American Automakers Will Benefit From Struggling Rivals

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Recent events favor American automakers over their Japanese rivals. General Motors (NYSE: GM) and Ford (NYSE: F) are poised to benefit from brewing animosity between China and Japan, a workable labor agreement with Canadian workers, and a new Toyota (NYSE: TM) recall scandal.

Toyota's Latest Recall: Management Knew about Defect

It has been learned that Toyota knew about a defect in its power-window switches as early as 2008. There is speculation that company management was weary of additional recalls after its expensive accelerator pad recalls in 2010. There are questions about whether Toyota delayed action over power-window switches to save face.

In 2009 and 2010 7.43 million Toyota vehicles from around the world were recalled for acceleration defects. In addition to the cost of a recall, Toyota paid a whopping $16.4 million as penalty for not reporting some of the flaws in its vehicle's accelerator pads. A recall was the right thing to do, but it was a huge cost for the firm.

In October Toyota announced another recall, this time based on faulty power-window switches. The company was privy to these problems as early as 2008. The Evidence for Toyota's foreknowledge of this issue surfaced on The U.S. National Highway Traffic Safety Administration's website. It revealed that Toyota's Japanese headquarters received a report that noted an ''unusual smell and ''thermal damage'' in the power-window main switch.

If the mainstream media catches wind of this scandal it might become a serious problem for Toyota. Consumers may resent the company's possible reluctance to take expensive actions for safety.

China Protests Japan: Employee and Customer Riots

Organized protests across China erupted due to a long-standing territorial dispute with neighbor Japan, leading to lower sales for Japanese businesses in China. American automakers can benefit from this ill-will towards Japan by selling more American cars to the Chinese.

Both China and Japan claim territorial sovereignty over the islands, called Diaoyu in Chinese and Senkaku in Japanese. The islands are thought to sit on substantial fossil fuel reserves. A private Japanese owner bought the islands recently, spurring protests in several Chinese cities and a diplomatic crisis that could continue to damage trade relations between Japan and China.

This animosity is particularly focused on Japanese automobiles. Protests prompted widespread shutdowns of manufacturing plants and Japanese-run businesses in China, including car giants Honda (NYSE: HMC) and Toyota. Chinese protesters attacked Japanese businesses, destroying Japanese-made cars, setting fire to Toyota and Honda showrooms, and attacked dealerships of Japan automakers, including the popular Nissan (NSANY). Aeon stores, also belonging to one of Japan's top car retailers, were also attacked. Honda will still reopen its China-based factories despite the protests, but the closures have made a dent in earnings,  according to reports.

Anti-Japanese sentiment was not limited to Japanese automakers. Electronics giants Canon (CAJ) and Panasonic (PC) also shut down factory operations due to employee concerns about protests. Some Panasonic factories are again up and running, although one factory is still shut down due to protests by several employees. Protesters also ransacked retail outlets, including Fast Retailing, which sells the popular Japanese Uniqlo brand. Estimates show that Fast Retailing sales in China will be down 20 percent due to the protests.

Japanese auto sales in China will probably fare worse. Mazda reported that monthly car deliveries fell 35% to a number below what was shipped after the Tsunami. Mitsubishi reported that sales dropped 63%. More data like these are expected to be terrible for Japanese auto sales.

Japanese companies can recover from these short-term setbacks, but there no way to know what damage has been done to the Chinese appetite for Japanese autos.

Canadian Labor Agreement for GM and Ford

Though U.S. automakers have had spats with their labor unions for several years, the outlook for labor relations is improving. Recent negotiations have finally led to a several agreements between Canadian Auto Workers (or CAW) and the U.S. automakers General Motors and Ford. The labor agreement might extend four-years, avoiding massive strikes.

The General Motors agreement will "create or maintain" over a thousand jobs, and ensures that the company will invest close to $700 million to keep its plants in Canada. The agreement will still be ratified by vote by the Canadian workers. Around 5,600 workers from Ontario are part of the agreement, which includes those working in vehicle assembly and engine production.

The Canadian workers also reached their own tentative agreement with Ford, which provided bonuses and brought in 600 more jobs, while taking out raises to accommodate the cost of living. The General Motors deal matches the Ford agreement, which involves lump-sum payments and a ratification bonus instead of the raises.

In addition to this, the General Motors deal extends the life of the consolidated assembly line in Ontario. The plant was scheduled for closure in June 2013, but the agreement will keep the plant for another year. A flex plant in Ontario will have a third shift to bring in 900 more workers and another plant in charge of engine and transmission, also in Ontario, will have 100 more jobs available.

The accord, among others, promises to strictly enforce rules that guarantee employment for temporary workers only during peak employment periods, which includes the times that new car models need to be produced.

Ford employees represented by CAW will vote on the ratification of the agreement soon. The CAW is also slated to finalize the language of the agreement with General Motors, although voting has not yet been scheduled.

These deals are substantial because vehicles that are made in Canada also account for roughly 15 percent of the U.S. automobile sales. They also demonstrate how these firms are capable of securing their futures through negotiations with stakeholders.


Ford and GM have recently taken steps to secure their labor relations as their Japanese rivals have struggled in international markets. Their losses might thin out the competition for Ford and GM. In the future, these American automakers could find easier sales in foreign markets.

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