Mr. Ford's Wrong Turn

The architects of the new Toyota-Honda system assumed that production labor would be paid different rates, as it was everywhere else in the world. Final-assembly workers would receive a premium and less skilled employees of parts makers -- not owned by the car companies -- would work for prevailing market wages. These Japanese firms also assumed that in hyper-competitive markets, no company could commit to benefits decades ahead. Better to base pensions on defined contributions made during work years rather than by guaranteeing payments in the far future.

These were ominous trends for Detroit, and its response -- further investments in automation -- didn't make economic sense. (Remember when GM Chairman Roger Smith thought that all factories were to be run by robots?) The Toyota secret was designing and making cars and purchasing parts in more efficient and creative ways.

This new Toyota system -- which John Krafcik, my former colleague at the Massachusetts Institute of Technology and now the director of product strategy for Hyundai, labeled "lean production" -- uses less human effort and less capital to design products faster and with fewer defects.

What's more -- and this best describes Bill Ford's problems -- the leading Japanese car companies are making more money than their U.S. competitors not only because of lower costs, but because their lean design, production and purchasing system is turning out vehicles so desirable that Toyota and Honda can charge much higher prices for products in the same segment of the market. Indeed, these Japanese companies are giving wages and health packages to current workers in North America similar to those provided by their U.S. rivals, but they're selling vehicles today for $2,500 more than comparably equipped cars made by Ford and GM. This revenue difference, more than the production cost issue, lies at the real heart of Motown's problem.

Ford and GM have tried to embrace lean production methods, but as their market share shrinks, the legacy of the past looms larger. The U.S. firms need to shed large numbers of employees, but the main way to do that under "life-time employment" union contracts has been to encourage early retirement. This has solved one problem -- too many active workers. But it created a second -- too many retired workers for the active workers to support.

It's little wonder that money-losing Ford doesn't have the funds to invest in new technologies and is asking Washington for help. Meanwhile, Toyota is generating such enormous profits (more than $9 billion worldwide this year) that it can invest in new products and new technologies at a level far exceeding anything Japan Inc. could throw into the equation.

This is not to say that Washington shouldn't throw Ford a bone, such as tax credits for additional research on energy efficiency. Everyone needs to do his part to address the greenhouse gas issue. But that sort of government goodie won't save the American-owned auto industry.

The bigger question is how to cope with the pension and health care commitments of U.S. companies on the road to financial ruin. This is not only a government policy issue, but a societal one. U.S. auto companies, and many other firms, are suffering from the same syndrome that is afflicting Social Security: There are too few workers in the post-Baby Boom generation to support the benefits promised long ago to the Boomers.

One approach would be to stand back and let the auto companies fail. A bankruptcy judge could then explain that the promises made to retirees are much more extravagant than what most other Americans are getting. The judge could then call the deal off and pay out pension benefits at maybe 50 cents on the dollar.

Another alternative would be to transfer the obligations to the government. This would ease the pain of a generation caught in a historic industrial transition. But how can the government take on such a burden when it is already saddled with war costs and budget deficits?

But no amount of government assistance can rescue U.S. auto companies unless they become better competitors. In fact, Ford had it exactly backwards when he spoke to reporters last month. Japan isn't his problem; Toyota is. And the answer for his company, like the challenge to it, lies here at home.

Author's e-mail: jwomack@lean.org

James Womack is co-author of "The Machine That Changed the World" (Scribner) and the recently released "Lean Solutions" (Free Press). He is president and founder of the Lean Enterprise Institute, a nonprofit research and education organization in Brookline, Mass.