Witzenburg: Elephant in the Boardroom

February 26, 2006

Study: Product Woes Hobble GM by Joseph Szczesny (2/26/2006)
Despite talk of change, new products aren’t swift enough, say analysts.

Witz: How GM Should Fix Itself by Gary Witzenburg (11/21/2005)
There’s no quick and easy solution, but perceptions could help greatly.

 

Everyone knows how Japanese automakers invaded America’s auto market, one after another. Their progress was slow at first because their cars and reputations weren’t very good. Then a 1973 Arab oil embargo caused a long, painful, scary fuel crisis. The smaller Japanese cars were more fuel-efficient than American iron, and as their quality improved, they gained popularity at the home teams’ expense. U.S. makers’ initial sloth in addressing the widening quality gap and a second 1979 fuel crisis accelerated the share erosion that continues today.

 

The Japanese makers (especially the best two) continued improving until the now-impenetrable notion of Japanese superiority, regardless of brand, became widely perceived as fact despite tardy but truly impressive improvement by the domestics that today sees them fully competitive. But there was another element of that story that I don’t recall anyone addressing: the substantial difference in the cost of doing business in Japan compared to the U.S.

 

Primarily because the Japanese government (unlike our own) correctly views its automotive and other manufacturers as hugely important to Japan’s economy and the livelihoods of its people, those companies enjoy substantially lower business costs compared to ours…not just wages, benefits, materials, and services but the total cost of doing business. In these United States, that includes the considerable costs of multiple layers of taxation and regulation and out-of-control litigation that competitors do not have to bear. Lower business cost obviously enables more investment in products, R&D, marketing, and advertising.

 

Most importantly, lower-cost automakers can market comparable vehicles at lower prices and/or or better-equipped vehicles at comparable prices and earn more profit on them. Does anyone not understand that enormous competitive advantage?

 

Yet that is the elephant in the room that no one, at least outside the industry, wants to acknowledge or address.

 

Falling behind the world

 

Critics consistently blame GM, Ford, and (until recently) Chrysler leadership almost entirely for falling behind. “Bad decisions,” “bland styling,” “inferior quality,” “uncompetitive products,” they chorus. They believe our U.S. leaders just aren’t very bright, or don’t “get it,” don’t understand what it takes to compete. They think these leaders just need to work smarter and harder to build more competitive products, or step aside for someone who will.

 

Most refuse to recognize, or simply don’t want to address, the multi-thousand-dollar per car U.S. cost disadvantage that is driving U.S. automakers, and other businesses, out of business.

 

If that is so, you ask, why is DCX’s Chrysler Group in much better shape today than GM or Ford? Because it suffered through a very painful major “right-sizing” after being absorbed by Mercedes-Benz a few years back, and it has some nicely profitable products at the moment. Its U.S. operations are burdened by the same business-cost problem, but on a smaller scale.

 

Then came the Korean makers, with lower costs than the Japanese. Like the Japanese, their products were uncompetitive at first but have greatly improved in recent years. Witness the accelerating growth in sales and profits, U.S. and worldwide, of leading Korean maker Hyundai in just the last few years. Look at partner Kia gaining momentum behind it. Is this impressive (and scary) success occurring because Korean engineers and managers are smarter or work harder than everyone else? Are their vehicles better than everyone else’s?

 

No. The Korean makers and their managers, like their competitors, are certainly smart and hard-working, and their products in general are good and getting better. But even a casual look at their major selling points — the content they can load onto their vehicles while undercutting all competitors’ prices and long (expensive) warranties — clearly show that the primary reason for their rapid growth in today’s cutthroat U.S. and global markets is their substantial cost advantage over everyone else, including the Japanese.

 

Kia’s impressive new Sedona minivan, for example, claims $4000 more feature content than its segment-leading domestic target, Chrysler’s Town & Country, at a comparable price. Could Kia do that if its costs were comparable? Not for long. Considering that nearly all remaining media criticisms of domestic cars — “needs more standard safety features,” “needs more transmission gears,” “needs richer interior materials” — center on items that inevitably would add cost to improve, what domestic (or Japanese, or European for that matter) vehicle team would not sell its collective soul for another four grand to invest per vehicle?

 

And behind them, coming soon to a market near you, are the still-lower-cost Chinese.

 

With so much of today’s excessive business costs outside of the companies’ control, U.S. business (not just our auto business) needs help, not bailouts, from labor and government at all levels or will have no choice but to continue out-sourcing more parts and services and moving more operations to lower-cost countries to survive and compete with lower-cost rivals.

 

Next time, let’s examine major U.S. business costs that require assistance to relieve — what they are, what can be done, and who should do it.

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