Can German Auto Companies Keep Competitive Their Advantage?

VW workers have just gotten large raises. According to Reuters:

Salaries of workers at VW’s six western German factories and the financial services division will be raised by 3.4 percent from September, followed by another 2.2 percent increase from July 2014, VW said.

That is a significant set of raises in an economy where inflation is nearly nonexistent.

German car companies have moved further down the path that robbed the U.S. industry of profits, and it has started to do the same in Japan, which was once a relatively low-cost producer. The relatively lower costs of labor at Toyota Motor Corp. (NYSE: TM) and Honda Motor Co. Ltd. (NYSE: HMC) helped it swamp the American market with high-quality Japanese cars with modest sticker prices some 30 years ago. Japanese car workers eventually agitated for better wages, particularly based on how well their parent companies did. The Japanese manufacturers lost much of their financial advantage

High labor costs at U.S. car companies where driven as the UAW became more powerful and was able to milk better hourly wages and extravagant benefits from General Motors Co. (NYSE: GM), Ford Motor Co. (NYSE: F) and Chrysler. These contracts where not undermined, in many cases, until the Chapter 11 filings of GM and Chrysler

Even with the recovery of the U.S. car industry, American workers have not gotten as many jobs back as they might have as sales increase. These auto manufacturers wisely have moved some of their production to Mexico, which remains a market in which assembly line workers make very little compared to those in developed nations.

VW has been unable to hold the line on worker pay and may regret that soon, particularly as car sales falter in Europe. This is a situation not unlike the one the American car companies faced in 2008 and 2009 as a recession and high labor costs killed the U.S. industry.