Russel Sage Foundation

The recent RSF book, Wrecked, is a compelling study of the decline of the American automobile industry. The book debunks common misconceptions about where the industry faltered, drawing precise and well-researched comparisons between automobile manufacturing in the United States and abroad, especially Japan. In this interview, Wrecked co-author Joshua Murray offers insight into some of the book’s key findings. 

What is the most compelling evidence that the auto industry was not destroyed by American unions and worker demands, but instead by other forces?

When the labor cost differential between U.S. and foreign companies was greatest, the cost of labor accounted for less than a quarter of the advantage of foreign companies (labor costs account for even less today). The vast majority of the foreign advantage was, and is, in product and process innovation. The advantage of innovation lies in the different production systems used by companies. The American Big Three use a dispersed parallel production system, while most foreign competitors use a flexible production System. Flexible production facilitates innovation. 

The US companies used to use flexible production, but they abandoned it. They abandoned the system BEFORE any foreign competition arrived. Thus union demands raising labor costs above those faced by foreign companies using non-union labor could not have been the cause of abandoning flexible production. Since abandoning flexible production is the cause of the innovation gap plaguing US automakers, union/worker demands cannot be the reason the industry was destroyed. 

Can you describe how in response to union demands and work stoppages, the US auto industry abandoned flexible production and effectively ended product innovation?

Flexible production gives workers what we call high structural leverage. That is, the production structure makes it so that it takes less workers involved in direct actions like strikes, for a smaller amount of time, in order to force concessions. This is because the concentration of production, just-in-time delivery, and sole-sourcing allows workers to target key plants in the system and effectively shut down all or most of the company's production. In the post-war period workers began demanding a greater voice in production decisions, so as to ensure the benefits they had won and their share of the value they were helping to create. Auto management, not wanting to share in production decisions with workers, reverse engineered the system to remove worker leverage. Instead of just-in-time delivery, which allows a shortage of parts to shut down production, they began carrying huge stockpiles of inventory. Instead of sole sourcing parts, which allows a handful of workers to target a single plant, they began to source the same parts from multiple sources. Finally, instead of having suppliers and assemblers all clustered geographically, which made mobilization and direct actions more efficient, suppliers were separated from each other and from assemblers (often by thousands of miles). 

While this removed worker leverage, it also made implementing innovations very difficult and cost prohibitive, since innovations now had to be coordinated across many different suppliers and assemblers, all located in different regions. 

Can you explain in brief what you describe as the Japanese advantage in terms of flexible production and innovation?

Innovation is something that is implemented on a trial and error basis. Someone comes up with a new idea, the relevant actors try to implement the idea. If it doesn't quite work, those actors tweak things and try again until they get it to work. This process is aided by flexible production. First, geographic concentration of production means all the relevant actors (i.e., engineers, designers, rank and file workers, managers, etc. for both suppliers and assemblers) are close enough for face to face meetings. Studies of innovation consistently show that the more removed actors are from each other, the more difficult innovation is. Second, just-in-time delivery of parts means that if an innovation requires changes to a key part, there is no giant stockpile of inventory that is rendered useless forcing the company to take a financial hit. Instead, changes can be made quickly and cheaply. Long-term sole supplier contracts mean that the components suppliers will be willing to be partners in implementing an innovation because they know they will reap the long-term rewards and not have their contract dropped for a cheaper company two years from now. Finally, flexible machinery allows lines to keep being productive even as workers figure out how to implement an innovation. 

Is there any possibility of reversing the decline of the American automobile industry, and most importantly, bringing back American jobs in the auto industry? If so, what steps would have to be taken?

U.S. automakers would have to re-adopt flexible production. First, this means re-concentrating suppliers around existing assemblers. This could be done by incentivizing existing suppliers to move to where assemblers are by offering long-term sole sourcing contracts. It could also be done by building new supplier plants or contracting with new suppliers close to assembly plants. These new suppliers would also need to be on long-term sole source contracts. This is because step 2 is to engender trust between suppliers and assemblers. Trust is key to getting assemblers to also adopt flexible production, allowing them to be part of the innovation process. Step 3 is to re-introduce just-in-time delivery of parts. No more stockpiles of inventory. This step only works if travel time from supplier to assembler is short, and there is trust between supplier and assembler. Step 4 is to change machinery from single purpose to multi-purpose. Flexible production can result in downtime at stations unless machinery can do multiple tasks. This also allows for greater geographic concentration as multiple models can be made in the same plant. The final step is the most challenging for auto companies: they must repair the broken trust they have with their workers. The way to do this would be to admit that in the past management competed on the backs of workers by working to lower labor costs in lieu of being innovative. Then, offer the workers a real voice in the production process and real veto power over decisions. This would signal to workers that management was serious about sharing in both the necessary sacrifice and the rewards of the system. Then, the industry would have to weather the storm until their greater capacity for innovation began to pay off. And when it did, they would need to increase the pay and benefits of workers.

This is incredibly unlikely to happen if management is the one making decisions. It would take an incredible investment of capital at a time when they are struggling to compete. In addition, the US business community in general have shown they are more interested in defeating and limiting labor than they are in anything else.

For the above to have a chance at happening, the final step probably needs to be the first one, and that probably has to be forced by the workers themselves. If workers can start winning direct conflict with auto management and use those victories to gain a say in production decisions, they could spearhead the re-adoption of flexible production. 

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