JIT-ery

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We gaze out on the world from our window and see the hold-up. No, not that kind. The kind that gets us economists all hot under the bonnet. No, and it’s not what you’re thinking. Clean your mind.

It’s this that grabbed our attention:

Audi’s Hungarian workers end one-week strike

A headline from Automotive News Europe. As you can see, we’re nothing if not eclectic here in our reading habits at the Continental Telegraph.

Audi? A workers’ strike? What’s going on?

Now, personally we’re not great fans of the Audi ever since they produced that A2 (yes, that one) but it seems they’ve got a fan base out there that’s put the kibosh on management’s willingness to hold out against striking workers. They’ve bribed—no, we mean, raised the pay of–workers in their Hungarian factory by 18 per cent.

Yes, you got that right—nearly a fifth—after the workers, who belong to a union, walked out and refused to do that thingy they were hired to do. Ah, yes! Produce engines.

Now we need to take a small detour (but not in an Audi, you’ll be pleased to know) into how the automotive industry works. There’s this huge supply chain stretching round the globe where bits and pieces of that wonderful A2 are produced. To avoid having valuable loot tied up in inventories, some bright spark invented just-in-time (JIT) inventory management. A real Vorsprung Durch TechniK moment, if we may say so.

Now for JIT to work, this has to go like clockwork and not like one of those Q5 jobs we see blocking the road. Parts have to flow to the main production line smoothly, like the acceleration of an A8 on the Nürburgring, with parts arriving just in time to be incorporated in the final assembly.

It’s a wonder to behold. Perhaps the eighth wonder of the world, as the seventh is spoken for. Tim here would say that all this makes us richer. Division of labour, economising scarce resources, comparative advantage, that sort of thing. Personally, we like to sit sipping our Augustiner-Bräu and simply watch this clockwork marvel at work.

But we’re drifting away from the story.

One of the things that makes German industry great is the Czech Republic, Poland, Slovakia, Roumania, and all those other countries to their East and South.

What, you say? That’s not Germany.

Ah, but when it comes to making vehicles, it is.

You see, there’s a bit of a cost issue with using Germans. Wage costs. Social costs (including still paying solidarity surcharge). Naturally, German workers want their wurst and sauerkraut and motor manufacturers have to pay up for German workers. Worse still, until Merkel’s open door policy, the number of people in work was falling in Germany and as Tim will tell you, that means you have to fork out more dosh to get those workers to turn up at the factory gate.

So the ever so smart guys at Audi (and let’s be honest, it isn’t just them) decided to move production to those satellite nations next door–or even further away. Lots of workers just lining up to work at starvation wages on all those bits that go into making an Audi such an incredible car.

Wonderbar!

It has been and may continue to do so. But what’s happened?

Well us dismal scientists look at industrial organisation with our magnifying glasses and can spot that scratch on the Audi business model at, well—to be honest and not boasting—about two kilometres away.

This is what has happened:

The strike of thousands of workers led to a halt in production at the plant, which builds the A3 sedan and convertible versions, TT coupe and Q3 SUV. The strike also led to a shutdown at Audi’s home plant in Ingolstadt, Germany, due to a lack of vital components from Gyor such as engines. Audi builds the A3, A4, A5 and Q2 models in Ingolstadt

Eek!

A little labour dispute in Hungary over whether the Huns deserve to be able to afford their goulash has closed down Audi production.

Yup.

Bad news for the company. With JIT there’s no spare inventory lying around just waiting to be used. No production in Hungary, no production in Ingolstadt a few days later.

What to do?

Now this strike was a bit of a game of chicken as we game theorists would put it. Who’s going to fold first from the pain? Loss of production by the company or starvation for the workers.

In the bad old, good old days, the management would sit this one out waiting for the starving workers to beg to be let back in the factory so that they can buy their goulash. By the way, it’s great. Have you tried it?

But with JIT and for reasons of efficiency and cost Audi (and let’s be fair here, other automotive manufacturers do the same) has concentrated engine manufacture at Gyor. And only Gyor. You see they thought they were being very smart getting all these efficiencies and cheap labour to boot. No not that way. “To boot” means in colloquial English that we use, “in addition”. We’re not talking Jack’s boot’s here.

By legitimately withdrawing their labour (heck, they’re unionised to boot (there’s we’ve used it again) and can engage in coordinated action and help and discipline members not to break ranks) they can holdup Audi big time.

Frankly, we’d be tempted to do the same. Loss of a week’s wages—possibly not even that, since lost production will be made up in overtime to catch up; production can’t restart until those engines start arriving at Ingolstadt again—and you’ve “negotiated” an 18 percent pay rise. What’s not to like?

Perhaps those very smart managers weren’t so smart as all that.

Now watch this space for copycat behaviour by other organised groups of workers. Audi is a soft touch.

It promises to be a great spectator sport. Time for another stein of that Augustiner-Bräu.

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