Brain-Jockey

Tough Love for Detroit: No “Just-In-Time” Bailouts

Written by Audrie Zettick on November 19, 2008

“Google” a phrase like “Detroit auto bailout” and you’ll find thousands of articles, many bemoaning the state of the Big 3 U.S. automakers.  Search on the terms “Honda Indiana Plant” and you’re likely to get a bunch of hits showing articles from 2006 (like this one from CBS News) lauding the possible opening (and lobbying for) an American Honda manufacturing plant in Greensburg, Indiana.  

 

Be careful when you read your list of hits, though.  You might miss the one or two about the Honda plant that opened this week.  Yes, opened.

 

On Monday, a Honda plant with over 1,000 employees (expected to eventually employ 2,000 or more workers) opened, beginning the manufacture of the Honda Civic.   This follows expansion of a Toyota plant in Lafayette, Indiana, where the Camry began assembly earlier this year. 

 

As it should be, Honda is able to respond to marketing and economic conditions by producing the smaller more fuel-efficient Civic.  Toyota is contracting in some areas, adjusting labor and lowering SUV and truck production, to respond to conditions that favor the smaller Camry and Prius hybrid. 

 

It’s not that the Big Three don’t adjust.   They have tended to overproduce regularly, resulting in having too many cars to move (much to dealer complaints) and the resulting special incentives and worker layoffs.  Of course, prices then rise as, eventually, demand and supply meet a critical point.  This past summer, Chrysler shut down all plants for two weeks.

 

On the other hand, Toyota historically has held fewer days of inventory than the Detroit automakers.  Most of the time, this keeps them in strong financial position.  Sometimes it backfires, such in this past summer when consumers seeking smaller fuel efficient cars were forced to look elsewhere due to a 6-month waiting list at Toyota.  The irony: Toyota’s demand was up at a time when sales dropped dramatically for U.S. automakers. 

 

The difference between Toyota’s and Chrysler’s periodic shutdowns is more than scale.  These include:

 

• Lean Manufacturing: Toyota’s just-in-time inventory (or Lean Manufacturing) approach is part of a larger strategy that allows them to adjust where and what models they make.  Toyota’s renouned approach allows them to cut waste all along their production process. 
• Business risk:  The downside of running lean–running short of cars–has less of an impact on them then overproduction and carrying the inventory at the plant or at the dealers. 
• Economic Impact:  Toyota’s temporary labor reductions and model reshuffling affects the local economies less than Detroit’s actions.  Among the strategic measures implemented by Toyota: shutting production at all plants for two extra days in December, laying off some temporary workers and eliminating one shift making the Toyota Tacoma at the California-based plant they share with GM.  Compare this to Chrysler’s shutting down for two weeks or laying off 1,000 workers.  

 

We’re not talking cost of labor here, we’re talking plain old business planning.  What makes lawmakers think that bailing out the Big Three will change their management practices?  Or, more frighteningly, having government at the helm (a la Pelosi) will result in effective management? 

 

Yes, there will be regional economic fallout, but it’s time for tough love for the U.S. auto industry.  Detroit sees us as a source of funding.  Toyota and Honda see us as consumers, and plan accordingly.  I vote for the latter.