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OCR for page 169
Appendix A
Estimates of Comparative Productivity
and Costs UnderA~ternative Methods
This appendix presents estimates of the U.S.-Japanese landed-cost
differential on a small vehicle, using several different methods
and approaches. In addition, estimates of differences in produc-
tivity also were obtained. Some of the panel members have had
access to internal studies of these issues that make use of pro-
prietary data. Our intent here, however, is to make use of public
information in order to illustrate the range of estimates implicit
in generally available data.
The four approaches can be distinguished in their unit of
analyses. The first adopts what is essentially an economy-wide
m acro perspective; this we have labeled the industry/macro
approach. The second, the industry/micro view, looks at the issue
from the standpoint of the industry taken as a whole. The third,
the company perspective, uses data on two major firms, as
detailed in their annual reports. Finally, we present data on
plant_by-plant comparisons of particular kinds of production
processes. The concluding section of this appendix summarizes
the results.
Before reviewing the analysis it is important to note the
difficulties associated with calculations of this sort. The auto
industries of the United States and Japan produce a different mix
of products and have organized production in different ways,
particularly in terms of vertical integration. Productivity com-
parisons are also significantly affected by differences in capacity
utilization that have been substantial in recent years. While
attempts have been made to correct for these factors, even the
most careful comparison requires judgements and assumptions that
affect the results.
The Industry/Macro Approach
One way to compare productivity in auto manufacturing in the
United States and Japan is to do the comparison on an economy-
169
OCR for page 170
170
wide basis. This approach, which involves comparisons of effici-
ency in every production activity required in making an automo-
bile (i.e., mining iron ore, oil refining, steelmaking, machinery
fabrication, power generation, business services), uses an input-
output analysis. Given the scope of automobile production, this is
close to comparing the economy-wide productivity of the United
States with that of Japan.
Available data on economy-wide productivity indicate a U.S.
advantage, so it is no surprise that the industry/macro approach
tends to find higher total labor hours per vehicle (defined over the
whole economy) in Japan. Dan Luria of the United Auto Workers'
Research Staff has used 1977 input-output data updated to 1980
and estimated labor content for a small, 1980 Japanese vehicle to
be 364 hours versus 336 for the American; this is a U.S. advantage
of about 8 percent. With assumed hourly charges of $ 11
(averaged over all embodied hours) for the United States and $7
for Japan, Luria's estimate of the manufacturing cost advantage
of the Japanese is $1148. If freight charges ($400) are subtracted,
Luria's analysis implies a landed-cost advantage of $748.
It should be noted that, while the industry/macro analysis does
not provide an estimate of productivity or cost difference origi-
nating within the auto sector, it is not inconsistent with the
existence of a U.S. disadvantage. Indeed, existing evidence
suggests that a good part of the production activity outside of the
auto sector (and even some in the sector but outside of the big
firms) may take place in small establishments where productivity
is low. Luria suggests that the Japanese had a productivity
advantage of 11 percent (about 15 percent in 1981 terms) in the
auto sector but that they were 16 percent less productive in other
industries.
Industry/Micro Costs and Productivity:
Motor Vehicle and Parts Industry
To obtain estimates of cost differences in the auto industry itself,
it is useful to first examine differences in labor productivity. In
1974 Baranson estimated that output per labor hour in the
Japanese motor vehicles and parts industry was 88 percent of the
level reached in the United States (i.e., the ratio of productivity in
Japan to productivity in the United States was 0.88~.2 This 12
percent U.S. advantage in 1974 is consistent with calculations
developed by the British Central Policy Review Staff; using 1973
data they estimated the relative productivity ratio to be 0.82.3
These estimates can be updated using published data on growth
rates of productivity in the United States and Japan. Abstracting
from cyclical fluctuations, the evidence suggests that growth in
OCR for page 171
171
labor productivity in the Japanese auto industry (vehicles and
parts) averaged 8-9 percent per year in the 1970s; the comparable
figure for the United States is 3-4 percent.4 If we apply a
mid-range estimate of the differential (i.e., 5 percent) to previous
estimates of relative productivity, we arrive at a value for 1980 of
1.18. The data on industry growth rates imply that the Japanese
producers operated at levels of productivity almost 20 percent
above their American competitors.
More rapid growth in productivity in Japan has been accom-
panied by higher rates of wage increase. Whereas in 1974
Japanese hourly compensation rates were about 37 percent of the
U.S. figure, in 1980 the ratio was roughly 50 percent.5 Relative
unit labor costs can be calculated by dividing the compensation
ratio by the index of relative productivity.6 This method yields an
estimated unit labor cost ratio of 0.424 = (0.5/1.18) for 1980.
Thus, Japanese-U.S. differences in the growth of productivity and
compensation have been offsetting; the wage gap has continued to
narrow, while a productivity gap has emerged and grown larger;
relative unit labor costs remained roughly constant at 0.425 over
the 1974-1980 period.
We assume that the estimate of relative unit labor costs
applies both to the auto manufacturers and to their suppliers. The
estimate can be used to calculate the dollar value of the Japanese
advantage in lower overall labor costs per vehicle. Since our focus
is on the overall labor content in the vehicle, including purchased
parts and materials, we are in effect comparing the relative
position of the Japanese and U.S. automobile production systems.
We are not comparing labor costs at the level of a Toyota or a
General Motors' (GM) car; our analysis seeks to estimate the
impact of productivity and compensation in the whole productive
confederation--original equipment manufacturers (hereafter,
OEMs) and suppliers of components and materials. Note that this
is different from the industry/macro approach, which included
many more activities outside the "productive confederation" in the
calculations.
Table A. 1 presents the basic building blocks of the analysis.
Column 1 contains an estimate of the shares in manufacturing
costs of hourly and salaried labor (at the OEM level), purchased
components, and materials. These estimates are based on data
prepared for the National Research Council, Committee on Motor
Vehicle Emissions, as well as discussions with industry sources.7
The estimates do not reflect the experience of any one company
but are intended to approximate an industry average. It should be
emphasized that all of the data refer to production of a small,
subcompact vehicle. In addition to the data in column 1, industry
participants have provided us with estimates of average OEM
labor hours per vehicle, current rates of employee cost per hour,
OCR for page 172
172
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OCR for page 173
173
and labor content in purchased components and materials; these
data are presented in columns 2, 3, and 5.8
The calculation of U.S.-Japanese cost differences takes place
in three steps. We first use the data in columns 2 and 3 to get an
OEM hourly labor cost per vehicle of $1170, and then extrapolate
using the cost shares (column 1) to arrive at a total manufactured
cost and the cost of purchased components and materials (column
4~. Next, we multiply the cost per vehicle in column 4 by an esti-
mate of the labor content of the three categories presented in
column 5. The data imply, for example, that $1255 of the $1901
cost of components is labor cost. Finally, we calculate the U.S.-
Japanese labor cost gap by multiplying the U.S. data in column 6
by 0.575; the adjustment factor is based on our previous estimate
of the Japanese-to-U.S. unit labor cost ratio. 9 Thus, column 7
provides an estimate of the difference in the cost of producing a
small vehicle in the United States and in Japan due to differences
in unit labor costs, not only at the OEM level but also at the
supplier level as well.
The estimated cost gap is sizeable. When the effects of
components and materials suppliers are added, the Japanese cost
advantage is $1690. Although the calculations in Table A.1 are
based on estimates of cost structure and labor content, reasonable
adjustments of these assumptions would not reduce the order of
magnitude of the Japanese cost advantage. To arrive at a landed
(i.e., after shipment to the United States) cost differential, it is
necessary to add general administrative and selling expenses as
well as the costs of capital and transportation. Our estimates
from annual reports and other sources suggest that these factors
would reduce the Japanese advantage to $1436.~°
The Company Perspective: Evidence from Annual Reports
Additional insight into the differences in production costs in the
United States and JaDan con he obt;~in.~rl 1-hr^~~rh :~n ::n~l~rcrie of
· CALL ~ =~= V 1
~ ~ · ~ · . _
Data contained In company annual reports. The use of annual
reports shifts the focus of analysis to the costs incurred by the
major manufacturers. In terms of labor costs the shift in focus
generally means that no information will be available on labor
embodied in components or materials. However, differences in
costs associated with nonlabor inputs and with corporate-wide
management and salaried personnel can be assessed. Further-
more, the annual reports allow us to estimate labor productivity at
the OEM level. This approach thus provides a useful check on
industry estimates.
OCR for page 174
174
Any comparison of Japanese and U.S. companies must confront
several analytical problems. Perhaps the most serious issue is the
great difference in vertical integration and relationships with
suppliers. At Toyota, for example, purchases account for almost
80 percent of the value of final sales. Because Toyota holds an
equity interest in many of its suppliers, this figure is somewhat
misleading. Comparable data for U.S. firms show much less
reliance on suppliers. GM, for example, has a purchase-to-sales
ratio of less than 50 percent. A second major problem is the
different product mix of U.S. and Japanese firms. The data we
shall use are those for 1979, when the products of the Big 3 were
dominated by models in the medium-size ranges. The Japanese
produced a much narrower range of vehicles, with heavy emphasis
on the subcompact segment.
Our approach to annual-resort analysis can be illustrated using
data on Toyo Kogyo (Mazda) and Ford. Both companies provide
sufficient information on automotive production and employment
to permit calculation of labor hours per vehicle in U.S. and
Japanese operations. Although Toyo Kogyo is about one-third the
size of Toyota and used to be a relatively high-cost producer, it
has experienced significant gains in productivity in recent years
and now appears to have costs that are on par with those at
Toyota and Nissan. Available evidence suggests that Ford is
somewhat less efficient than GM, so that the Ford data may
understate industry productivity.t ~
The basic estimates of employee costs per vehicle are
presented in Table A.2. Two principal assumptions underly the
calculations. Data on total domestic employment and total
domestic employee costs were broken down into automotive and
nonautomotive components based on the ratio of automotive to
total sales. This effectively assumes that nonautomotive busi-
nesses were as productive and as labor intensive as the automo-
tive group. Since cars and trucks account for over 90 percent of
sales at Ford and Toyo Kogyo, this assumption is not critical. The
second assumption is that Ford employees worked an average of
1620 hours per year. For Toyo Kogyo the comparable number was
assumed to be 1900 hours. These adjustments reflect differences
in the effects of vacations, holidays, personal leave, and
absenteeism. ~ 2
The evidence in Table A.2 reveals sizeable d ifferenc~ i n
-a ~ >
_ r_1
~ . ~ ~ . ~ . . . . . _ .
productivity and total employee cost per unit. Given our assump-
tions, we estimate that the average Ford vehicle required 112.5
employee hours, while Toyo Kogyo produced an average vehicle in
only 47. At an exchange rate of 218 yen to the dollar, we find
that employee cost in the average Toyo Kogyo vehicle was less
than $500; the comparable figure for Ford was $2464. The size-
able cost gap reflects differences in product mix and vertical
OCR for page 175
175
TABLE A.2 Estimated Employee Costs Per Vehicle, 1979
Ford
Toyo Kogyo
(1) Domestic production of cars and trucks (millions)
(2) Total domestic employment
Automotive
Nonautomotive
(3) Total domestic employee hours
Automotive (millions)
(4) Total employee cost
Automotive (millions)
(5) Employee hours per vehicle
(6) Employee cost per vehicle
3.163
219,599
19,876
$7794.50
112.5
$2464
0.9~83
24,318
2,490
46.20
$482.20
47.0
$491
NOTES: Line (1): Published production figures for Ford have been adjusted to eliminate
65,000 imported vehicles; the Toyo Kogyo data have been adjusted for production of
knock-down assembly kits. Lines (2) - (4): Data on automotive employment and costs were
obtained by assuming that the ratio of automotive employment to total employment was the
same as the ratio of sales; the same assumption was made to obtain Ford employment costs.
Line (3): Ford hours were determined by assuming that each employee actually worked
1620 hours per year. Toyo Kogyo hours assume that each employee actually worked 1900
hours. Line (4): Data include salaries, wages, and fringe benefits. For Toyo Kogyo, com-
pensation data were derived by updating a 1976 figure using compensation growth rates at
Toyota; an exchange rate of 218 yen per dollar (1979 average) was used to convert yen to
dollars.
integration as well as wage and productivity differentials. Toyo
Kogyo concentrates heavily on the production of small cars, while
Ford's product line covers a much wider range of sizes. Ford
produces a larger fraction of the average vehicle in house. Infor-
mation on value-added in the annual reports and discussions with
industry sources suggests that the Toyo Kogyo results should be
increased by 15-20 percent in order to adjust for differences in
vertical integration. Using the higher estimates yields 56 hours
per vehicle for Toyo Kogyo.~3
To correct for differences in mix we have estimated the cost
to Ford of producing the Toyo Kogyo product mix. The calcula-
tions are presented in Table A.3. The procedure uses data on
manufacturing costs by vehicle size class developed for the
Committee on Motor Vehicle Emissions of the National Research
Council in 1974.~4 Estimates of the cost to Ford of producing the
Toyo Kogyo mix were obtained by first computing a weighted
average of the relative manufacturing cost indexes with Ford's
1979 production shares by size as weights. The ratio of the com-
parable Toyo Kogyo weighted average (1.06) to the Ford weighted
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176
TABLE A.3 Product Mix Adjustment
(1 ) Ratio of car to total vehicle production
(2) Production shares by size
small
medium
large
(3) Relative manufacturing cost by size
(small= 1.00)
small
medium
large
(4) Weighted average relative manufacturing cost
(small= 1.00)
(5) Production of Toyo Kogyo mix at Ford level of
integration
(a) employee cost per vehicle
(b) employee hours per vehicle
Ford
0.645
o. 1 la
o.68a
0.21
1.00
1.35
1.71
1.38
Toyo Kogyo
0.652
0.83
0.17
N/A
N/A
N/A
1.06
$1893b $589
87b 56
a Assumes that only Pinto and Bobcat models are small; Mustang and Capri sales were
placed in the medium category.
b Obtained by multiplying lines (5) and (6) in Table A.2 by (1.06 . 1.38).
SOURCE: Committee on Motor Vehicle Emissions (1974); Ward's Auromotive Year
Book; annual reports.
average (1.38) was used to adjust both costs and productivity. It is
an estimate of the effect of product mix on Ford's average
_ cost
and labor hours per vehicle. After these adjustments we estimate
that Ford would require 87 employee hours to produce the
average-size vehicle in the Toyo Kogyo product line, compared to
56 hours in the Japanese firm. Labor cost per vehicle is just over
$1300 higher at Ford. These comparisons are based on the
average-size vehicle at Toyo Kogyo. For a small vehicle (i.e.,
Pinto versus Mazda GLC) the Ford estimate is 82 hours per
vehicle, while the comparable Toyo Kogyo figure is 53; the
corresponding costs per vehicle are $1785 (Ford) and $556 (Toyo
Kogyo). Even this adjustment may overstate costs and hours
required to produce the Toyo Kogyo mix at Ford if the trucks and
commercial vehicles produced by the two companies differ
substantially.
The analysis of annual report data suggests that the difference
between Ford and Toyo Kogyo employee cost per small vehicle in
1979 was about $1200. Updating to 1980 would increase the
absolute dollar difference by about 10 percent, a reflection of
changes in wage rates and materials prices. An adjustment for
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177
changes in exchange rates also would have only negligible effects.
W e have used an exchange rate of 2 18 yen per dollar ( 1979)
average; use of 200 yen per dollar (approximate rate at the end of
1980) would reduce the gap by about $50.~s
The estimated cost differential reflects the compensation and
productivity of all employees in the two firms. It does not,
however, capture differences in unit labor costs in components or
materials. Although the data were developed within a different
f ramework, the evidence on labor content in components and
materials used earlier is suggestive of the likely order of magni-
tude. After adjusting for possible differences in productivity
differentials at the supplier level, adding $700 to the employee
cost differential seems justified. We conclude that differences
in compensation and productivity lead to significantly lower unit
employee costs in Japan; if Ford is indicative of average U.S.
performance and if Toyo Kogyo is representative of the major
Japanese auto producers (and comparisons with Nissan and Toyota
suggest it is), then the cost advantage from labor and materials is
likely to be about $1900 per vehicle. Analysis of other elements
of total cost--e.g., selling and general administrative expenses--
provides evidence of a U.S. advantage of about $135 per vehicle.
Likewise, freight costs and the 2.9 percent tariff add another $400
to Japanese costs. The net result is a landed-cost advantage to
the Japanese producers of $1465.
Evidence from the annual reports suggests a somewhat larger
cost differential than we obtained using the industry/micro
· ~
approach. The difference arises primarily from a much higher
level of productivity in Toyo Kogyo than suggested by our updating
of the 1974 estimates of Baranson. Those estimates applied to the
entire motor vehicles and parts industry and were admittedly
r ough and imprecise. It is not unreasonable that relative
productivity at the OEM level would exceed levels achieved by
suppliers. Without additional evidence it is difficult to judge the
accuracy of the Toyo Kogyo data, yet similar calculations for the
other major producers and discussions with industry experts
suggest that the Toyo Kogyo analysis is representative. Indeed,
care has been taken to make sure that our assumptions erred in
the direction of underestimating the gaps in productivity and cost.
Productivity at the Plant Level
The final analytical approach involves a comparison of produc-
tivity and cost on a plant-by-plant basis. The sources of these
data are government surveys, plant visits by executives and
engineers from the U.S. firms, and consultant reports." 7 Care
OCR for page 178
178
has been taken in these studies to compare similar processes and
to correct for differences in product mix and degree of vertical
integration. There is no claim made of complete coverage; only a
few types of processes have been examined. It is felt, however,
that several of the most critical elements in automobile produc-
tion have been studied and that those studied are representative of
the industry average.
Table A.4 presents data on labor hours per vehicle in selected
plants in the United States and Japan. It is evident that th e
Jananese have a sizeahle nv`?rnil r~rncill~tivitv =Humnt~am anal th=+
~ _ t~ } At_ ~ ~~ ~ ~~— ~] 1— Ill 1—~
. ~ ~ ~ ~ . · · . . .
~ ~ ~ ~ .
fine rental varies considerably in parts of the process. In
or a,~ss~ons, foundry, and forge operations the differential
ranges from 0 to 35 percent. The largest gap is in the stamping
plants, where the Japanese advantage is close to 3 to 1. Stamping
is one of the few processes where the Japanese appear to have a
significant technology edge. The major press lines and transfer
presses in Japan are equipped with U.S.-made automatic rolling
bolsters and quick-die-change features. 8 Together with other
automatic devices these features allow the Japanese to achieve
output rates of 550 panels per hour versus 300-325 in the United
States.
The plant comparisons do not provide a complete set of cost
figures, but the data can be used with previous information to
obtain estimates of employee cost per vehicle. The comparisons
imply that the ratio of Japanese to U.S. productivity at the OEM
level is 1.9. Using an employee cost per hour ratio of 0.5, the
productivity evidence implies a unit labor cost ratio of 0.263. If
we apply this figure to our previous estimate of U.S. OEM
employee costs per small vehicle of $1515, we end up with a
TABLE A.4 U.S.-Japanese Difference in Productivity in Selected Plants:
Hours per Vehicle
Plant/Process
Assem- Stamp- Trans-
Country bly ing Engine mission Axle Foundry Forge Total
United
Statesa 38 10 7 8 5 5 1 74
Japanb 17 4 4 6 3 4 1 39
Difference 21 6 3 2 2 1 1 35
a SOURCE: J. E. Harbour, Comparison and Analysis of Manufacturing Productivity (final
consultant report), Harbour and Associates, Dearborn Heights, Mich., 1980, p. 2.
b SOURCE: Japanese Ministry of Labor, Statistical Survey of Labor Productivity, 1978, as
cited in Abernathy et al. (1980, p. 41).
OCR for page 179
179
Japanese advantage of $1094. This assumes, of course, that the
higher estimated productivity ratio is reflected only in lower
Japanese hours, not in higher (and more expensive) U.S. hours.
The procedure may thus understate the cost gap.
The Impact of Capital
The difference in labor productivity estimated here may be
affected by differences in capital, which may in turn affect cost
comparisons.
Before examining evidence on this point it may be useful to
clarify the issues with a simple diagram. Figure A. 1 (panel 1 )
presents two unit isoquants, one for the United States (Qus) and
one for Japan (Qj). The vertical axis measures capital, and the
horizontal measures labor. The isoquant depicts all the possible
combinations of capital and labor that can be used to produce one
unit of output. The way we have drawn the diagram implies that
at a given capital-labor ratio the Japanese use less capital and
labor to produce a unit of output than U.S. firms. This may be due
to differences in management or techniques.
We assume that the United States is at point A, with a
capital-labor ratio given by the slope of the ray, OA. The
J apanese are at point B. with a higher capital-labor ratio. At
these points the Japanese have higher labor productivity and lower
capital productivity. Assume for the moment that the unit
isoquant for Japan in Figure A.1, panel 1, shifted upward to coin-
cide with the unit isoquant for the United States, while Japan's
capital-labor ratio remained unchanged. Japan would be at point
C, while the United States is assumed to remain at point A.
Compared with the United States, labor productivity in Japan is
much higher, but capital productivity is lower. Depending on the
prices of the inputs, total cost comparisons could go either way.
Panel 2 uses the same type of diagram to illustrate a Japanese
productivity advantage in both capital and labor. Here Q j is
placed far enough below Qus that both less K and less L are
required per unit, even though the K-L ratio is higher.
To examine these issues we have developed estimates of
capital-labor ratios and capital productivity using data from Ford
and Toyo Kogyo for 1979. The estimates can therefore be
compared to the productivity analysis for the two companies
presented earlier. The results of our calculations are presented in
Table A.5.
Any attempt to compare capital stocks in two countries must
confront problems of inflation and differences in prices and
currency values. Both problems are addressed in Table A.5, but
we also present unadjusted values for comparison. The annual
r - - - ,,
OCR for page 180
180
-
<~ K
fit:
y
-
~ KUs
<: Kj
Panel 1
-
/
J
Lj
\
LABOR (L)
>< ~
, _ _ I'
_ /
Imp<
1
. 1
Lus
Panel 2
J
US
Lj
LABOR (L)
'US
'US
FIGURE A. 1 Capital-labor ratios: United States and Japan.
OCR for page 181
181
TABLE A.5 Capital-Labor Ratios and Capital Productivity, 1979
Toyo Kogyo
General Specific
Exchange Exchange
Category Ford Ratea Rateb
Plant and Equipment
(billions of dollars)
Book value
Adjusted for inflations
Inventory
(materials and work in
proces~billions of dollars)
Capital-Labor Ratios
(dollars)
$15.330 $1.539 $1.269
26.975 2.509 2.068
$2.939 $0.077 $0.077
Capital per employees
Book value $40,063 $ 63,113 $52,003
Adjusted 65,599 100,888 83,128
Capital per labor hours workede $24.73 $33.22 $27.37
Adjusted 40.49 53.10 43.75
Capital Productivity
(dollars)
Capital per vehiclef
Book value
Adjusted
$3,048 $1,639 $1,351
5,052 2,623 2,161
a Average 1979 exchange rate was 220 yen per dollar.
b Capital information exchange rate (structures and equipment) calculated based on data in
Irving B. Kravis et al., International Comparisons of Real Product and Purchasing Power
(Baltimore, Md.: The Johns Hopkins Press, 1978); 267 yen per dollar in 1979—applies only
to gross plant and equipment.
CTo correct plant and equipment for inflation, book values were restated in 1979 prices
based on age of capital and variation in equipment and structures deflator from national in-
come accounts; only estimated capital used in vehicle production is included (calculated
based on fraction of total sales in automotive).
Capital includes both gross plant and equipment and inventories; no inflation adjustment is
made for inventories.
e Annual hours per employee are 1620 for Ford and 1900 for Toyo Kogyo.
f Vehicles include cars and trucks; excludes tractors for Ford.
SOURCE: Annual reports, 1979. Deflators were taken from "Monthly Finance Review,"
Japan Ministry of Finance (Dec. 1980); "Quarterly National Accounts Bulletin," OECD;
"Historical Statistics" OECD; Economic Report of the President, 1981, Council of Eco-
nomic Advisors. Purchasing power parity exchange rates were taken from Irving B. Kravis et
al., International Comparisons of Real Product and Purchasing Power (Baltimore, Md.: The
John Hopkins Press, 1978).
OCR for page 182
182
reports for 1979 provide data on the gross book value of plants
(including land) and equipment and the value of work in-process
inventories. The yen values for Toyo Kogyo have been translated
into dollar values in two ways. The first uses the general
_= ~ r _~^ r I I
ex<:nange rate of ~ flu yen per Molar, while the second uses a
specific or purchasing power parity exchange rate of 267 yen per
dollar. This latter measure is derived by comparing the yen and
dollar prices of comparable (in terms of quality, performance,
function, etc.) equipment and structures at a point in time. We
have used the estimates prepared by Kravis et al. for capital
formation (structure and equipment) in 1973, updated by differ-
ences in the rates of inflation in the equipment and structures
deflators from the United States and Japan national income
accounts. The results for book value show Ford with 15.3 billion
dollars, and Toyo Kogyo with 1.54 billion dollars or 1.27 billion
dollars depending on the exchange rate used.
Inflation affects comparisons because of the accounting
convention of reporting assets at original cost. We have restated
the book values in 1979 dollars using rough estimates of the age of
the capital stock in the two companies and the business fixed
investment deflators from the national accounts. The formula can
ne written as follows:
GBVadj = GBV rP(1979)
L P(1979 - Age)
where P is the investment deflator, the number in parenthesis is
the year in which the price index is measured, and age is calcu-
lated as the ratio of accumulated depreciation to annual
depreciation. Since the ages of the capital stock at Ford (8.1
years) and Toyo Kogyo (9.4 years) are comparable, and since the
rates of inflation have not been greatly different, the inflation
adjustment has only a small effect on the relative amounts of
plant and equipment. The data on age of capital suggest that U.S.
and Japanese auto firms are using equipment of comparable
vintage. it does appear, however, that the Toyo Kogyo data may
overstate the average age of the capital stock for all Japanese
automobile manufacturers. Data on Nissan, for example, show an
average age of capital of 7.1 years in 1979. Likewise, the Ford
data may understate the average age of the capital stock for U.S.
automobile manufacturers. Data on G M, for example, show an
average age of capital of 11.4 years in 1979. These data imply
that the capital stock in the U.S. auto industry is, on average, 3-4
years older than the capital stock in Japan. For comparisons made
in 1979 this implies that the average piece of equipment in Japan
was purchased in 1972, while the average piece of equipment in
the U.S. firms was purchased in 1968-1969.
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If there were significant technological breakthroughs between
1968 and 1972, the difference in age of capital between the U.S.
and Japanese auto industries could imply important differences in
the level of technology. Research by Abernathy on the develop-
ment of the production process in the auto industry suggests that
technology in the late 1960s and early 1970s was not character-
ized by major changes.~9 While a difference of 3-4 years in the
age of the capital stock is likely to be of some importance in
productivity comparisons, the implication of existing evidence on
the age of capital and the course of technical change in the auto
industry is that the level of technology embodied in plant and
equipment in the U.S. auto industry is not greatly different from
the level found in the auto industry in Japan. However, more
detailed research on the nature and timing of technological change
in the auto industry is needed before strong conclusions can be
drawn.
After adding material and work in-process inventory (which is
not inflation adjusted) to gross plant and equipment, line III
presents measures of capital-labor ratios. We f irst calculate
capital per employee and then take differences in annual hours
worked into account. The data support the conclusion that Toyo
Kogyo operates with higher capital-labor ratios, irrespective of
the measure of labor input used. The estimates of the Toyo Kogyo
edge range from 58 percent for the unadjusted book values per
employee to 8 percent after correcting for inflation, purchasing
power parity, and differences in annual hours worked. These
conclusions are unchanged if data for 1978 or 1980 are used
instead, implying that adjustment for utilization differences does
not affect the results.
The important point to note is that the differences in capital-
labor ratios, even without any adjustments, are not sufficient to
explain the productivity gap observed earlier. As far as differ-
ences in OEM hours per vehicle are concerned, the effect of
capital depends on capital's share in the cost of value-added. Even
if this were as high as 0.5 (for the economy as a whole it is more
like 0.25-0.30), capital differences might explain a labor
productivity difference of 30 percent, rather than the difference
of 55 percent we actually observe. If we use a capital share of
0.3, the potential impact of differences in capital-labor ratios
between the United States and Japan on labor productivity ranges
from 2.4 to 17.3 percent, depending on the specific definition of
capital and labor used.
The evidence in line III suggests that differences in capital-
labor ratios cannot fully explain the productivity gap. It appears
that more is involved than substitution of capital for labor. Line
IV underscores this point by comparing capital per vehicle. As
they stand, the estimates suggest that panel 2 of Figure A.1 is a
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TABLE A.6 Summary of U.S.-Japanese Cost Differences
Approaches
Cost Category Industry/Macro Industry/Micro Company Plant
(per vehicle) (1) (2) (3) (4)
OEM employee
cost N/Aa $871 $1219 $1115
Materials and
components N/Aa $819 $700b $700b
Other costs N/Aa $146C $146C $146C
Freight and
duties N/Aa ($400)~ ($400) ($400)
Landed-cost
difference $748 $ 1436 $ 1665 $ 1561
a These data are not included in the analysis; sources used only provided a total cost differ-
ence.
b This estimate starts with the $819 difference in column 2; it is assumed, however, that
productivity in the supplier sector is lower than the OEM level and that the wage ratio re-
ma~ns unchanged. As a first approximation the material advantage has been reduced to
$700.
c Other costs include capital charges, general selling and administrative (GS&A) expenses,
warranty costs, and costs of in-country transportation. The capital costs are taken from Table
A.5 as described in the text; GS&A expenses have been taken from annual reports. The
breakout is as follows: capital = $68; GS&A = ($132). The Japanese have an advantage in
warranty of $90; their inland freight is $120 less expensive. These data are taken from a re-
port by Harbour Associates as reported in Abernathy et al. (1980, p. 60).
Numbers in parentheses indicate the U.S. advantage.
more accurate reflection of the situation. The calculations imply
that Toyo Kogyo uses less labor and less capital per vehicle. While
these data have not been adjusted for vertical integration or for
differences in product mix, doing so would not affect the
conclusion. If we use the same adjustment for product mix that
we used in the labor productivity analysis (see Table A.3), we
would reduce the Ford book value per vehicle from $3048 to $2340
(the adjustment factor is 0.768~. If we also use the same adjust-
ment for vertical integration that we used in the labor produc-
tivity analysis, we would increase Toyo Kogyo's book value per
vehicle by 15 percent, from $1639 to $1885. The product mix
adjustment is likely to understate capital per vehicle at Ford,
because capital input does not increase with the size of the
vehicle as rapidly as labor and materials.20 Even so, these
adjustments show that the Japanese firm uses less capital per
vehicle than its U.S. competitor.
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The evidence in this table reinforces the observation of the
panel experts that differences in technology and automation, while
factors, were not the most important determinants of differences
in labor productivity. Moreover, the table adds further evidence
that the overall cost and productivity gap lies in the more
effective and efficient use of relatively comparable resources. If
we use capital per vehicle adjusted for inflation and the specific
exchange rate and assume a capital charge (depreciation plus
interest) of 15 percent, the numbers in Table A.5 imply a Japanese
advantage of $433 per vehicle in capital costs t($5052 - $2162) x
0. 153. If the Ford capital per vehicle is reduced to reflect
differences in product mix as described above, and if the Toyo
Kogyo capital per vehicle is increased by 15 percent to reflect
differences in vertical integration, we end up with a Japanese
advantage of $209 ~$3880 - $2485) x 0.153. Finally, if we use book
value per vehicle and the general exchange rate, and apply the
product mix adjustment and the adjustment for vertical
integration, the result is a Japanese advantage of $68 t(52340-
$1885) x 0.153. This is the value we have used in the overall cost
comparisons. Because the product-mix adjustment may under-
state capital per vehicle at Ford, and because we have used the
general exchange rate and book values, the $68 estimate may
understate the Japanese advantage.
Summary
Table A.6 summarizes the cost differences obtained under the four
approaches and adds estimates of other costs, indirect freight
charges, and corporate overhead. These calculations are neces-
sarily rough. And we have not maintained strict independence,
since a given method may use information obtained under a
different perspective. As noted throughout this appendix, where
assumptions were necessary we have tried to err on the side of
understating the cost advantage of the Japanese. Nevertheless,
the results point to a significant differential ranging from $1000
to more than $1400.
NOTES
1. These estimates are based on unpublished work done at the
Research Department of the United Auto Workers.
2. Baranson's estimates are presented in Toder (1978), p. 151.
3. British Central Policy Review Staff (1974~.
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186
4. These estimates are based on data from the Japanes e
Ministry of Labor and the U.S. Bureau of Labor Statistics.
5. This figure is based on unpublished data from the U.S.
Bureau of Labor Statistics (BLS), as well as published company
information (annual reports, etc.~. Fringe benefits differ
significantly between the U.S. and Japanese auto industries, and
we have attempted to reflect these differences. Given the
importance of "internal" friezes in JaDan. there maV he errors: in
a, . . ~ .
one estimates. Discussions with knowledgeable participants in
both the United States and Japan suggest that an>, errors are
minor. For 1980 the BLS estimated the U.S. and Japanese
compensation rates in the motor vehicles and equipment industry
as follows:
Average
Hourly Earnings
United States $9.81 $14.71
Japan $5.96 $ 6.98
Hourly
Compensation
Source: Unpublished data, U.S. Bureau of Labor Statistics,
October 1981.
6. Note that the calculations are based on compensation and
not the costs to the employer of a unit of labor. The ratio ignores
costs to the employer for an hour of work that does not show up in
the employees' direct compensation--taxes, absenteeism, and so
on. Since these terms tend to be larger in the United States. the
calculations may understate the Japanese advantage. It should be
noted that the panel did not deal with the question of relative
rates of compensation for top executives in the U.S. and Japanese
auto industries. Although compensation data have been used for
all salaried workers in the cost comparisons, no attempt was made
to break out executive compensation (i.e., vice-president and
above). The view that top executives in Japan have lower rates of
pay than their U.S. counterparts has been expressed in the litera-
ture, but the panel had no basis for judging that claim. The
absence of disclosure requirements and the complexity of top-
executive pay make comparisons difficult. Furthermore, U.S.-
Japan differences in top executive compensation are likely to have
only minor effects on cost comparisons. For example, in a good
year, such as 1978, the top five executives at Ford were paid an
average of 5638,000 in compensation. Assume for the moment
that the top 25 executives at Ford were all paid this amount, while
their counterparts at Toyo Kogyo were paid nothing. Such a
difference in executive compensation would add only $6 to the per
vehicle cost difference between Ford and Toyo Kogyo. (This
assumes that all executive compensation applies only to U.S.
passenger car production, which was about 2.6 million in 1978.)
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7. Committee on Motor Vehicle Emissions (1974~. Note that
we have assumed an average level of options. Industry sources
include staff reports of (J.S. companies, memoranda from
members of the panel, and informal discussions.
8. The nominal cost per hour worked is the cost to th e
employer and includes base rates, fringes, and other payroll costs.
We assume that material suppliers (steel, plastics, etc.) have the
same ratio of unit labor costs as participants in the industry.
9. Let C(US) and C(~) be unit labor costs in the United States
and Japan, respectively. We estimate C(~/C(US) = 0.425. We
want to know C(US) - CtJ). Column 6 gives us C(US). Thus, C(US)
- C(UJ) = t1 - CtJ)/C(US)] x column 6; this result is column 7.
10. See notes to Table A.6 for a breakdown. These estimates
pertain to 1980; updating to 1981 would raise them somewhat.
11. This is documented in Abernathy et al. (1980~.
12. The data for annual hours worked for Ford assume 35 days
of contractual vacation, paid personal holidays, and so on and an
adjustment for absenteeism of 5 percent of normal annual hours
(assumed to be 2000~. The Toyo Kogyo hours are based on 2037
hours average in Japanese manufacturing, plus adjustments based
on holidays and vacations.
13. The vertical integration ad justment reflects industry
judgement rather than analysis of purchases-to-sales ratios; on the
latter basis the two companies are comparably integrated.
14. The procedure probably understates the number of hours
per vehicle at Ford, because the adjustment is based on total
manufacturing costs, not the cost of labor alone.
15. If applied to total passenger car production, the large cost
difference reported here would seem to imply much higher profits
than Japanese firms typically report. Since accounting practices
differ between the two countries, it is difficult to interpret such
apparent discrepancies. One possible explanation is the difference
between profits for Japanese auto companies in their home market
and profits in the U.S. market. Discussions with Japanese
executives suggest that the U.S. market is much more profitable
than the domestic market in Japan. The overall level of Japanese
profits, therefore, may be an average of very profitable and only
marginally profitable markets around the world.
16. If the industry data on productivity are accurate
(Japan-to-U.S. ratio of about 1.2), and we use the Toyo
Kogyo-Ford ratio at the OEM level (about 1.5), then the implied
level of productivity for suppliers and the assumed wage ratio
justifies a differential of about $650-$700 per vehicle.
17. Plant-level data on Japan are available from the Japan
Ministry of Labor in its annual Labor Productivity Statistical
Survey. U.S. data have been obtained from industry sources. For
additional data, see Abernathy et al. (1980~.
18. Abernathy et al. (19sn)
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~ go
19. See Abernathy (1978), pp. 86-113, for a discussion of
technology in engine plants and pp. 114-J46 for a discussion of
assembly plant technology.
20. For evidence on this point, see Abernathy (1978~, pp. 21
and 193-194' where the unit body construction method used on
small cars is described. It appears that small-car production may
actually be more capital intensive (more capital per vehicle)
because of many fewer parts and unit construction.
Representative terms from entire chapter:
employee cost
