Posted on: Sunday, November 23, 2003
U.S. auto industry forced to match global price cuts
By Craig Torres
Bloomberg News Service
Last year, Ram Thuluri made parts for American cars in an American city. Now he will make them in India. His reluctant odyssey from job creator to job exporter indicates what's driving the loss of U.S. manufacturing jobs: manufacturers themselves.
In 1998, Thuluri founded RamaTech LLC in Belleville, Mich. By 2000, the business was selling $40 million a year in components for Ford Motor Co. and General Motors Corp. vehicles.
Two years later, Thuluri lowered his prices as automakers pressured suppliers and found cheaper components abroad. His operating costs rose and his debt payments didn't fall. Thuluri pledged his wife's wedding jewelry as collateral on business loans. His lender, Comerica Inc., foreclosed on RamaTech six days before Christmas 2002. Thuluri fired 300 workers, contributing to the 2.78 million U.S. manufacturing jobs lost over 39 months.
Starting over, Thuluri will pay workers 50 cents an hour in Hyderabad, India, instead of $14 in Detroit.
"The auto industry isn't going to wait," he said in an interview in a suburban Detroit workshop where he designs components to be produced, for the most part, at his brother's plant in India. "They want you to be in the forefront with them and fight these wars" for quality components at a lower price.
The advent of the Internet and slowing inflation spurred the move to find cheaper parts abroad and accelerated the decline in manufacturing jobs in the 1990s, say economists such as Stephen King, managing director at HSBC Holdings Plc in London.
The Internet made prices more readily accessible and allowed bidders in New Delhi to compete for contracts as if they were in Detroit. As U.S. factories modernized equipment, more used machinery found its way to China and India, improving the quality of products made in those countries.
Demand slowed
U.S. consumer demand slowed as a recession took hold in March 2001, and disinflation — the slowing of price increases — kicked in, squeezing corporate profits. New-car prices are down 3.83 percent from five years ago, according to the U.S. Labor Department's consumer price index.
General Motors, Ford and DaimlerChrysler AG are struggling with too much capacity and with competitors such as Toyota Motor Corp. that continue to erode U.S. makers' market share. The tariffs on steel imposed by President Bush in 2002, and ruled illegal last week by the World Trade Organization, made it more difficult for U.S. automakers to lower their raw-material costs.
"The price-cutting is much more severe on the Big Three side," said Dan Luria, an auto analyst for the Michigan Manufacturing Technology Center in Plymouth, Mich. "The internationalizing of sourcing is being driven in their view by the fact that they have to keep cutting prices because nobody wants their product at the current price."
Permanent trends
Even as U.S. growth accelerates, manufacturing jobs show few signs of improving. The economy expanded at a 7.2 percent annual pace in the third quarter and shed an additional 128,000 manufacturing jobs in that period.
Global price competition and parts buying from overseas are permanent trends, not temporary ones brought on by the 2001 recession, executives said.
"The flow of globalization will continue, and that shouldn't be a surprise," said retired General Motors chairman John F. Smith Jr. during a recent speech in Michigan. "The plus side is that it makes goods much cheaper."
General Motors, the world's largest automaker, spends $75 billion a year on components for worldwide operations.
The company told suppliers earlier this year that it wants to cut costs by as much as 20 percent over three years on engine, interior and chassis components in North America, said Thomas Hill, spokesman for the company's worldwide purchasing group, in an interview. Suppliers also were told separately that, as of Oct. 1, they would have a 30-day window to match competitors' lower prices, down from 18 months, on long-term contracts, Hill said.
Ford, meeting last week with its 100 biggest suppliers, asked those it said were charging above "industry benchmark" prices to implement 3.5 percent cuts starting in January. Ford estimates it will cut costs by $3 billion this year.
Ford's North American operations started a program last year called Team Value Management, where teams that include suppliers seek ways to cut costs in parts and supplies.
"In the 1990s, the ability of nations to pass on cost increases in the form of higher prices was reduced dramatically," King, the economist at HSBC Holdings, said in an interview.
"The correlation of national prices with international prices became much greater," he said. "It is almost as if we have moved in many industries to a global law of one price."
Imported materials equaled 24 percent of the total value of U.S. manufacturing production in 2001, up from 14 percent in 1991, according to the National Association of Manufacturers. U.S. factories exported 14 percent of their production in 2001, up just 2 percentage points from a decade earlier.
One result of U.S. reliance on overseas suppliers is a 16 percent decline in manufacturing jobs since July 2000, the last time the economy created new industrial jobs. That's "the worst in 30 years of record keeping," said David Heuther, the association's chief economist.
Typically, the U.S. economy creates new jobs as it drops obsolete ones. That is happening at a slower pace. The economy has shed 1.1 million jobs since the recession ended in November 2001.
Sitting in an office with a brown carpet that's losing a battle with greasy footprints from his small machine shop next door, Thuluri offers one small example of the trend.
He places a fuel-injector part for a Cummins Inc. diesel engine on the table. The finely turned steel cup is "a piece of jewelry," he boasts, noting that it can be sold from India for $1.15 instead of $2.50 in the United States. He says there are few U.S. companies that can compete at his price. And he isn't sorry for those who can't.
"Who still owes $4.5 million?" Thuluri says, referring to personal debts still owed to Comerica. "I can't even buy an ice cream cone now."
