BASEBALL, HOT DOGS, APPLE PIE AND TOYOTA?

8/2/09

This morning’s (i.e., Sunday, 8/2/09’s) Chicago Tribune’s “Rides” section featured an article by Steven Cole Smith on domestic content of vehicles sold in the United States, as measured by Cars.com. While using some dubious criteria, especially factoring in sales volume in the calculation of domestic content, the article was enlightening, especially for those who insist on buying Big 3 cars in the interest of “buying American.” Shockingly, to those who don’t follow the industry closely, of the top 10 U.S. content vehicles, according to the Cars.com criteria, five bore Japanese nameplates, and the Toyota Camry had the highest domestic content. (By more logical criteria, the Ford Taurus, assembled on that Athens of the Third Millennium, the south side of Chicago, would come in first.)

More interesting, though, was Mr. Smith’s pointing out that many make the argument that one should buy a Big 3 nameplate because

“…the money you spend on an F-150, for instance, is likely to stay at Ford’s headquarters in Dearborn, Mich., while a lot of the money spent on a Camry will be shipped back to Japan.”

This reasoning is specious, disingenuous, laughably lacking in knowledge of basic finance and economics, or a combination the first and the third, for a number of reasons.

First, there is a LOT more labor cost in an automobile than there is profit in that same automobile. Therefore, if the car is assembled here from parts manufactured here, the lion’s share of the money spent on the car goes to the American workers who made it. The profit per car is relative peanuts compared to the labor cost of the car.

But what happens to that relatively small amount of dollar profit made on each car? Finance 101 tells us that a corporation can only do two things with a dollar of profit: it can either pay that dollar out in dividends or it can reinvest that dollar in the company’s operations. None of the Big 3 is currently paying dividends, and, if they were, a substantial chunk of those dividends, in the case of one of the Big 3, would go to a foreign company, Fiat. Since the Big 3 are not currently paying dividends, if the foreign manufacturers are paying any dividends (They are.) and they have any U.S. shareholders (They have plenty.), that share of their profits going to U.S. investors greatly exceeds (by infinity, currently) that share of Big 3 profits (There are none currently.) going to U.S. investors.

Even if and when we return to a “normal” situation, in which the Big 3 all have private shareholders and pay out dividends from profits, we will not be able to assume that all Big 3 dividends go to U.S. investors and all the dividends of foreign manufacturers go to non-U.S. investors. Under “normal” circumstances, GM, Ford, and Chrysler have plenty of foreign investors; indeed, Chrysler will probably emerge more or less wholly owned by Fiat. Further, Toyota, Honda, Nissan, BMW, Daimler, VW, etc., have plenty of U.S. investors. Admittedly, the concentration of U.S. shareholders should be bigger in the Big 3 than in their foreign competitors, but, still, plenty of the foreign carmakers’ profits will find their way to American citizens in the form of dividends.

What about those profits that are not paid out in dividends, but, rather, are reinvested in the company? Don’t those U.S. dollars wind up in Japan when spent on, say, Toyotas and wind up in the U.S. when spent on, say, Chevys? No. Who has been the most aggressive in investing in U.S. auto plants of late? The easy answer is “Nobody,” because, over the last year or so, no one has built any new plants here. However, over the last, say, five or ten years, it is the Japanese, Koreans, and Germans who have been aggressively building plants here, with Toyota alone having built several mega-plants since the turn of the millennium. While the domestics have spent plenty of money retooling existing plants, they have built few, if any, new plants over the same time period and, on a net basis, have shut down far more plants than the Japanese and Koreans have built. At the same time, GM has, understandably, aggressively added new capacity in China. Remember, these are all multinational corporations with multinational capital budgets. But, as of the last ten years or so, the Japanese, Germans, and Koreans have been investing heavily here while the Big 3 have been disinvesting here and investing heavily overseas.

So most of the money spent on a car goes toward labor. If that labor is U.S. based, most of the money spent on a car stays here. As far as the relatively small profits per car are concerned, they either go to shareholders, who can be domiciled anywhere for any of the multinational car companies, or they are reinvested in the company’s operations. Of late, those investing here have been foreign companies while those disinvesting here have been U.S. companies.

No one should be buying a car based on the faulty reasoning that a dollar spent on a Big 3 product is “good” for the U.S. while a dollar spent on a foreign nameplate is “bad” for the U.S. economy. If one is concerned about the impact one’s car expenditures have on the U.S. economy, one should pay attention to the domestic content of the car one is buying, not the nameplate the car bears. Money spent on, say, a Honda Accord built in Ohio, or a Mazda 6, built in a UAW represented plant in Flat Rock, Michigan, is far more likely to have a beneficial impact on the U.S. economy than money spent on a Ford Fusion, built in Mexico, or a Pontiac G-8, built in Australia. All four of the aforementioned, by the way, are terrific cars, no matter where they are built, and, unless one puts an inordinate amount of consideration into country of origin, any would be a great purchase.