equates to nearly $5 per hour worked relative to our major foreign competitors. More startling to know is that these added costs are nearly equal to the total manufacturing production costs in China. The assistance of our policy leaders at the state and national level is required to get these runaway costs under control. Let us hold them accountable.
The uneven playing field that we are being forced to play on must be fixed, not winked at. Some of our trading partners continue to impose illegal barriers or abnormally high tariffs and unfair taxes on U.S. products. Others engage in currency manipulations. Trade agreements must be strategic, fair and enforced.
This is not about elevating anyone's political positioning, or providing fodder for election year political rhetoric. It is not about national patriotism.
It is all about raising the awareness of harsh global economic facts. It is all about allowing American manufacturers to compete on a level playing field. It is all about making manufacturing a high-level national priority and buttressing a future for the bell cow of the U.S. economy--the American auto industry. And locally--it is all about Detroit, Michigan remaining the core for global automotive manufacturing.
Detroit's auto industry needs an "action plan" for a healthy future. You and I have every right to demand it. You and I have to be a part of the solution. Just know that we will need to make sacrifices; some at a personal level; some at a corporate level; and some at a government level. Know that it will not be "business as usual" and we will have to work in a different fashion: structurally and cooperatively.
We must build an action plan--one that defines our pursuit for continuous improvement--and one that will serve as a catalyst in fixing the domestic cost problem that we are saddled with today. Here are ten points to help us get started:
1. Respect the human resource and realize that people are our most important asset. We would not be in business without our employees and the positive spirit of our workforces.
2. Where unions are present, foster cooperative partnerships to maintain sound management and workforce relations. Work jointly with the unions that represent your employees.
3. Implement proactive programs for education, training and skill-set development to adequately prepare your workforce for the demands of an increasingly hightech and sophisticated workplace. The massive advance of technology in product, processes and systems requires a totally different set of skills.
4. Continue to invest in R&D, regardless of the economic climate. At AAM we increase our R&D spending by 10 percent per year, on a dollar basis.
5. Provide the highest quality products, services and customer response in an efficient, timely manner ... and at a fair and competitive price. Demand Six Sigma performance. American Axle is a Six Sigma producer. Are you? I am talking about 3.4 parts per million ladies and gentleman.
6. "Design in" all the right features in your products, processes and systems to best serve your organization and your customers. All quality and cost issues start with design. Provide continuous direction and review of product design from concept to production. All design and process needs to be done simultaneously and concurrently using the latest technical capabilities.
7. Negotiate sourcing agreements with organizations maintaining world leadership standards and capability.
8. Actively engage your company and human resources in the communities where your associates live and work.
9. Work with your governments--local, state and national--to create the right operating environment. Work to correct "real" economic issues--such as the brutal 22.4 percent burden we discussed earlier.
10. Realize that you need a good balance among your stakeholders. This includes your employees, the shareholders, unions, suppliers, customers, communities and related financial institutions.
This is not a one-time event. What I am presenting to you today is a dynamic process ... and it will require all players to structurally change.
To be a winner, and remain a winner, we must use the creativity, innovation, and imagination that have made U.S. manufacturing the benchmark for the world. We must have the ability to adapt to the ever-changing market place. Winners provide innovations and new technology, the ability to lead change and the ability to provide world-class quality, design, technology and appropriate logistics at competitive pricing.
Manufacturing is the bedrock upon which this country was built. It is the driving force and creative catalyst of our continued progress. Yet, manufacturing has a major problem in America. And, we have a very real and significant problem in the American automotive industry.
Throughout my long career, I have seen the manufacturing industry do great things. I have also seen it make some huge mistakes. Today, the global competition is not coming. It is here. It is real. We must adjust to it.
This is the defining issue of our time in Detroit. Everyone in this room has to make the decision to mentally and intellectually involve themselves in the solution to this issue. In the short term, manufacturing will have more than its fair share of challenges. With no pain and strain there will be no gain.
I always say, "Life is a choice." I have made my choice. I chose an auto career 40 years ago. Under the most difficult of conditions AAM, was birthed as a new standalone company, headquartered in Detroit with nearly-100-year-old facilities and ancient ways of doing businesses. Now, we are fiercely proud and can compete globally with an outstanding unionized workforce, highly sophisticated product technology, and six sigma, world-class quality.
The moment of choice for the American auto industry is at hand. Detroit and its people must come to a decision. Let us decide to be the industrial leaders of our time, so Detroit remains the world automotive epicenter. We have no entitlement in that iconic role. I personally believe in and am committed to the American auto industry. I believe in Detroit. I believe in the State of Michigan. But more importantly I believe in the talented people of Detroit and Michigan who make our great cars and trucks, and yes ... gear, axles and driveline systems.
The spirit among the people in this city is one of hope, optimism, confidence and unity of purpose. I firmly believe that we have the drive and determination to get Detroit out of the cross hairs and again successfully defend our world leadership role.
I am formally inviting each and every one of you to help in fortifying Detroit's leadership in this vital auto, engineering and manufacturing capacity. Let us preserve our city's legacy and heritage for future generations. It is up to us to take the lead.
Count me in. I hope I can count you in.
Richard E. Dauch is co-founder, chairman, and chief executive officer of American Axle & Manufacturing, and immediate past chairman of the National Association of Manufacturers. His keynote remarks were presented at The Detroit Economic Club, on May 10, 2004.…