Tough Times for American Auto Giants


By

Abhishek Roy Chowdhury
Research Associate
ICFAI University
Kolkata
E-mail:
abhishek_roy_c@rediffmail.com
 


General Motors, Ford and Chrysler, the big three American carmakers were struggling for survival in North America, by the end of the first quarter of 2005. For last few years, they had been continuously losing market shares to their Japanese rivals Toyota, Honda and Nissan. By February 2005, the overall market share for the US auto giants, reached a record low of 57.6%, from 61.7% only three years back. In April 2005, General Motors posted $1.1billion quarterly loss, the worst since 1992 when the company somehow managed to evade bankruptcy. Ford, being GM's biggest American rival, experienced a sharp 38% drop in its 2005 first quarter earnings. It recorded first quarter profit of $1.21billion, as compared to $1.95billion in 2004 first quarter. Chrysler group was standing at comparatively better position, though, profit dropped by 11% from last year.

The Legacy Cost

The Detroit automakers are grappling with huge legacy costs, due to health care and retirement benefits provided to the workers, retirees and dependants. General Motors, the biggest private health care provider in America, spent $5.2billion in 2004 as health care cost. The amount was rising. In 2005, GM is expecting to see a 7.7% increase. GM's health care costs are adding $1600 to the production cost of every vehicle. The employees had not been paying anything as their share of health insurance premium. In addition, more than 26% workers were suffering from obesity. Treatment for obese workers was eating away around $286million every year. Passive smoking was affecting most of the workers, as smoking was allowed inside the production area.

The condition at Ford was also no better. Ford's health care cost reached $3.1billion in 2004. The company is spending around $1000 per vehicle, as health care cost. The American automakers had been investing heavily in their workforce. They indeed care for the well being of their workers, but now the situation has gone beyond control. As of 2005, the Detroit auto giants are only managing to sell their cars at a break even level, unlike the Japanese counterparts, who are earning around $1900 per vehicle.

The American carmakers are planning to shrink. They are cutting down jobs, reducing the number of white collar employees, canceling merit pay hikes for the salaried employees and planning to shut down a number of plants. However, it will not be an easy task. The United Auto Workers (UAW) has a strong presence in America. They were never open for a bargain with the management. Under the influence of UAW, it is unlikely that each worker will agree to contribute $100 a month as health insurance premium, as expected by Gary Cowger, the vice-president of global manufacturing and labor relations at GM. In Japan, the government provides all health care benefits to the workers, while in America, health care benefits cost billion dollars to the employers.

The Poor Fuel Economy

Looming gasoline prices in the United States had direct impact on the demand for GM's gas-guzzling Sports Utility Vehicles (SUVs) and light trucks. Gasoline price reached $2.31 per gallon in April. Sales of large SUVs fell sharply. With further increase in gasoline price, Japanese fuel-efficient models would out-compete the American ones.

Gas-electric hybrid cars have been emerging to be a solution, in time of this poor fuel economy. A hybrid could save fuel worth $5500 over the entire life of it. Already a number of Japanese hybrids were running on American roads. Ford recently introduced its Escape SUV Hybrid. GM and Crysler were yet to come up with some new models. However, Hybrids also have some disadvantages, which created initial disinterest among the top executives of GM and Chrysler, in manufacturing them. Production costs of hybrids are high. Therefore, they are expensive. Hybrid cars cost around $3000 more than the gas-only models and heavy too. Though GM has shown maximum interest in hydrogen fuel cell technology, it also has two hybrid models in line the GMC Sierra pickups and the Chervolet Silverado. Daimler-Chrysler also declared its plan to launch its first hybrid, the Dodge Ram Contractor Special.

However, launching two or three hybrids might not be enough to pull out the Detroit automakers from the mounting crisis. Most of the brands have also grown old. They are needed to launch some attractive models in 2005. GM's three best selling SUVs experienced decreasing sales TrailBlazer was down by 46.4%, Envoy fell by 51.8% and Rainier lost 26.9% as compared to 2004 scenario. Buick and Pontiac were perhaps the weakest among all GM brands. Ford's F 150s were also facing declining demand. Customers want cars that will save their cost to fill up the tank. They are becoming more interested in crossover vehicles, which are fuel efficient and also provide SUV utility. Large pickups, which were the area of expertise for the American big three, are losing popularity, owing to lack of fuel efficiency. 

Debt Burden

GM is making more profit from its financial services named General Motors Acceptance Corp. (GMAC), than from car manufacturing. Also, the company has outstanding debt of $300billion in the first half of 2005. In May, Standard & Poor's downgraded GM and Ford's debts to a junk status. As a result they might lose their customer base for their debts. In addition, the reduced rating could result in increased cost of borrowing fund from the financial institutions in future. S&P mentioned that the management strategies at GM and Ford were not competent enough to combat the cost crisis and to compete with the Japanese.  

Inefficient Production System

 Apart from health care issues and debt burdens, there are other factors responsible for the eroding market share of the American players. Production cost of the American automakers is much higher than their Japanese peers. The pioneering Toyota Production System (TPS) and Elastic Production System (EPS) were the secrets of success of the foreign-funded automakers in America. The TPS, which is also popular as the "Lean Production", helps eliminate waste and maintain high quality standards by constant quality improvement. Also, through EPS, The Japanese are reducing their production cost by 20%. Comparatively, the American automakers spend on an average 8 hours more on production of each vehicle. For example, Nissan, the fastest in production among the Japanese big three, spends 18 hours for one car, while Chrysler, the slowest among the American big three, spends around 31 hours. The extra time spent on every car costs the American plants $300 to $500 more than the Japanese plants.  It is estimated that, by 2005 end, five out of nine production lines of Toyota in North America (71% of total production in North America) will be able to successfully implement EPS, as compared to only 34% plants of GM, Ford and Chrysler combined.

Job rotation is a common practice among the Japanese. The workers go through a number of job trainings and face frequent changes in responsibility. Apart from providing various job experiences, the system also eliminates boredom, depression and possibility of tired muscles, which are the inevitable effects of repeated body movements while doing a single job for days after days.

Other Problems

 The Asian car manufacturers, particularly the Japanese ones, maintain a steady relationship with their auto component suppliers. The Japanese automakers encourage the suppliers to invest in R&D, in order to develop advanced equipments. Japanese plants have a reputation that they never break the relationship before the suppliers' investments produce any result. The Americans also encourage R&D activities by the suppliers, but, often they break the contracts, whenever a better option is available. Also, the US auto giants always prefer short term contracts, to reduce cost.

Lack of quality is a deciding factor for the decline in the demand for American vehicles. In terms of durability, Japanese cars are far ahead of the American ones. The Japanese vehicles show stability in their quality and performance in the long-run. Also, Japanese brands have higher residual value. In America, people prefer Japanese brands to the American ones, while purchasing a second hand car, since, after driving for 5 to 6 years, the American brands are mostly found damaged.

Effective production systems, healthy labor-capital relationship, close relation with the component suppliers and advanced quality as well as technology, are the strengths acquired over the years, by the Japanese auto manufacturers. Toyota, the biggest among the Japanese top three, has an aim of overtaking GM as the world's largest carmaker, by capturing 15% market share by 2010.

The American auto tycoons are in deep trouble. In one hand they have internal problems of rising health care costs, gas-guzzling old models and huge debts, and on the other hand they are facing tough competition from their Japanese counterparts as well as increasing gasoline prices and high raw materials costs. GM is at maximum risk. There are two options left for GM to shrink or to go bankrupt. Perhaps, Ford is also approaching towards the same destiny.

However, before long, The Japanese may outperform the Americans. Therefore, Cost-cutting and introducing new fuel-efficient models, remain as the two "must do" jobs for the American auto giants in 2005, in order to fight back before it is too late.

References

1. Welch David and Beucke Dan, "Why GM's Plan Won't Work", Business Week, May 9th 2005
2. "Gas-Guzzling Cars Will Drive American Economy Into Ditch", http://mixedpower.com/
3. "Ford's 1Q Profit Dips, May Have 2Q Loss", http://news.usti.net/
4. "What has made car US car-makers look so gloomy?", http://english.people.cm.cn/
5. Porretto John, "Chrysler Group 1Q Profit Falls 11 Percent", http://finance.lycos.com, April 28th 2005
6. Garsten Ed/The Detroit News, "GM, FROD get 'junk' rating", http://www.detnews.com/, May 6th 2005
7. Benton Joe, "American Carmakers Losing the Race", http://www.consumeraffairs.com/, April 21st 2005
8. "General Motors reports Q1 loss of $839m highest since 1992", http://www.finfacts.com/, April 19th 2005
9. "American Carmakers", http://www.hybridcars.com/
10. Kageyama Yuri, "As GM falters, Mo. 2 Toyota keeps driving hard", http://www.detnews.com/2005/, March 18th 2005
11. "GM may kill a brand", http://money.cnn.com/2005/, March 23rd 2005
12. Taylor Alex, "GM Hits The Skids", Fortune, March 21st 2005
13. Garsten Ed/The Detroit News, "GM slashes prices of midsize SUVs", http://www.detnews.cm/2005/, February 22nd 2005
14. "Ford posts sharp earnings drop", http://www.vcamm.com.au/, April 21st 2005
15. "Feature Hybrid Car", http://www/soultek.com/

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1 Standard & Poor's Corp. This is a credit rating agency
 


Abhishek Roy Chowdhury
Research Associate
ICFAI University
Kolkata
E-mail:
abhishek_roy_c@rediffmail.com
 

Source: E-mail October 2, 2005

  

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