8/1/1999 | 5 MINUTE READ

Labor: A Study of the Automotive Industry's Scarce Resource (PART 3 OF 3)

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This is the final article reviewing findings from the recent OSAT study, the Michigan Automotive Policy Survey, a project for the Michigan Economic Development Corporation Michigan Automotive Partnership Business Roundtable.

According to Michigan Automotive Policy Survey respondents, Michigan suppliers have experienced a much higher incidence of severe difficulties due to the current labor shortage than have non-Michigan suppliers (Table 1). However, the fact that 84.3% of Michigan suppliers and 88.9% of non-Michigan suppliers report being affected by the labor shortage suggests that the lack of available labor is a concern for all industry participants. The pressure that a tight labor market puts on all aspects of business operations can be a significant burden, especially at a time when many companies are experiencing limited capital resources.

It is also interesting to note that the OEMs report no adverse effects due to any current labor shortage. This response is likely due in part to their limited need for hiring and to their position at the top of the human resource food chain.

Table 1: Overall, has your company been adversely affected by recent labor shortages? Please check one.
 Percent of Responses
Yes, severely0.0%35.7%16.7%
Yes, moderately0.048.672.2

Round 1 results identified labor shortages as reported by the respondents for several key labor markets. A Round 2 question was asked to identify actions taken to alleviate these reported shortages. The responses make it apparent that most industry participants have experienced an increase in recruiting efforts due to the reported labor shortage. However, the OEMs' responses suggest that, with the exception of a need for increased recruiting effort, they have not been negatively affected by any labor shortages.

Getting Workers. Both supplier groups indicated that increased training, increased wages/salaries, and an increase in recruiting outside of the geographical area are among the responses that have been most frequently used. Conversely, suppliers indicated that the labor shortage has not yet lead to the need to relocate facilities either within the state or to other states. However, Michigan suppliers were statistically more likely to report that they had relocated a plant within the state than were non-Michigan suppliers.

Initial work for the Michigan Automotive Partnership indicated some concern among Michigan suppliers about the loss of key employees to companies located farther up the supply chain. The human resource food chain described the situation where larger companies higher up the supply structure made common practice of preying on their own supply base to get qualified skilled labor. Although in a sense it is a way of promoting from within—allowing those that were capable a chance to increase their income and benefits—it has the potential to be very costly to the system. The cost to hire and train a new employee, compounded by the lost productivity during the learning period, has a negative impact on the competitiveness of suppliers.

Losing Workers. The Michigan Automotive Policy Survey responses indicate that its proximity to the customer may be a drawback. 67.3% of the Michigan suppliers reported that they had either frequently or occasionally lost employees to companies located further up the supply chain, compared to only 38.5% of the non-Michigan suppliers (Table 2). Further, 20.4% of the Michigan suppliers said it occurred frequently, while only 5.6% of the non-Michigan suppliers reported this to be a frequent occurrence.

This indicates that, at least in Michigan, the automotive industry operates a sort of minor league farm system. There is a large difference, however, between the way baseball operates its farm system and how it operates in the automotive industry. In baseball, the major league team is affiliated with the farm team, and assists in the development of players and funding of the team. Conversely, in the automotive industry, the higher tier suppliers are more likely to ask for cost reductions than to assist in paying for the training costs and lost productivity caused by the movement of an exemplary employee through the supply chain.

Customers & Wages. The responses indicated that, especially in a time of labor scarcity, it is not necessarily beneficial to be located within your customer's labor market. This finding has significant implications for the State of Michigan and the suppliers located here. It is possible that Michigan suppliers, in an effort to retain employees, may be forced to offer higher compensation packages than similar companies located further from their customers. The cost of labor is one of 22 site selection criteria factors addressed in the survey. The non-Michigan suppliers rated local labor costs as critically important in the site selection process, higher than proximity to customers. In fact, the cost of labor was rated as the second most critical site selection factor by non-Michigan suppliers. Conversely, the Michigan suppliers rated proximity to customers slightly higher than local costs and rated labor costs as less critical than did the non-Michigan suppliers. Further, 53% of non-Michigan suppliers reported that local labor cost was among the top three most important of the factors, while only 16% of Michigan suppliers considered labor cost among their top three.

Table 2: Has your firm recently lost employees to other firms located farther up the automotive supply chain?
 Percent of Responses
Yes, this has occurred frequently.20.45.6
Yes, this occurs occasionally.46.933.3
No, but we have lost employees to other firms at our tier of production.20.436.1

The respondents were also asked if they had experienced losses to other firms in their tier. Thirty-six percent of the non-Michigan suppliers said that this occurred, while only 20% of the Michigan suppliers reported losses to others in their tier. The loss of an employee, whether to a company in the same tier or to one located further up the supply chain can be a costly event. Yet the movement of an employee to a competitor can, to an extent, be attributable to competitiveness. Conversely, the movement to a higher tier can be viewed as a benefit for the employee, but a detriment to the system.

It is also noteworthy that several respondents clearly indicated that the loss of employees to their OEM customers has had a negative impact. Increasingly, the automotive industry is becoming a virtual system. As more responsibility is moved from OEMs to the supply chain, it is crucial to ensure that the lower tier suppliers continue to achieve the increasingly high quality and productivity standards. The challenge to industry participants is to balance the good of the firm with the good of the system.

A final comment is worth noting. For those that are viewed as top performers, the human resource food chain represents outstanding opportunity—especially in the current environment. It is certainly not a negative that the human resource food chain exists in the automotive industry. However, it is crucial that industry participants and public policy makers are aware of it and understand its implications.