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There’s more to cost-effective car production than low wage costs 

Published: Thu, 19 Feb 2015 14:17:11 GMT

Ford Fiesta production line Cologne Germany
Ford's German Cologne Fiesta production line

Open quote signAt a time when satisfactory profit margins for most mass carmakers are hard to come by, it is paramount to build your price sensitive bread and butter cars in a low cost country, right?

In the view of some analysts, particularly during the lingering car sales famine in Western Europe, there were at least four overridingly crucial concerns for at least some of the region’s weaker volume carmakers: surplus capacity, wages, wages and more worries about wages. 

Its is as though non-unionised labour, low wage and social costs and favourable exchange rates were the Holy Grail for the overall financial viability of an automotive operation. 

Low wage Eastern Europe and parts of Asia, the popular and comforting scenario goes, will save some volume carmakers by building today’s cars at the lowest possible unit costs.

Germany is infamous for its sky-high wage and social costs, comparatively low annual working hours, plus generous holiday entitlements and some of the highest public holidays in the region. 

As one wit has put it, instead of marking their public holidays in red on most calendars, the Germans should highlight instead the few number of working days in an average working year. 

To which should be added Germany’s highly unionised labour force, generous holiday pay entitlements and some of the highest energy costs in mainland Europe

In short, given a choice, few carmakers, perhaps with the exception of a few isolated manufacturers of high-margin luxury cars, would voluntarily choose to build their cars in what seems outwardly as a hostile environment for today’s highly cost-sensitive automotive industry. 

At today’s €50.58, Germany has the world’s highest hourly wage costs in the autoindustry. 

Moreover, autoindustry workers just across the eastern border in Poland, currently earn €8.79 an hour. 

Cast your eyes just a little further south, their counterparts in Romania, home to Renault’s fast gaining Dacia, workers earn €5.5 and hour. 

That’s a mere 10 per cent of the hourly wage earned today by their same industry German colleagues.

Perplexing to some, therefore, Germany remains the way and ahead biggest car producer in Europe. 

Last year, contrary to the industry’s lowest possible cost bashers, Germany’s domestic car production rose 3 per cent to 5.6 million passenger cars. 

With the exception of Audi, down just 0.8 per cent to 845,190 units, all remaining carmakers posted gains. 

Apart from highly profitable and still highflying prestige carmakers such as BMW, Mercedes and Porsche, that includes producers of mass market cars such as Volkswagen, up 5.5 per cent; Opel up 1.3 per cent; and even Ford. Its German car production, buoyed not only by its popular Focus, but no less so its small and highly cost-sensitive Fiesta, rose 6.2 per cent last year to 646,435 units. 

Ford, renowned as one of the most hardnosed carmakers in this business, knows full well why its still pays to build some of its cars in high-cost Germany. 

That’s chiefly because of favourable unit costs at its highly automated high-tech car plants at Saarlouis and Cologne. 

All told, this traditional carnival Monday no cars were built at Ford’s Cologne three-shift Fiesta plant. 

That’s because Ford’s workforce probably frolicked in Cologne’s famous annual street carnival procession. 

And yet, for most of the year Ford’s Cologne plant is a buzz of activity and stands out as one of Europe’s most productive car plants.

Evidence that, unlike oil and water, an industry’s prime-essential cold business sense and a high-quality life for its skilled and well-paid workforce can indeed mix. 

In the final analysis, it can still add up to all-out favourable bottom line numbers
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