The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
J]) Ik\(G)IT Opinions expressed in this newsletter do not necessarily reflect the views of the management of the Federal Reserve Bank of San Francisco, or of the Board of Governors of the Federal Reserve System. worsen the inflation spiral as indexation formulas transform the price hikes into higher private spending for payrolls and higher government spending for transfer payments. In a word, "import fighters" don't automatically translate into "inflation fighters." when American consumers recognized the meaning of the latest OPEC price shock and domestic price decontrol. And the price of the Japanese product was right. Even after paying high transportation and insurance costs when shipping into the U.S market, Japanese producers boasted a major production-line cost advantage of perhaps $1 ,000 to $1 ,500 per car, primarily because of wage differentials. The average Japanese auto worker makes only about half as much per hour as his American counterpart (compared with a two-thirds ratio in manufacturing generally). Given 1978 levels of hourly wage rates, and given an estimated 125 manhours of production time for a subcompact car, the comparative U.S. and Japanese production-labor costs in 1978 amounted to $1,581 and $817, respectively-a differential of $764 for labor costs alone. Detroit's failure and . . . How did Detroit get into its present fix? A partial answer is provided by columnist George Will-"ln 1973 Egypt attacked Israel and devastated Detroit." The massive change in the world petroleum market after 1 973 favored auto producers who made fuelefficient cars (Japan)and worked against those who made gas-guzzling monsters (Detroit). Until 1973, the North American market was the province of the large V-8, and the economies of large-scale production effectively protected this country from substantial import sales. But the enforced shift to small cars then reversed that advantage. Detroit generally fai led to meet the challenge until after the second (Iranian) oil shock, for several reasons. The industry required long lead times (and massive amounts of money) for engineering and design of new models that were major departures from existing models. Also, its customers, with Detroit's encouragement, showed a continued preference for traditional models. And more importantly, Detroit responded somewhat slowly to the growing demand of some buyers for fuelefficient models, simply because fuel didn't seem like much of a problem after the initial price shock. The pump price of gasoline (in real terms) remained practically stable for a half-decade, because of a government policy which kept gas prices artificially low through regulation. Japan's market share has not grown steadily, however, but rather in fits and starts since 1 973, reflecting the changes in the relative strengths of the Japanese and American currencies. When the yen declined against the dollar in late 1 979 and early 1980, the Japanese share of the U.S. market rose to a new peak; but when the yen turned around and rose against the dollar, Japan's auto-market share dropped from 23 to 16 percent between, JuIy and October 1980. From Detroit's point, a cheaper dollar thus would be welcome-although that factor appears secondary in light of the major long-term cost advantages in Japan's favor. Detroit's response Detroit is moving to meet the challenge with the greatest restructuring of operations in the industry's history, featuring automated factories, downsized cars, and the latest forms of computer technology. By 1 984, the industry plans to build 30 new engine lines, 19 new transmission lines, and 89 new assembly lines-and this will require more than $70 billion that is hard to find in today's depressed market. But as a resuIt, by 1985 everyone of . . . Japan's opportunity Japan meanwhile offered a growing supply of products which offered high quality (with flawless paint jobs, for example) as well as reliability (with a low rate of warranty claims). With high gas mileage, plus those other seIling points, Japan offered products which were perfectly positioned in the marketplace 2
@FedFRASER