The GM-Toyota Joint Venture

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The GM-Toyota Joint Venture

September 1, 1983 15 min read Download Report
John F.
Senior Policy Analyst on International Economics

(Archived document, may contain errors)

288 i September I, 1983 THE GMATOYOTA JOINT VENTURE INTRODUCTION In February 19 83, General Motors Corporation and Toyota Motor Company of Japan announced a joint venture plan to co-produce a small, front wheel drive auto in a plant vacated last year by GM in Fremont, California. According to the agreement, the two com panies will pr oduce a car comprised of a Japanese engine and trans mission and a U.S. body. The name of the new car, which.wil1 be marketed by Chevrolet, has not been decided. It will not replace any existing GM or Toyota car.

The two companies together plan to invest $ 300 million in the project, including the $130 million plant that GM still owns. According to GM and Toyota projections, the project will create 12,000 new jobs in the U.S.--3,000 in the production process and 9,000 in supplier and related industries spre a d throughout the U.S Fremont, California, is enthusiastic about 'the venture. Pub lic opinion in California and the rest of U.S. is also highly favorable. The United Auto Workers support the project, even though Toyota is resisting hiring on the basis of seniority UAW workers laid off after the GM plant closed and the joint venture company will utilize Toyota production techniques that include I1versatile1l workers (who perform two or more jobs a practice not allowed in UAW plants in the U.S.

Apparently only Chrysler and Ford oppose the project, charg ing that it violates anti-trust legislation. They also contend that it will cost*more jobs than it creates, since the car built by the new plant will compete with other U.S. made cars.

Federal Trade Commissio n is expected to rule on the anti-trust issue in September The 2 The project appears to offer important benefits It will give the U.S. auto industry, as well as the United Auto Workers some direct lessons in Japanese management techniques, labor managemen t relations, and technology. It also promises to defuse the domestic content movement and efforts to continue %oluntarylf quotas 0.n Japanese cars=-both of which would be detrimental to free trade and the competitiveness of the U.S. auto industry.

Hence, t he criticisms seem unjust. Not only do Chrysler and Ford seem to be afraid of competition, but the charges of anti trust violations seem to have little basis in fact. Indeed, the joint venture will excite competition It also promises to help the American consumer by putting another quality, economical, and clean car in the marketplace.

SITUATION IN THE U.S. AUTO INDUSTRY The Toyota/GM joint venture must be seen in the context of a still seriously troub1ed.U.S. auto industry. During 1980-1982 several hundre d thousand, nearly one quarter of U.S. auto workers were laid off--50,000 by Chrysler in 1981 alone U.S. auto manufacturing plants operated at under 60 percent capa city. At this same time, foreign auto companies captured 30 per cent of the U.S. market Du r ing the slump Recovery has changed this situation only slightly. Lower interest rates and a stronger economy have helped. But the U.S auto industry is not back on its feet. Few workers laid off are back'working. Closed plants remain closed. And the auto r ecovery would not be what it is were it not for the fact that there is still an import quota on Japanese cars In fact, the main problem for U.S. auto companies is competi tion from Japan.

Japanese cars account for around 27 percentage points buyers origina lly took to Japanese cars because of their lower price. Then it was fuel economy. Now it is quality or value pur chased. Independent testing services such as Consumer Reports give virtually all Japanese cars sold in the U.S. excellent rat ings in terms of quality: frequency of repair, resale value, and integrity of body. No American car gets an excellent rating.

Studies indicate that Japanese manufacturers can make the same car as U.S. companies for $1,000 to $1,500 less. Other estimates range as high as $ 2,500 Of the 30 percent penetration of the U.S. market American Sources of the Trouble There are three reasons for the higher cost and lower quality of.American cars: labor, government and management. Of the $1,000 to $1,$00 savings in production that Jap a nese manufacturers have over American companies, one half is the cost of labor. This is not because labor is cheaper in Japan. In the auto industry how ever, American labor is more expensive-more than half again 3 Japanese labor , In short, labor in the U. S. auto industry is over paid. In 1981, auto workers were paid 70 percent above the average of nonagricultural industries.

Moreover, Japanese auto manufacturing companies use less labor.

Japanese plants are located more rationally, closer to raw material supplies and markets U.S. companies are located inland, requir ing more expensive land transport. New companies are located for reasons of reducing unemployment or hiring minorities. the U.S Japanese unions do not oppose automation or robotization.

Japan has two to three times more robots in manufacturing than the U.S Japanese companies stress quality control, which they maintain in Japan in large part through excellent labor-management relations. This is much more difficult in the U.S And unlike Also cru cial is the quality of labor.

Government red tape is also a serious problem. Chrysler argued that its financial crisis could be explained totally in terms of the co st incurred by the company to comply with govern ment regulations, pay taxes, and Social Security. All American auto companies note that exporting is cumbersome and that it is more difficult for them to export than for American distributors of Japanese au t o companies to import. While the Japanese govern ment does not subsidize the exports of Japanese cars, as some con tend, it helps business rather than impeding or harassing it and generally gives greater assistance to large, dynamic exporting companies th an to small, nonexporting firms U.S. auto companies have been forced to diversify to survive.

They have also been impelled to invest in foreign auto companies and import cars from Japan or build manufacturing plants abroad to remain competitive.

Hence American companies are unable to compete--in the U.S or abroad. In 1979, fewer than 200,000 American made cars were sold overseas (ironically, nearly ten percent of them in Japan).

Only Saudi Arabia and Kuwait purchase more U.S. made cars than cars manufactu red elsewhere U.S. auto companies based abroad are doing well, but are hurt by the bad image of U.S. cars at home and the financial condition of the parent company. Since 1979 America's share of the world market has dwindled. U.S. companies appear to have no hope of getting a meaningful slice of the 1980s world market, estimated at.41 million units of passenger cars alone.

Meanwhile, Japanese companies are daily expanding in the inter- national market.

Current Solutions One of the solutions frequently cit ed to deal with the U.S market side of the problem is a local or domestic content bill 4 requiring that all automobiles sold in the U.S. contain a certain percentage of American-made parts. Such a bill was sponsored by Representative John Dingell (D-MI) a nd recently passed the House It is doubtful, however, whether the bill can muster sufficient support to pass the Senate or to override an almost certain presi dential veto.

Such a bill would protect the U.S. auto industry in a way The bill would This kind of protection that would ultimately make it non-competitive hurt the consumer, and it would, no doubt, have an adverse effect upon both the energy and the environment ism would destroy any hope of American-made cars competing in the international marketpl ace.

Another alternative is a quota--voluntary or otherwise In fact, a voluntary quota is now in effect.

International Trade and Industry (MITI) reluctantly agreed in April 1980 to a quota of 1,680,000 units a year.

Quotas generally do not work and this one is no exception. Limiting the number of autos that Japanese manufacturers can export to the U.S. prompted Japanese companies to send a greater percen tage of larger, more expensive cars to the U.S. Thus, Japan proved that not even large American cars a re competitive. Also, Japanese companies now are making a larger share of the profits in the U.S with the same volume--profits U.S. companies need for investment in research and new machines. In addition, Japanese cars are put ting still more U.S. workers out of a job because more labor goes into bigger, more luxurious cars. Finally, since Japanese com panies are exporting fewer smaller cars to the U.S energy and environmental problems are made more acute Japan's Ministry of Continuing quotas will interfer e with the market forces and protect U.S. auto companies at a time when they should not be and cannot be, realistically protected. Moreover when President Carter announced the oluntary" quota on autos, he indicated that it was not binding. The new MITI hea d recently said that he sees no reason to continue it for a fourth year. If sales of Japanese cars are restricted and U.S. automakers do not produce a better product--which, history teaches, they will not do if protected South Korea, Taiwan, and other coun t ries will simply enter the market. In the meantime, U.S. agricultural and other industries exporting to Japan would suffer-punished even though they are efficient THE TOYOTA-GM VENTURE AS A LEARNING EXPERIENCE Two Japanese companies--Honda and Nissan (Dat s un)--have al ready set up manufacturing operation's in the U.S. a plant operating in Ohio; the latter is completing assembly works for smal1,trucks in Tennessee. Both are basically new operations. Both are nonunion managers and could become models for U.S . companies to follow The former has Honda and Nissan will be run by Japanese 5 Many of the workers in these plants are being sent to Japan for training in Japanese management techniques So far, both operations see considerable hope of success.

On the othe r hand, they have created some problems. Japanese management techniques cannot easily be adopted in the U.S. The plants are seen as anti-union, taking advantage of cheap,labor and beneficial work laws in certain sections of the U.S. Finally the plants are located where they are because of special advan- tages offered by the state governments involved.

Toyota long has resisted setting up operations in the U.S Volkswagen of America for fear of sullying its reputation for quality products--general ly the best among cars sold in the U.S has experienced this problem, though not so noticeably because of a parallel deterioration in quality at their German plants. Honda now seems to be facing the same situation.

Toyota rejected a deal with Ford some months ago and why, in the case of the proposed joint venture agreement with GM, Toyota is not putting its name on the final product motivation. is coping with the threat of domestic content legisla tion and extended quotas I This explains why In short, Toyota's The de a l offers some important advantages to the U.S. auto industry in terms of learning how to build a good car--advantages that the Honda and Nissan plants do not offer will be unionized from the outset make it a union shop ed the fact that they must make some concessions--mostly in terms of maintaining labor discipline to hold up quality control they have basically agreed to the new plant rehiring laid-off workers on the basis of work commitment and quality rather than seniority They have also promised stiffer work rules and will allow management to discipline workers who consistently are late slothful or impede productivity and quality management-or the union will take care of these problems itself First, the plant There will be no fighting to The United Auto W orkers have already accept Thus The plant will import from Japan parts which Toyota produces more cheaply and where quality is the highest--engines and trans missions. Robots will take up some of the slack in keeping qual ity in body integrity and evennes s in fitting parts together. The plant will be located rationally near the market, rather than close to the steel industry, or in Detroit, where the U.S. auto industry has been by tradition. Some parts of the car will come from either Japan or the U.S. dep ending on price and quality thereby fostering keen competititon in parts manufacturing.

Only one type of car will be produced in the plant: a front wheel drive, subcompact car of engines for its front wheel subcompacts, including. ceramic engines which will be much lighter, cheaper to build, and capable of increased fuel efficiency and less pollution, future improve ments can probably be made in the auto quickly and cheaply Since Toyota is working on new types 6 Toyota will pick th e chief operating officer, since he will be responsible for the machines used in the assembly process and the engineering of the car GM will occupy half of the Board of Directors seats, since it will provide half the investment, and will market the car thr ough existing Chevrolet dealerships tion in the auto industry, the agreement is limited to the produc tion of one type of vehicle, at one facility. Also, the agreement has a termination date--19

95. The number of cars produced annual ly will not exceed the 200,000 now planned. Future expansion will be up to General Motors To ensure that the joint venture does not .endanger competi CRITICISMS OF THE PROJECT Nevertheless, both Chrysler and Ford have assailed the agree ment as, in the words .of Chrysler's Lee Iacocca, tifundamentally tition in the U.S. car market since it will involve a "mergerii of the world's number one and number three auto makers In other words, Chrysler and Ford are accusing Toyota and GM of anti-trust violations, in spite of the precauti o ns taken and the severe limits in the agreement. Iacocca also contends that the venture will cost the U.S. two jobs for each one it will provide I bad." Both companies feel that the agreement will threaten compe- I These criticisms seem shallow. First, si nce 1970, Chrysler, has owned 15 percent of Mitsubishi Motors of Japan and has exclu sive rights to market specific Mitsubishi autos in the U.S.

Mitsubishi Motors is connected'to a parent company which is one of Japan's largest combines and, in terms of bo th assets and sales is much larger than Toyota. The ties go further: Mitsubishi supplies Chrysler engines for its K cars,.has purchased outright Chrysler Australia, and is financing the exports of its cars to Chrysler in the U.S. to help Chrysler through its financial crisis.

Second, Ford, in the 1970s, purchased one-fourth of the stock of Mazda-now Japanis third largest auto maker. Ford still owns stock and is the beneficiary of huge increases in the stock prices of the company--helping, of course, to kee p Ford afloat during hard times.

Third, the argument that the project will cost as many jobs as it will create is probably not credible. The car will compete with foreign cars more than U.S. cars. This is particularly true since it will find its best mark et in California where the percen tage of foreign cars, especially Japanese cars, is considerably higher than the national average. The proportion of foreign cars that are subcompacts there is also greater. This is further evi dence that it will compete w i th imported cars, including the Japanese imports sold by Chrysler and with the Chrysler K Car, which is essentially a mixed breed--a U.S. car with Mitsubishi or Volkswagen engine (like the yet to be named Toyota-GM car is unlikely, moreover, that United.A u to Workers leaders would have approved the deal if it were to cost American jobs It 7 The effect on unemployment in the U.S. is, in fact difficult' to predict at this time. The new facility will hire workers from the GM Fremont plant and some from a Ford p lant also closed in California this year. Parts companies nearby and elsewhere in the U.S:will benefit. Even more employment will be created if the experience is a good one for Toyota and it decides to build parts plants in the U.S as it heretofore has be e n unwilling to do It now is considering such a move The venture also offers GM two advantages Chrysler and Ford have not mentioned: saving perhaps 2 billion in research and development costs (in replacing the Chevette) and an advantage in meeting stiffer f ederal mileage and pollution regulations that go into, effect at about the time the new GM-Toyota car will begin sales. It'will, if successful, help GM compete in selling small cars. Chrysler and Ford have conveniently not noted that they proportionally h ave a larger share of the small car market and that they are taking advantage of foreign connections to do so.

Ford also has more significant operations abroad than is generally realized--making it the number two auto company in the world (con sidering only domestic operations it is smaller than both Toyota or Nissan).

CONCLUSION The Toyota-GM 'venture represents free enterprise--not mono poly. There is no evidence to indicate that the U.S. government or the American public should be concerned that the two companies would or could corner the market. The scope of the joint venture is limited to one factory, to one car, and a fixed time of opera tion.

Toyota decided on the undertaking for public relations reasons. The milieu was one of bad press in the U.S. toward Japan and specifically toward Toyota--the only large Japanese auto com pany without a U.S. operation. Senator Donald Riegle (D-MI recently charged publicly that Japan has Ilarrogantly cost millions of Americans their jobsfr and "has broken up milli o ns of American families.Il Other congressmen in recent months have made reference to Ilyellow people and IrJapsIt in the context of discussing unem ployment in the auto industry A Chinese student recently was murdered in Detroit by unemployed auto workers who thought he was Japanese. Domestic content legislation in the U.S. threatens Toyota. So do quotas the venture to GM at a later date up with GM and co-producing cars could sully their reputation for quality in the U.S. and throughout the world ing of co r nering the global car market in cooperation with GM. Toyota can do better on its own Toyota officials have said they hope to sell their part of They still fear that linking Nor is Toyota think GM was motivated by a need for Japanese technology--not in ass e mbling cars, but in management techniques (especially organi8 zation) and in management-labor relations. The deal may also pro vide GM cheap access to future Toyota developments in building small, fuel efficient, and clean engines. Japan is ahead of the U .S. industry in this area And it will provide GM with investment capital to reopen a factory it closed a number of months ago. In auto sales in the U.S. and elsewhere GM will remain competitive with Toyota--as best it can.

The United Auto Workers was motiv ated by an opportunity to put American worker's back to work and to save the auto industry in the U.S. If the,Toyota-GM joint venture were to cost more jobs in the U.S. than it would create overall, UAW would hardly support the project. Union leaders also realize that the U.S. auto indus try is in dire straits, despite the current recovery. UAW is wil ling to make concessions; in fact, it realizes it must. And it would prefer to do this in a project where the union is welcome rather than force itself into a wholly Japanese operation (such as Honda or Nissan).

The transfer of organizational technology from Japan to .the U.S. may establish a useful precedent. After World War I1 Japan obtained valuable technology from the U.S.--making possible its reindustrial ization and post-war economic success leaders favor providing U.S. companies with new Japanese techno logy from a number of Japanese companies and business leaders. If the transfer works in this joint venture, it will pave the way for much more Japanese B u tthey are unsure how they can do this and face opposition The Toyota-GM joint venture should not be regarded as violat Since the auto ing anti-trust guidelines in the U.S. simply.because two large companies are cooperating It should be judged by whether i t fosters or stifles competition in the auto market industry has become so international, the Toyota-GM deal must be seen in its global context ing in a market where it is not doing well and where, in spite of its size, it is behind many other competitors.

The charges of anti-trust violations seem to stem much more from the fear of competition by Ford and Chrysler than from con cerns that monopoly will result. Free cornpetition is threatened by domestic content legislation and by quotas--which seem more lik ely if this project fails help avoid both GM seems to be getting help in compet The Toyota-GM venture will no doubt History tells us that government legislation which blocks the movement of goods and services .and technology has. fostered economic depress ion, the decline of innovation cultural stagna tion, and war. Civilization's advances have taken place in an en vironment of openness and interchange. This has sometimes been painful.

It was for Japan after World War 11; but look at the results. It is now painful for the U.S but consider the alter- natives. 9 The Toyota-GM venture also carries serious implications for U.S.-Japanese relations to create more unemployment in the U.S its convictions regarding free trade and competition the U.S. government want s to avoid a wave of anti-Japanese .feelings in the U.S.--being fueled now by unions and politicians who are looking for votes and seek a scapegoat for the unemployment pro blem in the U.S. It must be remembered that Japan is America's number one ally, not just in Asia but anywhere number one overseas trading partner. It is the leading purchaser of American farm products and a number of other categories of U.S. goods. The trade balance in the 1950s and early 1960s favored the U.S. Now, only because of a dec l ine in U.S. productivity, it favors Japan The Japanese government does 'not want Yet it cannot abandon Similarly Japan is America's Ford and Chrysler have called for congressional hearings to criticize the venture public opinion against the project by por t raying the joint venture as a merger. All of this is designed to influence the Federal Trade Commission's vote. The FTC can delay the project (having already done so for several months issue a complaint, or sue Toyota and GM. Or it can approve the project sion is in the American interest and in the interest of free trade American competitiveness, and U.S.-Japanese relations They have sought to use the press to turn The latter deci John F. Copper Director Asian Studies Center


John F.

Senior Policy Analyst on International Economics

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