GM, Toyota, Japan, and National Health Care

The so-called auto company bailout debate has turned into a piece of cynical posturing by Republicans eager to reclaim their fiscal responsibility/small government/right to work credentials by sneering at a bridge loan for the Big Three and the UAW—even as the transplant operations they champion so enthusiastically send billions in profits to Japan.

As Paul Krugman pointed out, even if the Detroit automakers deserve some tough love, pushing them into bankruptcy in the middle of a severe economic downturn and exacerbating the recession is not the way to do it.

Assume that a bridge loan to help the Big Three weather the downturn is going to happen, perhaps when the current crop of congresscritters has left Washington and the bailout can be hung around the neck of the Democrats and the Obama administration.

Maybe in February, we can have a serious discussion about fundamental problems and systemic solutions.

And the whole debate might not hinge on greedy unions, electric cars, CAFÉ standards, on brain transplants for auto executives.

It should be about national health care.

A key difference between GM and Toyota isn’t unions.

It’s national health care in their home markets.

When they go overseas, both corporations are global and have done a pretty good job of wringing regulatory concessions out of local governments, keeping unions either toothless or out of their plants, and limiting responsibility for retiree incomes and health insurance to the bare minimum.

In the homeland, it’s a different story.

In the United States, GM paid $4.6 billion in 2006 in health care costs for 350,000 retirees. A lot of those retirees were employees who were downsized in a series of restructurings.

In an effort to whittle away at this number, GM changed its policies so white collar retirees have lost their lifetime GM health insurance and will be pushed into Medicare upon reaching 65, saving GM $1.5 billion. Health care for union retirees will be pushed into a UAW-administered trust—a Voluntary Employee Benefits Association or VEBA—into which GM will pour $33 billion.

Even with these changes, GM has a hefty, multi-billion dollar yearly bill in retiree health care costs it has to work through.

If GM doesn’t go bankrupt first.

The story’s different for Toyota in its home base in Japan.

In Japan, Toyota pays health care for its retirees for two years after they leave the company. That’s less than 3,000 workers per year. The health care costs are so small they don’t show up on Toyota’s balance sheet.

Then the Japanese National Health Insurance—the government-operated facility that covers the retiree and non-worker end of Japan’s universal insurance system--picks up the tab.

That’s important.

The interesting little secret about Toyota is that, like GM, its home base operations are not especially profitable, even with the health care subsidy.

Japan is an expensive place to have a factory. When bonuses are factored in, Toyota and GM workers both make yearly incomes in the $60,000 range.

Even with massive exports of Japan-built cars, the Japanese operations account for about 1/3 of global profits while posting 50% of worldwide sales.

In the first quarter of FY 2006, Toyota’s home operations brought in about US$1 billion of its total profits of $3.23 billion.

That’s roughly what GM was paying per quarter on retirees’ health care.

Both Toyota and GM suffer from high-cost manufacturing facilities in their big home bases. GM bears the additional burdens of a) no national health insurance and b) apparently having done quite a thorough job of bungling the fiscal consequences of its promises to the UAW retirees since the 1950s concerning their health care.

For both countries, the primary money-making action is overseas.

Toyota North America brought in $2 billion on almost half the sales. In other words, 50% of worldwide profits on 30% of global sales.

GM made $2 billion in its strategic Latin American and Asia/Pacific sales while struggling in Europe.

So you have two companies almost identical in size and scope of operations, and equivalent in profitability outside the homeland.

But Toyota has, by a combination of skill, luck, and circumstance, successfully navigated the hazards of running an enormous industrial operation in a high-cost homeland with a tradition of labor militancy while successfully globalizing.

GM, on the other hand has been less successful in working through its challenges in the homeland, even though it has done a pretty good job overseas, and now is getting flattened by the truck of a brutal recession.

National health care plays not insignificant role in keeping Toyota profitable and its absence plays an important role in keeping GM unprofitable.

As Gina Hamilton argued in a thoughtful piece in the Coastal Journal:

Toyota and its Japanese cousins started out with a benefit package that GM, Ford and Chrysler had to purchase themselves. In short, Toyota, Honda and Nissan had a government 'bailout' from day one in terms of health care and retirement pensions.

It could also be argued that GM’s financial woes have distorted its behavior in the North American market.

In a bow to the laws of comparative advantage, GM’s cost disadvantage forced it to surrender the field in North America to Toyota in the particular market that Japan was interested in—sedans and compacts—and concentrate on the heavy iron instead. When high gas prices and a recession materialized, GM was in the worst position possible.

It may turn out that the secret to restoring rationality and competitiveness to the global auto manufacturing industry is extending to the retirees of the Big Three in the United States the same privilege that their brethren at Toyota, Honda, and Nissan enjoy in Japan—national health care.