An analysis of the dimensions of productivity of the U.S. automobile industry and some explanations

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(5) -. c.. 2. ALFRED. P.. WORKING PAPER SLOAN SCHOOL OF MANAGEMENT. AM ANALYSIS OF THE OIMENSIGrG GF. mODUCriVITV CF THE U.S. AUTCyGBILZ INOUSTKr. February. AiMD. 3C1E ExPuANATIC'S. l:?o2. 127A-S2. MASSACHUSETTS TECHNOLOGY 50 MEMORIAL DRIVE CAMBRIDGE, MASSACHUSETTS 02139 INSTITUTE OF. t^.

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(7) AN ANALYSIS OF THE OIMtMSIOKS OF. FROOUCriVITV. rjF. INOUSTHY AHD. February 1^52. THE U.S. AUTCXG3ILZ 3C-1E ExPl.ANATIG;5. This research has ceen supported by the. Contract. OT:-'.S. 5631-:-:-:321.. 127A-S2. .. J'.S.. Oepart'ent cf Transportation.

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(9) II. AN ANALYSIS OF THE DIMENSIONS OF. PRODUCTIVITY QF THE U.S. AUTOMOBILE INDUSTRY AMD SOME EXPLANATIOi'JS. by. Zenon The.Tiis. A.. S.. Zann2to3*. Papagsorgiou**. Ming-Je Tang*** .. V/illiam 8.. LimJsley*'^*. February 1982. *. Professor of Managc-ant and Principal Invastigacor, Slcan Sar.col of 0Z13:^, Pnona (517) Manaoa-iant, M.I.T., 50 Manorial Driva, Canbriaga, M.A 253-716''t.. **. Researcn Associate, Sloan Scnool of Managanant, M.I.T.. *** Doctoral Candidata,. Sloan School of Managernont, M.I.T..

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(11) Ill. TPaiE OF CJNTErJTS. '. I. .. fsge. INTROOUCriOrj. 1. DIMENSIONS Of PRODUCTIVITY. 5. •«% '. 11.'"^. .. A.. B.. C. .. III.. Theoretical Definition of Average and Marginal Productivity. 5. Empirical Application of Average Productivity Equal ion. 7. Empirical Application of Marginal Productivity Equation. .. DIMENSIONS OF VALUE ADDED. 15. -17 '. A.. Theoretical Definitions. 17. 3.. Empirical Application of Percentage Contribution Equation. 20. Empirical Application of Changes in Percentage Contribution Equation. 29. C.. IV.. PRODUCTIVITY MEASUREMENT: INDICATORS. COMPARISON WITH MA:NAGeRIAL rERFORMAiMCE. A.. Managerial Performance Indicators. B.. Time Series of Managerial Performance Indicators. 35. V.. Model Testing. .. •. Model. 2.. r^del 2. 3.. Statistical Results. .. 49. '. '. 51. •. 55. CONCLUSIONS A.. Competitive Labor Market. B.. Non-Competitive Labor Market. 47. A7. '. 1.. 1. 36. _. .. C.. 33. '. 56 57.

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(13) I.. INTRO'JUCTnf.!. .. W3 havs extensively discussed various productivity measures in V/orking. Paper SSM //1251-6i and Working Paper SSM ifl23^-Q2. value added of output(s) over value of inputCs). We have deduced that only. i-;ieasures. fulfill for the. ."nost. part the criteria of nomogeneity, robustness, validity, practicality and. utilization. As we have pointed cut in Working Paper SSMi'-123A-S2, our statistical. tests using the auto^^c'oile industry as our e'-npirical domain showed that the time series of the value added over payroll and benefits r.easure of. productivity generally exnioited superior perfornance. value added over payroll and benefits. .vas. In a few cases that. not the best .neasure,. it performed. very closely to the best measure (value added over operating costs and. depreciation or capital expenditure), according to our test. However, there is a fundamental reason \;hich oictates the eventual. adoption of the value added over payroll and benefits measure as the most. meaningful measure of productivity. approach to industry analysis. a. The reason is that for our strategic. meaningful measure of productivity should not. only describe the productivity o^. a. firm absolutely but also relatively to 'its. degree of vertical integration. The time series of value added over operating costs and capital. expenditures (or deoreciation) adequately describe acsolute productivity but are deficient in describing relative productivity because the denominator. (operating costs) is dependenu upon the varying degree of vertical integration from one particular firm to another.. In our estimation this is a very. important paint beca^:e tna cnanjea :n vertical integration over the years,. implemented either oy conscious strategic planning or enfcrcec by external.

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(15) econoTiic/political influences greotly affects Lns rslativs nsasure.Tient of. productivity among firms and can even mislead the uninitiated analyst. Since we have chosen the U.S. AutomcDile industry as cur domain for the. empirical application of our theoretical concepts,. v;e. the time series of value addea over sales for General. proxy measure of vertical integration for these. t.vo. present in Figure l(a,b) t-'otcrs. firms.. and Ford as a V/e. observe that. the degree of vertical integration for General Niotors has declined. significantly from 1953 ana for Ford from 1960 onwards.. That means that the. ratio of the value of materials purcnased from vendors over sales kept. increasing.. Complexity of operations and/or higner wages are the only. plausible explanation for the decline of value added over sales. Besides the conventional measure of vertical integration shown in Figure l(a,b), we present in Figure l(c,d) an alternative measure of vertical. integration, namely value added to cost of goods sold over cost of goods sold.. The value added over sales measure of vertical integration includes. market power aberrations reflected in sales, which. the latter measure avoios. V/e. observe in Figure l(c,d) that the degree of vertical integration for. General. ?-;otors. onwards.. nas declined significantly from 1961 and for Ford from 1960. Since both firms kept increasing their ourcnaseo materials from. _. vendors, we may hypothesize that the industry experienced increased complexity of operations and/or niglier .vages. It should be noted 'that coth measures exhibit. the same relative decline. which furtiier enhances our conclusion about the decline of vertical integration..

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(17) «. *« t *$. t *. ««. —vj0.450+. Figure 1(a). :. Value Added over Sales (GM). O.SOOi » «. 0.4S0*. I. -. «. I. t s. t. « (. t. «. (. Figure 1(b). :. Value Added over Sales. 0.230* t. —.. 94.0. >. 60.0. +. 66.0. J. 7:.0. ^. 78.0. fYtAR 84.0. (Ford).

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(19) t. «.3?0t. 0.340t *. *•"" ,. .. -. , ,. .. Figure 1(c):. *t. •. Z. *'^"* ,. ,. ..r-„ 34.0. .. 72.0. 66.0. 60.0. 5*.0. .„..-.!. ,. 78.0. Value Added of Cost of Goods Sold over Cose of Goods Sold (GM). f.42fl'. «. *. O.TROt. »«. « *. *. ». ». *. ». »». ». •. .. *. Figure 1(d). .,. Value Added of Cost of Goods Sold over Cost of Goods Sold. *. o.o7o',' -. —. ,. **•«. 7r.o. .. /a.o. :. 04.0. (Ford).

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(21) II.. DiMEN'SrjriS OF r;^JOUCriVITY A.. Theoretical Osfinition of Average and NlarGJna.l Productivity Value added for year. 123/<-82 as revenues adjusted. t. has been defined in V.'orking Paper SSM. for increases/decreases in inventory costs. minus. cost of materials, or. VA^ = rjsfj - M^. (1). where = v.due Added in year t. VAj.. âdi. adjusted for inventory cost in year. ~ iêvenues. = Cost of. M.. materials in year. t. t. Operating profit can be defined as revenues adjusted for. increases/decreases in inventory costs .ninus ccst of laccr (approxi.iatea in our case by payroll and benefits) minus cost of capital (approxiiâted. in our case by depreciation). op^. =. .Tiinus. cost of materials, or. Ns^^J - re^ Dt. ". \. ^2). v/here OPx^. r>6^. = ^. -. Operating Profit in year. t. Revenues adjustea for inventory ccst in year. P3^.. = Payroll and. D^. =. M^. = Cost. 3enefits in year. Depreciation in year. t. of Materials in year. t. t. t.

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(23) Combining squations (1) and (2) we get the averagL' productivity equation,. VA. =. FQj.. +. Dj.. + OPj.. (3). -. or. VA. OP. D. -. (.s. It follows from the s'oove analysis that the change of. productivity over. tiiTie. can be given by the .marginal productivity. equation.. VA. -. - VA. t+1. t. 0_. +. t+1. D_. -. OP. =0. + op'. t+1. t. (5). t. The possiole conoinations for change in productivity and its. dinensions are given in Table 1.. For example,. Case a depicts the. possibility that all three ratios (value added over payroll and benefits, depreciation over payroll and benefits and operating. profits over payroll and benefits) increase over time; Case depicts. a. b. positive change in value added over payroll and benefits. and operating profits over payroll and benefits and a negative. change in depreciation ever payroll and benefits.. The rest of the. Cases follow by simple pemutation. The six cases presented in Table 2 cover exhaustively all. potential chang'is in tne percentage contributicns cf the dimensions of value added.. Assuning tnat such cnanges occu-r. randOiTily,. tne ex.

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(25) ante prouability that each of the above six ca:es vdll happen is 1/6.. Any st'.atistically significant deviation frcn the probability. of 1/6,. refutes. thie. null hypothesis of. rando.-n. oi:curence or "random. walk" and poses the possibility of another causal factor explaining the phencTieiion.. (. Change in from t to L+1) VA F3 D P3. Si'^n. Case. 3. of rn'ng-js in ^-zz j^s Case. 'Jase.

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(27) observe in Figures 2(a), 3(a) that. V/e. z'jt. ineasure of average. productivity, value added over payroll and benefits, is clearly dealing.. It. should be noted that General. :-:otors. started declining' in 1963 and Fords' in 1962.. captured shocks. sucii. as strickes. average productivity. Our .Tieasure has also. (1970 for G3neral Voters, 1967 for. Ford) and energy price increases (197A, 1979 for General Motors and. 1973, 1979 for Ford subject to their accounting policies), which. resulted in low outliers because of their negative impact on value added. The dimensions of productivity offer anoonsr view of tne dranatic. decline experienceo oy GM and Ford in the past fifteen years. Depreciation and operating profits over payroll and benefits are consistently declining for both General. i-lctors. and Ford.. Since the depreciation i-neasure in Figures 2(u), 3(b) is a mixture. of previous and current invest.Tients,. \/e. exaiined the ratio of. depreciation over payroll and benefits in constant dollars discounted by the Consuners Price Index (CPI).. \ie. observe that this ratio is. increasing, whicn indicates that the "true" behavior of the consumpticn of capital as a fraction of payroll and benefits is an intermediate case. between the 3(c).. '.Ve. extre.T.e. cases depicted in Figures 2(b), 2(c) and 3(b),. tend, hcvever, to hyothesize that. a. gently declining pattern. represents reality ôre closely, because the pattern of capital. expenditures over payroll. ar;d. benefits (current, lagged or led by one. year) is also declining, as shown in Figures 2(d,e,f) and 3(d,e,f). The operating profits over payroll and benefits neasure has also. captured the sh0C'<5 Figures 2(g), 3(g).. frc.Ti. strikes and energy price hikes, as shown in. Later. v/e. will. exa.Tiine. various components of value adJed and hence. the. relative grc/ch of the. snc./ rr.ore. explicitly the.

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(29) 2.05f. ». «. t. «. Figure 5^.0. 40.0. 0.2804. 64.0. 72.0. 78.0. 84.0. 2(cl). Value Added over Payroll and Rene fits (GM). t. « t I. «. s. *. * *. «. «. Figure ^Ch) 0.120+ +. +. 54.0. 60.0. 1. 66.0. 72.0. * *. 78.0. tTEAR 34.0. Depreciation over Payroll and Benefits (G.'!). t •. <. X. Fir.uro. 20. Ot. -. :. 2(r). ;. a. PcpreciaLion over Payroll and Benefits in Constant Dollar.: 54.0. 40.0. 64.0. 7.'.0. /8.0. 34.0. (CM).

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(31) :: :. 10. CE/PBGH 0.300*. «. Figure 2(d). Capital Expenditures (Current Ye^ (GM) over Payroll and Benefits O.OÔf 78.0. 72.0. o&.O. «0.0. S4.0. <. (. « «. <. Figure 2(e). Capital Expenditures (One Year La(GM) over Payroll and Benefits. 0.050+ +. ^. O.JOOf. i. +. 64.0. 60.0. S4.0. 1. /8.0. 72.0. 8<.0. f. ». 0.120f. *. t. *. t. -. V. $. Figure :(f ). $. « *. 9.040t. ^. +. 94.0. 1. 60.0. «d.O. 1. 72.0. t-. ;u.O. Capital Expenditures (One Year Le; (CM) over Pavroll and Benefits.

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(33) :. 11. o.sst. ». «. «. « .. Figure. (. g). Operating Profits over Payroll ar.d Benefits (GM). o.io» 5^.0. 2. 60.0. 44.0. 72.0. 73.0.

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(35) r.oof. 1.20+. .. ". '. *<. Figui-e. 3(.i). :. J.. Value Added over Payroll (Ford) -nd Benefits f. 54.0. +. 1. «0.0. ^. J. 66.0. 72.0. +T!:')R. 73.0. 0^.0. DP/PAYFD O.JSOt. « *. * «. «. t. t«. Figure 3(b). :. Depreciation over Payroll (Ford) and Benefits. 0.100+ ^. 54.0. ^. «0.0. HE. f-. +. 66.0. 72.0. 7U.0. 64.0. DF/CPB 3S.0f. *. <. «. <. « ». ». «. ». Figure 3(c). :. Doprecintion over Payroll and Benefits in Constant Dollars (Ford).

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(37) :. 13. 0.4Z0*. O.270t. «. «. * t. f. » «« » ». t. *. ». *. FlRure 3(d);. Capital Expenditures (Current Year) (Ford) over Payroll and Benefits 0.000+. _^. ^. loto'-'"""**.© 60.0. s.*; 54.0. ,.,EAR. ^. 78.0. 7:.0. .. S*.0. 0.320+ «. * <. «. « « <. t ». *. Figure 3(e) ^•^^°* 54.0. «o.o. 66.0. »». 72.0. « «. «. « «. «. 7d.o. 94.0. Capital Expenditures (One Year Lag) (Ford) over Payroll ana Benelits. t. «. ». Figure 3(f). :. Capital Expenditures (One over Pavruil and Benefits o6.0. 72.0. TQ.O. 64.0. "rear Lead). (Ford).

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(39) lA. O.AO» t «. » I. «. 0.40t. «. (. «. I. Fipure. •. -0.20+ 5^.0. 40.0. 46.0. -tnt.R ?.'.o. /s.o. m.o. 3. (g). :. Operating Profits over Pavroll and Benefits (Ford).

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(41) 15. conclusicos that are dedijced from Figures. 2 ana. 3.. However,. v/e. can. already discern that the rate of increase "of payroll and benefits. exceeded the rate of change of the other components of productivity. Finally, we observe that the approximate percentage increases. (decreases) of our productivity measure and its dimensions in nominal dollars, for both General Motors and Ford are approximately and (65"j) in the past fifteen years.. V.'e. 25;o,. (3C%). can thus deduce that the. increase of payroll and benefits primarily happened at the expense of operating profits.. C.. Empirical Application of ^'aôinal Productivity Ecuiticn In Figures A and 5 we present the time series of yearly change. in value added, depreciation and operating profit each divided by. payroll and benefits for General Motors and Ford respectively. This time series analysis, based on Equation (5), allov/s us to. compare the behavior of our marginal productivity measure, namely change over time of value added over payroll and benefits, witn the. behavior of its dimensions, namely change over time of depreciation and operating profits over payroll and benefits. We observe that the changes over time in value added,. depreciation and operating profit over payroll and benefits for General iVotors and Ford present a pattern clearly deviating from a. uniform "random walk", given that the probability of. a. negative. change in value added over payroll and benefits is approximately 70%.. Hence, we refute the null hypothesis of a purely random. movement of changes in productivity and its dimensions and recognize the neea for a causal diagnosis of the. pnenomenon..

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(43) 16. Value Added •l^'bOS. Deprociation. Operating Proiits.

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(45) 17. DIMEM3I0M5 CF VALU[^ AJilEO. III.. A.. Theoretical Jerinitlcns All meaningful measures of productivity use value added as. their numerator, as explained in Working Papers SSM -^ '-.^. SSM /r'123A-S2.. f/. 1251-51 and. In cur research we have proved the supremacy of. value added over payroll and benefits measure, at least in the case of the automobile industry.. In any case,. however, it is. theoretically and empirically necessary to analyze the dimensions of value added in order to shed more light to the behavior of tne. numerator of productivity measures. It follows from Equation (3) that the dimensions of value. added are payroll and benefits, depreciation and operating profits.. R3j. Hence,.

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(47) Change in (. frorn. t. re VA D VA. to. t-t-1). Case +. a. Sinn of Ch:-n Caê b +. :. .s. in Kitics Cas-:: /f. c. Cas; a -. Case e -. Case -. f.

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(49) 19. Change in (from t to t+1) VA P3. blon" Ca?-?. a. oi". Cai-o. C.-ig-i-"?3 L). '.n. C3'"ê. H-tiQ3 c. Case d. Case e. C-.s?.

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(51) 20. Empiric-^l Application of P-evcenlana Cent ribut ion Equation. Using the U.S. Automobile industry as our empirical domain will test the hypotheses raised in the previous section.. present in Figures 6 and. 7. v/e. V/e. the time series of the percentage. contributions of the dimensions of value added for General. f-'otors. and Ford respectively.. We observe in Figures 6(a), 7(a) that the percentage. contribution of payroll and benefits to value added (inverse of our productivity measure) is obviously increasing.. We note again the. existence of outliers, for both General Motors and Ford, due to strikes (1967 and 1970) and energy price increases (1973-7A and 1979). Ws can hypothesize that the growth rate of payroll and. benefits is greater than the growth rate of value addec.. We will. test whether the difference in growth rates is statistically. significant.. We. test this hypothesis oy separately regressing the. index of payroll and oenefits and the index of value added over time.. Then, we test whether the coefficients of time in two. regressions are significantly different..

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(53) The regressions are the follcving;. Pa(GM). VA(G't). = -18.3 + 0.182t (s.d. = 0.016A4). -12, A + 0.126t (s.d. = 0.012520). =. re(FORD) = -26,2. +. 0,257t. (s.d. = 0,02233). VA(rORD). =. -18.5. + o.ieît. (s.d. = 0.01708). '. The t-test shows that the coefficients of. ti;?.e. value added are significantly different for botn. for payroll and. fir.Tis.. Actually. the t-statistic is 13.17 for GM and 18.56 for Ford, meaning both. are significantly at 0.01 level.. these. tv/o. Therefore, we conclude that for. firms, payroll and benefits has increased significantly. faster than value added. The percentage contribution of depreciation to value added for. General flotors shov.n in Figure 6(b), has been declining in two stages;. from 1958 to 1965 and frcm 1966 to 1977 with a quantum leap. from 1965 to 1966, while an up.vard trend started in 1978 reflecting. increased capital spending.. For Ford, the percentage contribution. of depreciation to value added shown in Figure 7Cc) has been rather. stable and on the average slightly declini-g. Ford has also started in 1973,. An upv;ard trend for. Since depreciation reflects a. mixture of various vintages of capital, we also present the percentage contribution of depreciation to value added measured in. constant dollars discounted by the New Car Price Index (NCPi) in Figures 6(:) and 7(c). siinilarly to. trr^. '..'e. unririj..,sted. observe tnat the adjusted ratio behaves ratio.. Furthermore. .ve. calculated tne.

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(55) ::. 22. ». «. «. 1. t. 66.0. :. 1--. 1. 1. 60.0. S4.0. Figure 6(a). *. 72.0. Payroll and Benefits over Value Added. 73.0. (GM). rp/G.i. O.JOwt. O.MOt. *. «. «. *. Figure 6(b). Depreciation over Value Added (GM). Figure 6(c). 10. o». * +. f. 1^,0. 60.0. 66.0. 72.0. ;<J.U. »-c«R Si.li. Depreciation over V.ilue Added in (CM) Conotaut Dollars.

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(57) 23 O.VOi. «. «. (. «. (. Figure 7(a) o.sot. 40.0. ^•'•o. 66.0. .. 72.0. 7tf,o. 84*0"^". Pavroll and Benefits over Value Added (Ford). O.2'40i. 0.t60f. *. t. «. *. «. *. Figure 0.080*. (. b). :. Depreciation over Value Added 60.0. 54.0. l«.0+. 78.0. 72.0. 66.0. «. t. 84.0. (Ford). ". « ». «. «. s. 12. 0?. 7. •-'*.* < «. «. «. f. ». Figure 7(c):. *. Depreciation Con'-,tant 72.0. ;a.o. tj4.y. ovir^r. D.illars. Value Added in (Ford).

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(59) ratios of capital expenditures to value added (current year and. lagged by one year) in figures 6(d,e) and 7(d,e).. We ooserve for. both General Motors and Ford a slightly declining or even stable. pattern witn an obvious upv/ard trend in 1976-77. The percentage contribution of operating profits to value. added for both General Motors and Ford exhibits a four stage evolution.. The percentages for ZA shown in Figure 6(g), omitting. the outliers,. are approximately. 1962 to 1965,. 25.^. 3G;a. from 1956 to 1961,. fron 1966 to 1973 and. 20^^. frcfr,. '36%. fron. 197A to 1979.. The. percentages for Ford shown in Figure 7(g), emitting again the outliers, are approxi.'Tiately 1966,. 22>^. 22;3. from 1956 to 1957,. 23'/,. from 1956 to. from 1963 to 1972 and 15^ frcm 1973 to 1979.. These. movements show that the "good" years of grcving profitability for the U.S. Autonooile industry ended in the mid-sixties, which is. consistent with the results of our produccivity measure analysis... Finally. \/e. observe that the approxirrate percentage increases. (decreases) of the percentage contrioution, of payroll and. benefits, depreciation ano operating profits value adced for GM in the past fifteen years have êen 43,6,. (3;0 and (50"o).. The. respective numoers for Ford in tne same time period are and (67;0.. We. 3C)^,. (IS.'o). therefore conclude that the increase of the. percentage contrioution of payroll and oenefits to value added can be primarily explained by the decrease of the percentage. contributicn of operating profits to value added, because the coange in the percentage contribution of depreciacicn to value added is relatively unimportant..

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(61) «. »«. ». *. «. «. «. .. o.030t. 66.0. «o,o. 5.«.o. 84.0. 78.0. 72.0. Figure 6(d). :. Capital Expenditures (Current Year) over Value Added (CM). O.ltoi. 0.123f -. *. -. -. ». » <. O.lOOf *. ». ». ». «. ». ». «. «. «. ». ». 0.07S<. Figure 6(c) 0.050*. « +. +. 54.0. 40.0. 64.0. 1. 72.0. V. 73.0. d".. :. Capital Expenditures (One Year Lag) (GM) over Value Added. Figure c(. f). Capital expenditures (One Year Lead) over Value Add>'J (CM).

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(63) O.HOOf. <. <. « «. «. *. tt t. t. Figure 6(r) o.oao>. « ^. S-I.O. 4. 60.0. t. £6.0. j.. 72.0. ^. 78.0. >TCAR. iA.O. :. Operating Profits over Value Added (GM).

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(65) «. *. *. *. t. t. >. I. *. «. figure 7(d). Cafitnl r.xpeiid i turcs (Current Year) over Valuo Added (Ford). O.OOOf +. 4. ^•O. --. ,._. ,. 60.0. 6«.o. /2.0. ftF^R. b4.0. ,'8.0. O.:40f. o.:oof. *. Figure. 7. (e). :. CaplLaT E.\p'?ndi turcs (One Year over Val'i'.' ,\ducd (Ford) 0.0401 -». 5<'0. O.JOf. *. 60.0. f--. ». 4A.0. 71.0. 78.0. » (. «. «. «. «. t. ». t. «. «. Figure 7ff) Expoiiditures (One Year Lead) CV'T V.il.u Added (Ford). Capit.-ii. -0,10*. --. *. 34.0. 40.0. 4^.0. -.,. 71,0. ^... 70.0. I. rEfiR. 84.0. L.jg).

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(67) /». 0.3Qf. *. t t. «. «. <. < «. *. *. « *. o.iot «. Figure 7(g). :. Operating Profits over Value Added (Ford).

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(69) :^y. C. Empirical -ôjlicatLon of CM.inngs in. .. In Figures 3 and 9 we present the tiie. Cgn^ributlon. Pjrc..-;ni:3:i:^. tiiTie. 'Er^'jition. series of changes of. percentage contributions of value added for General Motors and. Ford respectively. \ie. observe that the patterns of. series of chances of the. ti.Tie. percentage contribution of payroll and benefits (high probaoility. of positive changes) and operating profits (hign probability of negative change) to value added for General iVotcrs and Ford, •. clearly deviate from. a. "random. .•/alr<",. v/hereas the test for. depreciation is indecisive. In Figures 10 and 11. v.'e. present the. ti^'Tie. series of the. relative rates of change of the ccnpcnents of value added for. General Motors and Ford respectively. We observe tnat tne relative rates of. of the co'ipcnents. cha.-!ge. of value added do not follcv any "random wal'<" pattern.. Chitting. outliers, the time series of the ratio of change in payroll and. benefits over change in value added is predominantly positive and for both General riotors and Ford the ratio is on the average around. 50%, which implies toat changes. are of the. sa.T.e. payroll and benefits account en the average for change.. sign and that of this. 50/J. The time series of the ratio of change in depreciaiion. over change in 'value added for both General. f-VDtors. predominantly positive and on the average around. and Ford are. 7/3.. The same. observation holds for operating profits change over value added change, namely the time series are predominantly positive; the. averane ratio is around. a5."o.. ..

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(71) Payroll.

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(73) Payroll.

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(75) .. In Figures 12 (a,b,c) and 13 (a,b,c) ws present the value. added "elasticities" of. respectively.. tiie. conponents for General Motors and Ford. The value added "elasticites" of dimensions give us. the tine series of the ratio of percentage change of eacn of the. three components of value added over percentage change of value. added We observe that for both General Motors and Ford the average. value of the ratio of percentage increases (decreases) changes is. atound. 70'j. for elasticities of payroll and benefits with respect to. value added, (50;O for depreciation and (30G;o) for operating. profits respectively..

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(77) ::. 1.04. *. *. «. ««. «. Figure 12(a). Value Added "Elasticity" of Payroll and Benefits (GM) -2.0t +. ^. 40.0. 54.0. -- + -. _^. *6'<5. '*•". f. « ». «. 0.04. *t. * t. ««. * t. +. Value Added "Elasticity" of Depreciation (GM). it t. t. --. +. +. 64.0. 60.0. Figure 12rb). «. -4.0+ 5<.0. + C1V7 g^_0. ^. '78.0. 72.0. J. 34. «. «. «. «. * ». z -0.04. «. «. ». ,. *. ». «. «. Figure 12(c). Value Added "Elasticity" of Operating Profits (CM). -7.04 t •. S-l-O. ^.. ». AO.O. •. 64.0. ''^•0. ,-8.0.

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(79) :. » ». «. s. .. <. «. «. Figure 13(a) «. iA.C. ?.«. t. Value Added "Elasticity" of Payroll and Benefits (Ford). 40.0. -'. « 3. Of. «. s. 0.0+. tt. « *. « ». t. « t. Figure 13(b). Value Added "Elasticity" of Depreciation (Ford). SA.Q. 60.0. » «. ». **•<>. «». « «. 7Z.0. ». ». -a.O. t. 84. ». Figure 13(c). Value Added "Elasticity" of Operating Frofits (Ford) '*-0 .. 40.0. 46.0. .'^.o. J'O. d<.o.

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(81) 35. PFÔDUCTIVITY iME-^ÛrlEXSNT. IV.. :. COMPARISCM WITH. M.^-JiAG£.ÎAL FVTP^FQ.^NlPi-JCE. INDICATORS Since productivity is one of the psrformance indicators of. a. firm, we. are interested in finding cut the relationship between prcducuivity and. various perfor'nance indicators used by Tianagenent, such as return on sales, return on investîent. ,. etc.. These relationships allow us co further explore. the role of productivity in the operations of the firm.. For the automobile. industry, we are particularly interested in finding out the causal. relationships among imported cars market share, productivity and. profitability.. A.. Managerial Performance Indicators There are many. performance of. a. criteria commonly used by management to evaluate the. corporation, including return on sales, return en. stockholders' equity, return on total assets, return on net property and equipment, and net income, where the term "return" is usually employed either as net income or as operating inccme. (incom.e before taxes,' interest and. extraordinary items). Return on sales measures the overall profitability of. a. firm.. A firm. may increase its return on sales by reducing unit cost or cy increasing prices.. The reduction in unit costs reflects the improvement in production. efficiency or reduction in value of materials purchased.. The increase in. prices, holding unit cost constant, reflects the market power of the firm.. Therefore, return on sales represents mixed effects of efficiency and market power..

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(83) 36. Return on assets (ROA), return on equity (RGE) and on net plant and equiprncnt. {ROP) are defined as returns divided by total assets, stockholders'. equity, and net property. <i. equipnent respectively.. ROA indicates. hov/. well the. firm has utilized all its financial resources, v/ithout considering the. relative magnitudes of these resources (long-term debt, stockholders' equity).. ROA equals ROS divided by the asset turnover rate.. Therefore, ROA. reflects production efficiency, market power, and the efficiency in utilizing total assets to generate sales. ROc,. obviously, is of interest to present and respective shareholders,. and is also of concern to management, which is supposed to operate the. business in the stockholder's best interest, because it indicates how well the firm has utilized the shareholder's equity.. Return on property and equipment. (ROP) is a measure of the efficiency with which fixed assets have been. employed. Each of these four financial ratios can have two possible measures for Thus, we nave eight. its numerator (net income and operating income).. performance indicators, which together with two measures of net income (nominal dollars and constant dollars) will be compared with our productivity. measure.. 8.. Time Series of Mananerial ;êrform^nce Indicators The time series of tnese ten performance indicators for General Motors. and Ford are shown in Figures lA(a-k),. 15(a-k).. v.'e. ooserve that net income to. sales and operating income to sales have patterns similar to our productivity. measure. FORD.. 3oth ratios have declined smoothly since 1552 for GM and 1959 for. Tne rest of the ratios either sho.v a cyclical cr an increasing pattern. that can not provide us with early warning signal.. •.

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(85) «. «. «. Figure 14 (,i) +. ». t. * *. «. «. «. frr^R 84.0. f. 70.0. 72.0. 66.0. 60.0. 54.0. «. $. t. Operating Return to Sales (GM). t. *. *. Figure lACb). Operating Return to Equity (GM). 5.+ ». +. +. 60.0. 54.0. +. f. 66.0. « « (. « «. 60.. 33.. fEftR. «. «. «. «. «. ». t. 8J.0. 78.0. 7:^,0. Figure 14(c). «. Operating Return and Equipriient 54.0. 60.0. 66.0. 7^.0. 73.0. 8t.O. to. (GM). Plant.

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(87) :. J«. po.». ». *. ». «. «. «. Figure lA(d). Operating Return on Assets 5''0. AO.O. 64.0. 72.0. ;e.O. 8-».0. CGM). i:;rj(v. *. «. «. «. Figure. l-^(e). Net Return on Sales (GH). 2.0* +. •». so.t. +. 40.0. S'^.O. 66.0. 72.0. 8^.0. «. t t. 30.. '•TEAR. 78.. t. ,. t t. ,. « «. Figure l4Cf) Net Return on Plant and Equipment (CM). ^*'0. 60.0. '. .0. 78.0. MEflR 8^.b.

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(89) s « «. 18. Of -. .. »«. «. t. t. «. (. ». ». t. <. ». Figure l^(g). :. Net Return en Equity 4. +. ,. 60.0. 54.0. J2.0t. «. 66.0. <. *. ^. J. 70.0. 72.0. **. tTE(VR. t «. (GM). y4.0. «. Figure lA(h). :. Net Return on Assets (GM). ':.0. -. 8^.5. Figure 14(i). *. '. «. 78.0. :. '. 2000.. t -. :. "'°. «. «. «. Operating Income. t. *<'•<>. (GM). •. ,. **->J. 72.0. 78.0. 34.0.

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(91) ^0. ». ». ». 800. f. « V. «. «. I. Figure. f. lA(-j). :. Net Incoaie (GM) t. J. +. "•0. 40.0. ^. A.S.0. 7;,o '"O. ;«*; 78.0. *^''« d-I.O. Figure 14 (k). :. Net Incor.e in Constant Dollars (GM) 4.0t *. 5-«.0. ^.^. 60.0 •<^. 7d.O.

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(93) 41. *. » «. «. *. Figure 15 (a). :. t. «. Operating Return to Sales (Ford). +. 4. 54.0. 30. t. +. 60.0. +. 66.0. *. + rE«R 84.0. 4. 72.0. 70.0. « «. (. <. t. ». $. *. «. *. Figure 15(b). Operating Return. to. Equity. (Ford). 0.* +. 54.0. +. 1. 60.0. 6->.o. «. 'TEiIR. 84.0. 7J.o. .°::.o. «. ». « «. t. «. Fif.urc-. 54.0. 60.0. 66.0. 7:.0. 15(c). :. «. ». 0". 7d.O. 84.. Oporatitu^ Return to Plant and Equipr.-.ent (ford).

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(95) hi .!4.0>. *. «. t. « t. *. *. *. $. «. (. (. *. *. «. Figure 15(d) *. « « "^ ^. f. ^. 44.0. «0.0. 51,0. 6.0+. *«. Operating Return on Assets fTEi>R. ». f. 72.0. :. (Ford). 84.0. rS-O. < «. -. «. «. t. «. Figure 15(e) * «. X. :. >. Net Return on Sales (Ford). +. J. 60.0. J4.0. +. f. 44.0. '2.0. iTFJR. +. 70.0. B-).0. Figure 15(f) -. * '**-*'I. :. « «. o.ot. ^^.o'""";^:;"'"""^:;:^''. Net Return on Plant and Equipment (Ford).

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(97) +f. 43. Figure 15 (^-). 54.0. :. Net Return tn Equity 40.0. 72.0. (Ford). 78,0. Figure 15(h). :. Net Return on Assets (Ford) 54.0. 40.0. "•*'. 7'-0. 7d.O. 81.0. 2800.*. 3100.. 1400. *. « «. «. Figure 15(1). :. Operating Incone (Ford) *0-<>. A,!. •0. til.;.

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(99) :. A4. JyOO.t. jioo.t. 1200.. «. «. Figure 15(1). t ». *. t. Net Income (Ford). 0.*. ,. 60.0. ...0. 10.0+. '. TEAR 84.0. +. +. -'*-4*-0 .. ,„•. ;e.O. <"-. «. s. *. Figure 15(k). :. Net Incone in Constant Dollars (Ford) o.ot f. 34.0. tO.O. 66.0. f. 72.0. f. 76.0. + If EAR. 94.0.

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(101) 45. The correlation coefficients of our productivity fiieasurs with the. managerial performance inaicators are Ford.. snov/n. in Figure. 16u,d) for GM and. Value added per dollar of salaries and benefits is highly correlated. with operating incone to sales. (OrvOS). and net. inco.Tie. to sales (R05). for both. cofTipanies;. the correlation coefficients are 0.938, 0.977 for GM, 0.868, 0.807. for FQRO.. Therefore, productivity may explain most of the variance of ROS and. OROS. The time series and correlation coefficients indicate that operating. income to sales and net income to sales may be used as a surrogate measure of. productivity, and hence provide managers with. a. quick diagnosis of the. condition of their firms. Two arguments complement our findings.. property, assets, and stocknolders. '. First,. the bock value of. equity are the accunulaticn of past. investments which are in nominal dollars of the respective years.. book value of these items is not homogeneous longitudinally. figures are in current year dollars.. Thus,. the. Sales and return. Hence, in terms of homogeneity, only. OROS and ROS are consistent with our productivity measure. Second, net income is affected by "financial operations" such as the. debt-equity ratio, extraordinary items and tax rates have nothing to do with the production efficiency of a firm.. Operating income is an item without this. deficiency and thus is theoretically superior to net income in measuring efficiency.. Ccmoining the 'above two arguments, we find that theoretically and. empirically, operating income to sales describes oest the performance of the firm among various performance indicators.. Since value added over payroll is highly correlated to CRC5, we attempt in the following to test the relationsnips among three variables affecLing. performance:. operating income to sales, productivity, and imported cars.

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(103) 46. .«<OhGM Riir'JM '':^-"':«. OrOAHrt or-ocnn OIVIM-GM. «IGM OIOH. Ort/r-AYG o.ijvi. rô^GM. Rcr-iM. noGUM. 0.7.-3. 0.-.'.;.5. 0.951. 0.97/. O.'?10. ol7i. o:n:6. 0.7/0 o.vio. 0.9Ji o.7ei. O.Vi,.. O.U._/. 7. o.-.i. o..,..^. o.-^. 0.737 -0.20.. O.Uy9 0.160. 0.9. 0... 0.01. -O.O... -O.IO-J. o.:?s.i. o.-^t;.^. o.oi-i. ROAGM = Return on Assets ROEGM = Return on Equity ROSGM = Return on Sales ROPGM = Return on Plant NIGM = Net Income. pc..-cwi. okoa.m. orqc... ^^^^^. ^^^^^ ^^^^_. ^_^^.^. O. .. /U. 0..M. (GM) (GM) (CM) (GM) (GM). ^. OÛ^. ^_. ^. ^. ,^^. R'tir^rri. _^_^^^,. ^,^,,. OROACM = Operating ORDEGM = Operating OROSGM = Operating OROPGM = Operating = Operating OIGM. VA/PAY = Value Added over Payroll and Benefits. FiRure 16 (a). af<o30,^. (GM). :. org.gm. ^^. ,.,,,. Return Return Return Return Income. on on on on. Assets((,.-. Equityju Sales Plant. G.. (G. (G..

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(105) A7. market share.. V<e. believe that these three variables can elucidate. probleniS of the U.S.. C.. Mode]. ttie. A'jtomcoile industry.. Testing. In this section, we will test. tv/o. models.. The first. i-^cdel. is. symptomatic assuming that imported cars market share is an intervening variable betv/esn profitability and productivity.. The second model assumes. that productivity is the underlying cause of both imports market share and. profitability.. 1.. Model. 1. Market share of imported cars has increased since 1963 as shown in Figure 17.. One plausiole explanation is that the decline of the U.S.. productivity allowed imports to penetrate the U.S. market.. As a result the. market shares of existing firms as well as their market power in raising prices declined, and thus their profitability fell.. the first model is. Thus,. one where productivity affects imported cars market share which in turn,. affects profitability.. Model. 1. is shown as follows:. ("Market Power. ("Imported Cars^. Productivity. _^_,. Share j. —^[.f. 1. Oomestic Firms). -^>. Profitability. l..,^,^^^. Model. 1. The arrows indicate the causal relationships and the signs indicate tne positive. negative effect of the causal relations..

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(107) 48. MS 24. Ot. «« «. *. *. Figure 17:. Imported Cars Market Share ««. «. t« *. 4.0t 54.0. —. --. +. 40.. 64.0. •'•<>. 7a.. 94.0.

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(109) A9. It. should be notad that Model. 1. assumes that productivity will affect. profitability through market, share which permits the. firci. to raise its price. above its average cost. A piece of evidence supporting Model. 1. is that the ratio of new car. price index to auto producer price index sho\/n in Figure 18 has declined since 1963, which is highly negatively related to the imported cars market share. A plausible hypothesis is therefore. The correlation coefficient is -0.913.. that U.S. automobile manufacturers had market power to by-pass their cost. increase to consumers oefore tne penetration of foreign cars, but not. afterwards.. 2.. Model 2 A very strong assumption in ^todel. is that productivity affects. 1. profitability through market snare increase or decrease.. However, one may. argue that in a market without collusion, the efficient firm will nave lov/er average cost and is therefore able to act as a price leader who has market power to raise or Ic./er prices.. profitability. arid. Therefore, market share does not affect. the high negative correlation oeiween imports market share. and domestic firms' profitability is spurious. Therefore,. the model oecomes:. Imported Cars) Share j. ivarket. Productivity Market Power I. Profitabili^. of. IDonestic Firms. Model. 1.

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(111) 50. I.J0O+ " «. 1.0S0+. ». ««. «. ». I. «. «. ». 0.950+. '. :. Figure 18. :. .. —. °-^^^°* i. 54.0. .. J. -t. *0'0. * •. '^1*1. 70.0. tTEC.R. 8^-0. New Car Price Index over Producer Price Index (Automobile Indus Crv).

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(113) .. 51. The differance between Model. 1. and Model 2 Is that Model. 1. attributes the. profitability to the "price effect", while Model II atrributes its "cost effect".. '. Statistical Results. 3.. If the relationships of f-bdel. 1. hold, the partial correlation. coefficient between profitability and productivity should drop substantially after we controlled for :narket share of imported cars.. However, if the. relationships of Model 2 hold, then the partial correlation coefficient between imported cars market share and profitability should drcp, after. controlling for procuctivity In the present study, we use operating income to sales (ORGS) as the. measure of profitaoility.. between variables. between. a and b,. a. Let p. and b, and p. be the zero-order correlaricn coefficient. ,. be the partial correlation coefficient. ^. .. ao .o. after controlling for c.. The zero-order correlation. coefficients and partial correlation coefficients between the three performance variables are shown in Figure 19. We have four samples:. GM,. FORD, pooling data of GM and FORD, and SIC. code 371 industry (Motor Vehicle and Equipment from IRS Reports), pointed out that if model. Qodel. 2. 1. is correct then p^^. v/e. is correct then Pj^^ 2 should rop to zero, ,. have ana if. will drop to zero.. We observe that tne conditional correlation (p^- 2} between. productivity and profitability does not change very mucn from their zero-ord3r This result indicates that productivity. correlation coefficient (Pi^)-. directly affects pro'îtability, and thus imoorts nsrket share is not an. intervening variaoie. For model 2, the mccel.. Hence,. i-'odel. the results. For poolir.g data,. 1. is rejected.. from FJRO and pooling data generally confirm. the correlation coefficient oet'.veen.

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(115) 52.

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(117) 53. profitability and imports market share away the effect of productivity, to 0.03.. v.as. -0.629 originally.. After taking. the conditional correlation coefficient drops. This result indicates that imported cars rarket share is no longer. related to profitability if prcouctivity does not change.. A similar result is. found for FORD, in that correlation is weakened after contrclling for. productivity,. (fro'n. -0.650 to 0.546).. industry 371 are very strange. v'hich. prr. '^. means that imports. riar''°t. \/e. However, P23. observe that P23. for GM and the. •,. for GM is "positive". i. share is positively related to GM's. '^.oility if G-1's productivity does not change.. This result may be. tentatively explained by accepting the hypothesis that imported cars eroded the market position of. GVs domestic competitors. which resulted in increased. profitability for General Motors and foreign cars at the expense of Ford. Vi'e. tend to accept the result of pooling data because GM and FORO are. different in productivity and thus neitiier of them represents the universe.' However, by peeling them together, the sanple may represent the universe vary well.. For example, suppose the distributions of two samples are shewn in. Figure 20(a) after pooling the data, the distribution would be. distribution as. snc./n in. of the population,. a. normal. Figure 20(3) which represents the true distributicn •.

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(119) 5A. Figure 20(a). Figure 20(b).

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(121) 55. V.. CONCLUSIONS. Ws have observed that our productivity neasure for both GM and FORD has. declined.. However,. \/e. should stress agîn tnat, although our productivity. neasure correlates well with nanagerial perforrnance indicators it is a single. factor productivity measure.. For instance, if labor replaces capital,. decline of labor productivity. Tiay. the. increase capital productivity which nay. offset the decline of labor productivity. Ideally, only total factor productivity shows the overall efficiency of the conversion of input to output.. Sone researchers (Jorgenson,. Frienderlander) have used the production function approach to calculate total factor productivity gro.vth.. However,. tliese. studies are not free of inpurities. in calculating capital input and total output; they also factor markets.. assu^^.e. competitive. These conditions make the calculation of total factor. productivity impractical.. Although we have also used an impure measure of. capital input, as an alternative approach we have analyzed the change of the. components of value added to identify various hypotheses concerning the overall efficiency of the U.S. Automobile industry as reflected in the perforiaance of General Motors and Ford.. Two hypotheses may explain the gro./th of the share of payroll and. benefits (labor input) in the value added.. The first hypothesis assumes a. competitive about market and the growth of payroll and benefits percentage reflects the efficiency of resource ultilizaticn.. The second story assumes a. non-competitive labor marKet and the growth of payroll and benefits percentage Would not imply improvement in efficiency..

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(123) 56. A.. Competitive. L-2l:;or. Market. In a conpetitive. factor market,. the only reason explaining. v/hy. labor input increases Faster than capital input is that the narginal. product value per dollar of payroll and benefits is greater than. marginal product value. P'.'ir. dollar of capital.. Under these. circumstances, the firm prefers to use labor to substitute for capital and the share of payroll and benefits increases. As labor substitutes caoital, capital input decreases and thus the. percentage contribution of depreciation in value added decreases. However, we do not know .vhether the percentage contribution of profits to value added would increase or decrease.. This depends on whether the. decrease in tne share of depreciation can offset the increase in If this is the case,. share of payroll and benefits.. tiie. the firm is noving. toward cost mini:iization by rational input factor substition and is. improving its efficiency. The real wage rate. (wage rate adjusted by the consumer price index). has grown 2.6^% per year for GM and 5.34/, for Ford.. If the marginal. product value of capital increases, due to process innovations or lew. capital cost, the physical labor productivity should grow even fasteri One may argue that if the workers in both. fir.r.s. industry v/ould not be in today's difficulties. the possibility that 'labor has. 'oeer\. time the industry is in trouble.. were so productive, the However, there is always. very productive while at the same. That is because the firm made wrong. strategic decisions (e.g. low new investinent rate for the production of small cars), which resulted in the decline of profits dua to foreign. competition. efficiency.. In this case,. the problem is industry effectiveness not.

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(125) .. 57. Non-Cc'~inqtitiv3 Lihor. B.. hiket. The second explanation of the phenomena observed is that the labor. market is not conpetitive. over the firms and ~.>s-. v/as. The labor union (UAW) had .Tionopoly power. able to increase wages faster than the growth of. physical prod'jctivity c. In a non-competitive product mjket,. increases to consumers.. the firm can pass on labor cost. However, in a competitive product market, the. firm cannot increase prices accordingly and the increase in labor cost. reduces profits.. Therefore, under such circumstances, we would observe. that the percentage contribution of payroll and benefits to value added. increases and that of profits decreases. The question, why the percentage contribution of payroll and. benefits had not increased before 1963, may be satisfactorily answered. The product market was not competitive before 1963 and firms were able to pass on their cost increases. to consu.ners.. One piece of evidence. supporting the competitiveness of the market is the market share of imports, which has consistently increased since 1963, as 17.. sho'./n. in Figure. Due to competition, the ratio of new car price index to producer. price index was greater than one oefore 1963, but not after 1563 as. shown in Figure 18. If this, were the case,. .. •. .. .. then, the management had several. alternatives in coping with this proolem. their purchases of materials and. First, firms might increase. services, because it was cheaper to. buy from an outside competitive market than to produce tnemselves.. Second, firms might increase their foreign operations and tnen import. cars from their foreign subsidiaries.. Third,. fir.'is. migiit. reduce labor. input and increase capital input, if tney are subsitutaole..

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(127) 58. Our data confirm that Doth CM and Ford have gradually reduced their. degree of vertical integation, as shown in Figure l(a,b,c,d).. We. observe that value added over sales has declined since 1965 for GM and 1960 for Ford.. The percentage of foreign cperaticns in total sales for. both companies are shov/n in Figure 21 for Ford; we have not found similar information of ul.. operations increases.. We observe that tne share of foreign. This phenomenon can be attributed to importing. assembled automobiles, outsourcing of parts and also to increasing We have no data on parts imported by. demand in foreign countries. and Ford, but we. \/ill. G'-l. obtain such data in our further field research.. The time series of gross plant and equipment per employee snown in. Figures 22(a) and 23(a) for General Motors and Ford respectively show an This means that management attempted over time to. increasing pattern.. substitute capital for labor, as economic theory would predict. However, the rate of increase of payroll and benefits was so high that. the time series of gross plant and equipment per dollar of payroll and. benefits snov/n in Figures 22(b) and 23(b) have been decreasing since the. mid-sixties for both firms. Hence, not only the market became more competitive in the. mid-sixties, out also management did not use capital to substitute for labor fast enough.. There are several reasons for that:. (i). labor and. •capital were not suostitutable at a faster rate; (ii) high cost fixities. prohibited the management from investing in. management nad. a. ne.;. equipment; (iii) the. short term predisposition and (iv) management expected. that the union v.ould ask for to show more orofits.. a. higher snare in value added. v/ere the. firm.

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(129) 59. I mports oF Ford as a Perce ntic'e o t_. Ford's. 71. l.-or.escic. I-rodactiion. Sales of Foreign O perations as a Percentage of Total Sales.

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(131) bU. ft. «. 12. Of. «. < ». «. «. rigure 22(a) 6. Of 1. ^. l.SOf. ^. 60.0. 54.. t. *. J. Ai.o. 72.0. s. ». 78.0. YE.%R 84.0. :. Plant and Equipr7;enc per Employee (CM). t. Figure 22(b). :. Plant and Equipr.ent over (GM) Payroll and Benefits. ».20+ t. 54.0. f. ». 40.0. «. 64.0. +. 72.0. +. 78.0. trEflR. m.O.

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(133) :. OJ. *. t. « «t t. tf <. *. <. 12.0* »« ». «.o*. Figure 23(a). ». Plant and Equip:?.ent per Employee (Ford). «. __-+. ^. 5^.0. +. ^. 60.0. 44,0. ,yt; "''•'"'. ^. 72.0. 78.0. 84.0. •'2-.*l»r. * « S *. *. *. ^. -. «. •. °* ,. 5<.o. Figure 23(b). •. ^. 40.0. ^. i6.o. ^. ^ .. 7r.o. ,. 7B.0. +rEAS 84.0. Plant and Equipr;.ent over (Ford) Payroll and Benefits.

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(135) 62. Hligh. labor fixities, uncertainty snd -3xc3ssive union po\ier. seo:n. to. be the reasons explaining the aecline of productivity and tne increase. (decrease) of payroll and benefits (profits) in the value added of the U.S.. AutoiTiooile. Industry in the p^st 25 years.. Altnough our second hypothesis enjoys stronger data support than our first hypothesis, further research in the causes of productivity. change the impact of fixities on innovation this puzzle.. v/ill. shed nore light into.

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(137) -63-. APPENDIX FOR PLOTS.

(138) d. v=>.

(139) Figure 1(a).

(140) -:. J.

(141) Figure. 2 (e). :. Capital Expenditures (One Year Lag) over Payroll and Benefits. Figure. Capital Expenditures (One Year Lead) over Payroll and Benefits. Operating Profits over Payroll and Benefits (GM). (GM). (GM) ^. Figure 2(f). 0.280702 0.161471 0,090091. 2 (g). Figure 3(a). Value Added over PayroJ and Benefits (Ford).

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(143) :. -66-. Figure 3(f). Figure. :. Capital Expenditures (One Year Lead) over Payroll and Benefits. 3 (g). Figure. :. Operating Profits over Payroll and Benefits (Ford). Figure 6. 6 (a). Payroll and Benefits over Value Added (GM). (b). :. Depreciation over Valu Added (GM). (Ford). 56. 0.103927 0.372076. 55. 0.3'?0Q72 ". 0.113974 0.091158 0.1^5592 0.1-10045. 0.135746 0.150657 0.167154 0.211029 0,245601 0.186315 0,124355 130090 1. 0.665471 0.329540 0.363214 0.008569 0.519276 0.416984 0.503644 0.564277 0.432321 0.457533 0.498236 0.418905 0.059744 0.370459 0,307148. 55. 0.129.^69. 0«30^39S O.ri';9036. -0.043175 0.167874 0.138097 0.287905 0.363028 0.304060 0.149410. 0.13746 9 0,085187 0.060539 0.103616 0.142821 79. 79. Figure 6(c). Figure. Depreciation over Value Added in Constant Dollars. Payroll and Benefits over Value Added. 55. 79. 0. 394988 0. 310745 0. 289803 0. 210190 0. 304651 0. 299165 0. 235013 0, 361035 0, 375653 0, 360290 0, 370009 0, 305883 0. 287424 0. 295979 0. 233904 0. 080854 0. 271851 0. 279730 0. 265917 0. 123946 0. 158973 0. 262831 0. 259125 0, 245532 0. 177975. 7 (a). :. 55. 79. 0.545402 0.657161 0.616772 0.704152 0.567463 0.620094 0.570205 0.563559 0.610339 0.601302 0.590103 0.613357 0.769485 0,632333 0.6564 74 0.674300 0.635430 0.635806 0.900403 0.760469 0.765475 0.699558 0.673033 0.699644 0. 772069. 55. ^. ,. 79. 0.110043 0.140614 0.156050 0.108989 0.147241 0.140181 0.150018 0.126303 0.123800 0.121193 0.120397 0.147550 0.152874 0.136276 0.137450 0.177560 0,132354 0. 122507 0.117941 0.130104 0.144640 0.108343 0.099462 0.112753 0.118532. Figure 7(b). Figure 7(c). Depreciation over Value Added. Depreciation over Value Added in Constant Dollars (Ford;. (Ford). (Gr. 0.494968 0.548641 0.554067 / 0.592821 0.543100 0.552654 0.564169 0.512657 0.500459 0.518513 0.509594 0.546567 0.559702 0.567746 0.578646 0.741586 0.595795 0.597763 0.616139 0.745950 0.696382 0.620776 0.641413 0.641665 0.703493. (Ford) 55. 0.091648 0.126279 0.159207 0.233402 0.137867 0.121336 0.142614 0.113437 0.125011 0,122853 0. 115849 0.129704 0.184543 0.133345 0,141891 0.143737 0.120314 0,109944 0,138172 0,111363 0,123316 0,099035 0.03256 2 0.037621. 79 .0.1. 1. ?[}?/.. 55. '. 79. 0.362949 0.216560 0.224020 0.062366 0.294670 0.253569 0.287130 0.318003 0.264100 0.275344 0.294042 0.256939 0.045972 0.234272 0.201635 0.181962 0.244256 0.254250 -0.033375 0.127663 0.105710 0,201407 0.244 350 0.212734 0.115355.

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(145) :. :. ::. -67-. Figure 6. (d). Figure 6(e). :. Capital Expenditures (Current Year) over Value Added (GM) 55. 0.094070 0.166167 0.007808 0.053928 0.056205 0.002392 0.086604 0.003072 0.074200 0.103734 0« 122377 o«irJ7ii ©OUVDIJI 0.074009. Capital Expend! tu ês (One Year Lag) ov r Value Added (GM) 56. 0.0(36aii.3 1 j4366 0.074799 0.064456 0.069160 0.111207 0.083261 0.048396 0.070173 0.101660 0.125373. <). 79. Figure. 79. Figure. 7 (d). 0.090707 0.260915 0,171051 0,090095 0,054711 0.090600 0.096490 0.083180 0.104354 0.119240 0.133996 0.142431 0.180476 0.082410 0.094188 0.098373 0.080935 100344 0,077636 0.053161 0.000380 0.104316 0.151021. Capital Expenditures (One Year Load) over Value Added (GM) 56. 79. 7 (e). :. Capital Expenditures (One Year Lag) over Value Added (Ford) 56. 0.213795 0.200010 0.069906 0,082981 0.007699 0... 56. 105321. 0.101124 0.104673 0.137251 0.161993 0.147500 0.136020 0.126232 0.095001 0.099502 0.106263 0.100393 0,10731'! 0.12157L.. 0.. 79. 0.138939 0.000509 0.049917 0.069996 0.092300 0,070021 0.111120 0,004145 0.106576 0.147611 0,109906 0,000007 0,004 720 0,009903 0.094 04 9 0,119090 0.0694 77 0.079774 0.086707 0.091637 0.069256 0.090644 0.114395 0,125212. Figure 6(g). :. 0.113676 0.164999 0.103659 0.047310 0.050125 0.090612 0.065423 0.073959 0.072221 0.086001 0,120040 0,117005 0.078603 0,071328 0,123657 0,083831 0.069393 0.055006 0.000776 0.101113 0.058183 0.041733 0.069476 0.101816. Operating Profits over Value Added (CM) 55. 0.394983 0,310745 0,289083 0.218190 0.304651 0,299165 0.285013 0,361035 0,375653 0,360290 0,370009 0,305003 0.287424 0,295979 0,283904 0.000854 0,271051 0.2,79730. 0.'26fe9l7. 0.123946 0.150970 0,262001 0,259125 0.245582 0.177975. 79. Capital Expenditures (Current Year) over Value Added (Ford) 55. Figure 6(f). :. 79. 0.074401 0.069617 0.105453 0.116218 0.143555. 79. Figure 7(f). Figure. Capital Expenditures (One Year Lead) over Value Added (Ford). Operating Profits ove: Value Added (Ford). 0.124156 0,229979 0.240025 0.064676 0.056526 0.083017 0.079375 0.082926 0.090666 0.090639 0.129436 0,189048 0,117822 0,081636 0,093119 0.002332 0.073208 0. 100359 0.100015 0.105229 0.059593 0.040740 0,072494 0.110260. 55. 7 (g). 0,362919 0,216560 0,224020 0.062366 0,294670 0,250569 0,207100 0,310003 0.264100 0.275344 0.294042 0,;. 79. )939. 0.045972 0.234272 0,201635 0.181962 0.241256 0.25 4 250 -0.030075 0.127663 0.105710 0.201407 0.244350 0.21273) 0.115355.

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(147) i. -68-. Figure 12. (a). :. Value Added "Elasticity" of Payroll and Benefits (GM). 0.4527. Figure 12. (b). :. Figure 12. (c). Value Added "Elastic- Value Added "Elasity" of Depreciation ticity" of Operating Profits (GM) (GM).

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(149) -68-. Figure 12. (a). Value Added "Elasticity" of Payroll and Benefits (GM). ':. 0,4527 2,1214 0.6125 0,6172 1.0767 0.7711 0,6277 0,7?87 2,3526 0,8994 -0,3739 -1,1487 1,1145 1,5152 0,3431 0,4773 1,0457 1.2312. Figure 12(b). :. Figure 12(c). Value Added "Elastic- Value Added "Elasity" of Depreciation ticity" of Operating (GM) Profits (GM) 56. 0,273i. -0.4021 13.4466 -0.1693 -0.1212 1.0590 0,8216 0,3374 0,8379 0.1853 0.9614 -3.2706 -2.2261 0.1347 1.2312 0.3193 0,3231 -0,0294 0,7198 0,6363 2. ». 56. T"' O '>. 0.166C 0.4 041'. 2.2012. ivOc:',s. 65.6095. 79. 79. -34.4283. 79. 2.076 -6.612 2.370 3.011 0.334 1.474 2.087 1.343 -0.533 1.153 4.282 6.396 1,237 -0.095 2.668 7.281 1.401 0.629 2.883 4.092 3.170 0.896 0.530 191.306. Figure 14(a). Figure 13(b). Figure 13(c). Value Added "Elasticity" of Depreciation. Value Added "Elastic- Operating Return ity" of Operating to Sales Profits (Ford). (Ford) 56. 79. -0.4656 2.8010 -0.1569 -0.2021 4.6142 3.0932 0.0446 19.1813 0.8634 0.6701 4.5143 -0.2937 0.2009 7.8236 2.1468 0.0006 0.5101 -0.2175 -0.1267 -2.4843 0.0052 0.3005 1.6247 -4.4761. 56. 79. 2. Figure 13. (a). :. Value Added "Elasticitof Payroll and Benefit: (Ford). 56. 79. 0.2052 0.5755 0.6437 0.4302 -1.7957 0.0397 0.9343 28.5108 0.8866 0.8876 2.1577 0.2212 0.4 863 5.0561 3.3934 0.6465 1.0034 -0.9527 0.0836 0.8436 0.6295 0.8409 1.4022 -0.9904. Figure 14. (b). :.

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(151) 55. Figure 14(c). Figure 14(d). Operating Return to Plant and Equipment (GM). Operating Return. 55. 100.730 58.090 52.000 36,530 62.090 66.500 57.3^0 98.250 110.200 94.^,40 97,4.10. 69.560 62 630 «. ;i.66o 6(')i'TJ.O. 79. 12.010 67,970 75,780 76,980 24.490 37.150 85.570 85.830 77.220 45.390 Figure 14. (g). 79. :. Net Return on Equity (GM) 55. '. 27.9500 18.5000 17.2000 12.6300 16.2600 16.4900 14.8200 21.9400 22.3500 22.8300 18.5100 20.5500 17.5700 17,7500 16.7300 6,1800 17.9100 18.5100 19.0800 7,5000. 55. .9.5800. 20.1000 21.1700 19 9700 IS.wOOO V. 79. 79. Figure 14. (o). :. Figure 14(f).

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(153) Figure 14. (k). :. Net Income in Constant Dollars. Figure 15(a). Figure 15(b). Figure 15. Olê rating. Operating Return to Equity (Ford). Operating Return to Plant and Equipment. Return. to Sales (Ford). (GM). 55. 16.6100 9.5200 9.2400 8.1000 14.2200 12.4800 12.2000 12.4500 11.7600 10.1900 11.1200 9.4600 1.4200 9.0800 7.5200 6 7700 7.7100 8.0100 6.8200 2.5700 1.8200 5.5000 7.2600 5.5200 2.1100. 55. ». 643.20 717 .ZL 1702.52 1838.84 1795.29 1330.59. 79. Figure 15(d). 55. 79. :. (Ford). 1483.17 1041.03 1000.73 731.64 1000.11 1081.17 996.43 1610.49 1735.08 1867.38 2249.31 1845.06 1627.30 1662.09 iSSU.OJ. 55. (c). ating Return. 79. Figure 15. (e). :. 79. 46.5500 20.8100 23.1900 14.4700 29.1100 22.7000 26.1800 29.4700 27.6400 24.5700 28,5800 24.2200 3.2500 25.8500 21.2800 18.5600 22.8200 27.1200 24.4900 10.6900 6.8500 22.1800 32.4900 24.3400 8.8000. Figure 15(f). 55. 79. 77.9300 26,2500 28.9500 20.0100 49.6300 43.1800 39.0400 47,0600 45.0400 38.1100 42.4800 33,6800 3.8900 32.2300 27.0000 23,4200 28,0600 34.1200 30.2300 10.6800 7.8400 28.4300 44.2600 31.8500 9.9500.

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(155) :. Figure 15(h). Figure 15. Net Return on Assets (Ford). Operating Income (Ford). 16.7400 0.4600 9.0000 3.7100. 55. 55. 13. 04^-0. 11.39j0 8.0000 8.8700 8.J200 7.C300 9.2500 7.6000 i.C600. 79.. (i). :. 929.30 442.60 533.40 120,20 761.50 653.80 818,40. Figure 15. 79. 1028.20 985.80 1232,50 1157.50 171.90 1270.90 1110.00 1014.80 1267.40 1617.90 1553.80 605.20 436.40 1586.90 2745.60 2350,50 917.00. (j). :. Net Income (Ford) 55. .1.007.10. T'.OOOO. §.9400 s,:uoo 6.2500 7.4800 7.0000 2.5500 2.3000 6.2300 8.6900 7.1900 4.9700. :. -71-. ,. 79. 454.10 248.20 294,00 116.20 451.40 427.90 409.60 480.70 488.50 505.60 703.10 621.00 84.10 626.60 546,50 515,70 656,70 870,00 906.50 327.10 322.70 983.10 1672.80 1588.90 1169.30. Figure 17:. Figure 18:. Figure 22. Imported Cars. New Car Price Index over Producer Price Index (Automobile. Plant and Equipment per Employee (GM). Marlcet Share 58. 79. 9.1900 10^6800 6.2400 4.8100 5.1400 5.0800 6.24 00 6.1000 9.0100 7.2000 10.7000 11.7000 15.3000 15.3000 14.8000 15.4000 15.9000 18.4000 14.8000 18.6000 17,7000 21.8000. Industry) 55. 1.05330 1.02522 1.03470 1.03466 1.05583 1,05769 1,05984 1,05578 1.05828 1.04985 1.02437 1.00507 1.00000 1.00000 0.99618 0.98938 0,97476 0.94068 0.93205 0.90944 0.88243' 0.88231 0.37294 0.87306. 55. (a). 6,9782 8,7981 9.8016 11.4302 11.1012 11.2025. :. Figure 15. Net Income in Constant Dollars (Ford) 55. 566.209 304.914 348.754 134.180 517.068 482.412 457.143 530.574 532.715 544.241 744.021 638.889 84.100 601.344 497.723 443.422 541.335 694.333 681.067 221.462 200.186 576,598 921.653 813.152 537.856. 79. Figure 22(b)': Plant and Equipment ov-: Payroll and Benefits {. 1,37259 1.79625 1.92800 2.19689 1.98218 1,88952 2,13837 1.82260 1.75426 1.80655 1.72940 1.87590. 55. 12. ,6669 11. 8852 11. 9633. .2^. 12.6994 12,9683 14,1224 15,4274 15.6923 15.9972 19.4625 18.4174 19.4656 19.2575 22.9030 25.7020 24,3210 24.9196 26.2037 29.1669. (k). 1.9768'^. .. 79. 1.80260 1.81996 2.16395 1.76682 1.69539 1.50683 1.71943 1.74266 1.40176 1.29330 1,27622 1. ."Xj "'.^Ct.

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(157) -7iFigure 23(a):. Figure 23(b):. Plant and Equipment per Employee (Ford). Plant and Equipment over Payroll and Benefits (Ford). ^ •. .. 6,5208 8.7665 9.4601 11.3085 10.2346 10.0692 14.2892. 55. 13.121.0. 13.4829 14.0469 lA,5?i6 15.2611 16.7225 16.6942 16.8403 18.1913 17,6841 18.5544 1G»63J0 20,3925. 2.0709.8. 2g<l:il2o. Mi^f)^'i !:*?.:l:'/'30. 2-h[j('//M 5. 28.840r. 1.23380 1.71481 1.75519 2.13709 1.73182 1,70382 2.37384 2.09^M2. 79. 2.02430 1.91937 1.98628 2,33927 1.95251 1.97641 2.03282 1,76036 1.55407 1.43323 1.50949 1 463614 1,42135 1,22138 1.18634 1,29637.

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