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Foreign Investment: Japanese-Affiliated Automakers' 1989 U.S. Production's Impact on Jobs

Published by the Government Accountability Office on 1990-10-17.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

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                                   FOREIGN
                                   INVESTMENT
                                   Japanese-Affiliated
                                   Automakers’ 1989 U.S.
                                   Production’s Impact on
                                   Jobs


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                   United States
GAO                General Accounting Office
                   Washington, D.C. 20648

                   National Security and
                   International Affairs Division

                   B-241694

                   October 17, 1990

                   The Honorable Marcy Kaptur
                   House of Representatives

                   The Honorable Carl Levin
                   United States Senate

                   This report responds to your request that we provide estimates of the
                   possible effects on US. employment in 1989 of automobile production
                   by Japanese-affiliated automakers in the United States. These estimates
                   were developed using the methodology that supported similar estimates
                   for 1987 in our report, Foreign Investment: Growing Japanese Presence
                   in the U.S. Auto Industry (GAO/NSIAD-88-111,Mar. 7, 1988), and an esti-
                   mate for 1988 in a June 1989 letter to the Chairman, Senate Committee
                   on Finance. In addition, we developed estimates using four other scena-
                   rios which differ only in the assumption of the extent to which such
                   production displaced other US. automakers’ production.


                   The production of Japanese-affiliated automakers in the United States
Results in Brief   led to about 11,000 net job losses in 1989 compared to 25,000 in 1988.
                   The 1989 estimate is based on the assumptions that (1) 68 percent of the
                   Japanese-affiliates’ production in the United States displaced other U.S.
                   produced autos and (2) the remaining 32 percent made up the difference
                   between Japan’s voluntary export restraint level and auto imports from
                   Japan.

                   Higher auto displacement assumptions yield larger net job loss esti-
                   mates. For example, at 100 percent displacement the jqb loss would be
                   46,000; at 80 percent displacement the job loss would be 24,000. At
                   60 percent displacement the loss estimate would decline to 2,000, and a
                   40 percent displacement would lead to an estimated net gain of
                   21,000 jobs.

                   A key factor in the net job loss estimates for 1989 was that the Japa-
                   nese-affiliated automakers bought more parts from U.S. sources. The
                   reported increase in the use of U.S. parts, from 38 percent in 1988 to
                   about 50 percent in 1989, increased the estimate for U.S. parts sup-
                   pliers’ jobs related to Japanese-affiliated automakers’ production.




                   Page1                                      GAO/NSIAD-91-62
                                                                           ForeignInvestment
                     In response to business considerations, export restraints, and concerns
Background           over potential trade barriers, several Japanese-affiliated automakers
                     have built assembly plants in the United States. As noted in a recent
                     Commerce Department report, 168 Japanese companies had invested in
                     auto parts plants in the United States by the end of 1989, and 69 of
                     these are reportedly affiliated with a Japanese vehicle assembler.

                      There has been continuing Congressional interest in understanding the
                      effect on national employment of Japanese-affiliated auto production in
                      the United States. In general, these automakers have greater labor effi-
                      ciency than General Motors, Ford, and Chrysler (the Big Three) and thus
                      provide fewer assembly jobs. Further, they import more parts and com-
                      ponents than do the Big Three and, therefore, support fewer jobs in U.S.
                      auto parts supplier industries. However, whether the Japanese-affiliate
                      operations lead to net job losses or gains is highly dependent on the
                      extent to which their production displaces the production of other U.S.
                      automakers instead of imports, a factor that cannot be empirically pro-
                     jected. Therefore, we explored the range of possible job effects under
                     different displacement assumptions.


                     We estimate that Japanese-affiliated automakers’ production in the
1989 Estimated Net    United States in 1989 provided 66,000 jobs but displaced 77,000 other
Job Losses           jobs. The net effect was an 11,000 net job loss. Direct factory jobs
                      decreased by an estimated 1,000 and upstream’ supplier jobs were
                      reduced by 10,000.

                     Our estimate of 11,000 net job losses in 1989 resulting from Japanese-
                     affiliated automakers’ production in the United States was computed
                     assuming 68 percent of the production displaced Big Three production.
                     The bases for this assumption were that (1) transplant production dis-
                     placed imports to the extent that Japanese auto producers fell below
                     Japan’s voluntary export restraint level and (2) all other production dis-
                     placed the production of General Motors, Ford, and Chrysler on a “one-
                     for-one” basis, except for the estimated exports to Japan of these Japa-
                     nese-affiliated US. automakers. Japanese car exports to the United
                     States in 1989 were 1,940,000, or 360,000 below Japan’s voluntary
                     export restraint level of 2,300,OOO.Japanese-affiliated automakers pro-
                     duced 1,131,OOOcars in the United States in 1989. After subtracting
                     autos assumed to displace imports from total production, there


                     ‘1Jpstream suppliers provide inputs directly or indirectly to the vehicles up to the assembly level.



                     Page2                                                         GAO/NSIAD91-62
                                                                                                ForeignInvestment
                      remained 77 1,000 autos, or 68 percent of production, assumed to dis-
                      place Big Three autos.

                      A major factor influencing the results was the significant increase
                      reported by the Japanese affiliates for 1989 U.S.-bought parts and com-
                      ponents, The average domestic sourcing ratio for the affiliates (on a pro-
                      duction-weighted basis) was 50.5 percent compared to 38 percent in
                      1988. This led to a significant increase in estimated upstream supplier
                      employment associated with production by the Japanese-affiliated
                      automakers.


                      We recognize that there may be differing views as to which autos com-
Job Implications      pete against each other and, therefore, which autos are displaced by the
Under Different       production of Japanese-affiliated automakers in the United States. To
Displacement Ratios   explore the range of possible effects on U.S. employment, we developed
                      a series of estimates using different displacement assumptions, ranging
                      from 100 percent down to 40 percent.

                      In each displacement scenario, the Japanese-affiliated automakers’ U.S.
                      production of 1,131,OOOcars is estimated to provide 66,000 U.S. jobs,
                      including 16,000 direct factory jobs and 51,000 upstream supplier jobs.
                      When these autos displace autos produced by other U.S. automakers,
                      there will be displacement of the latter’s direct factory jobs as well as
                      jobs of their upstream suppliers. The difference between the jobs pro-
                      vided by Japanese-affiliated automakers’ production and jobs displaced
                      due to displacement of other U.S. automakers’ production is the net
                      employment effect.

                      Under the scenario assuming 100 percent displacement of Big Three
                       autos, 66,000 jobs are provided but 112,000 other jobs are lost, resulting
                      in an estimated net job loss of 46,000. At 80 percent displacement, net
                      job losses fell to 24,000. In the 60 percent displacement scenario, the
                      employment impact was almost neutral, with net job losses of 2,000.
                      When the displacement assumption was reduced to 40 percent, the esti-
                      mated net employment effect was a gain of 21,000 jobs. Details of these
                      estimates are in appendix I, table 1.1.


                      Most of the data in this report was provided by the private sector.
Agency Cements        Therefore, we did not request comments from any federal agency.




                      Page3                                        GAO/NSIAD-91-62
                                                                                ForeignInvestment
              Computation of the employment estimates was done using the same
Scopeand      methodology used in our 1987 and 1988 estimates. The formulas and
Methodology   quantitative factors used to calculate estimated job losses are set forth
              in appendix I.

              We would like to emphasize that the employment estimates are based on
              a number of data elements that we could not independently verify. For
              example, Japanese-affiliated automakers voluntarily provided us their
              domestic content ratios from which we developed domestic sourcing
              ratios. We obtained information on 1989 production from (1) officials of
              General Motors, Chrysler, Ford, Honda of America, New United Motor
              Manufacturing Inc., Nissan, Mazda, and Toyota; (2) the 1990 Ward’s
              Automotive Yearbook; and (3) the Department of Commerce’s Office of
              Automotive Industry Affairs. Because private industry is not required
              to provide us such information and because of the automakers’ strong
              interest in maintaining the confidentiality of their production data,
              reflecting the intense competition within the industry, we could not
              verify the information.

              We could not determine the extent to which parts and components
              included in the domestic content ratios include foreign source materials,
              but did note the growing number of Japanese-affiliated auto parts
              plants in the United States.

              Our study was conducted during September and October 1990 in accor-
              dance with generally accepted government auditing standards.

              Unless you publicly announce its contents earlier, no further distribu-
              tion of this report will be made until 30 days from its issue date. At that
              time, we will provide copies to interested congressional committees,
              executive branch agencies, and other interested parties. Copies will also
              be made available to others on request.




              Page4                                        GAO/NSIAD-91-62
                                                                        ForeignInvestment
B-241694




The major contributors to this report were Curtis F. Turnbow, Assistant
Director, George M. Delgado, Evaluator-in-Charge, and Jane-Yu Li, Econ-
omist. Should you have any questions, please contact me on
(202) 275-4812.




Allan I. Mendelowitz, Director
International Trade, Energy,
   and Finance Issues




Page5                                     GAO/NSIAD-91-62
                                                       ForeignInvestment
                                                                                  ,
Appendix I

Computation of the Effects on U.S. Employme&
in 1989 of Japanese-Affiliated Automakers’
Production in the United Staks
               A. KEY DATA SOURCES

               1. Japanese-affiliated automakers’ production of cars in 1989: 1,131,OOO
               (Data Source: Ward’s 1990 Yearbook)

               2. Car production displacement ratio in 1989: 68 percent

               Car imports from Japan in 1989 were 1.94 million, which was 0.36 mil-
               lion short of the voluntary export restraint level of 2.30 million. Exports
               to Japan by Japanese-affiliated automakers were about 5,000. That
               leads to the following computation:

               (1.13 - 0.36 - 0.005) / 1.13 = 0.68

               3. Domestic sourcing of parts ratios

               Big Three average: 87.6 percent (private industry estimate)
               Japanese-affiliated automakers: 50.5 percent (weighted average of data
               collected from Honda, Mazda, New United Motors Manufacturing, Inc.,
               Nissan, and Toyota)

               4. Employment per plant (annual production of 200,000 cars per plant)

               Big Three: 4,151
               Japanese-affiliated automakers: 2,613
               (Estimated from data collected for 1987, adjusted with 2 percent annual
               productivity gain, same annual rate used in our March 1988 report, esti-
               mated by historical data)

               5. .Job multiplier (number of upstream jobs per assembly job): 4.33 (com-
               puted from the labor requirement table of the Bureau of Labor
               Statistics).




               Page6                                        GAO/NSIAD-91-62
                                                                         ForeignInvestment
AppendixI
Computationof the Effectson U.S.
EmploymentIn 1989of JapanecwVflUated
Automakem’Productioniu the UnitedStates




B. COMPUTATION OF JOB IMPACT
(Results of job calculations rounded to nearest thousand)

1. US. jobs provided by Japanese-affiliated
automakers’ US. production, based on
5.66 plants: (1,131,OOOcars produced/200,000    cars
per plant = 5.66 plants)

Direct factory jobs
6.66 plants X 2,613 jobs per plant =                        15,000

Upstream jobs
5.66 plants X 4.33 upstream
multiplier X 4,15 1 jobs per
plant X .505 domestic sourcing ratio =                      51.000

Total jobs provided                                         66,000

2. U.S. jobs displaced due to reduced Big Three
U.S. production, based
on 3.86 plants: (5.66 Japanese-affiliated
plants X .68 displacement rate = 3.85 Big Three plants displaced)

Direct factory jobs
3.85 plants X 4,151 jobs per plant =                        16,000

Upstream jobs
3.85 plants X 4.33 upstream
multiplier X 4,151 jobs
per plant X .876 domestic sourcing ratio =                  61,000

Total jobs displaced                                        77,000

3. Net job loss

Jobs displaced                                              77,000
*Jobsprovided                                               66,000
Net job loss                                                11,000




Page7                                        GAO/NSIAL&91-62
                                                          ForeignInvestment
                                        AppendixI
                                        Computationof the Effectson U.S.
                                        Employmentin 1989of Japanese-Afffited
                                        Automakers’Productionin the UnitedStates




                                        C. JOB EFFECTS BASED ON VARIOUS DISPLACEMENT ASSUMP-
                                        TIONS (Rounded to nearest thousand)
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Table 1.1: 1989 Estimated Job Effects
With Varying Displacement   Scenarios                                         Assumed   displacement   of Big Three cars
                                                                          100 percent    80 percent     60 percent     40.~---
                                                                                                                           percent
                                        Jobs lost to displacement
                                          of Big Three cars     ____~_.
                                        Direct factory jobs                    23,000         19,000         14,000
                                                                                                                 ~..      .-    9,000
                                        Upstream jobs~-_--                    89,000         71,000         54,000             36,000
                                        Total                                112,000         90,000       ___--__
                                                                                                            68,000             45,000

                                        Jobs provided by
                                          Japanese-affiliated
                                          automakers                          66,000         66,000           66,000
                                                                                                       -- .___--                 66,000
                                        Net job loss (gain)                   46,000         24,000            2,000           (21,000)




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