Flint: Why Detroit Loses Money

February 14, 2008
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What’s difficult to understand is why Detroit’s automakers lose billions of dollars making cars and trucks here, while competitors like Toyota, Honda, BMW and Mercedes, who build them here too, make a fortune at it.

They’re all building new plants or expanding production at the old ones while Detroit is shutting factories.

General Motors, for example, reported a loss of $39 billion for last year, and my guess is that Toyota will have an operating profit approaching $20 billion for its March 31 fiscal year, with the North American operations the greatest contributor to that.

Here’s my explanation:

Rebates. Detroit has to pay buyers to take its products. If you pay $3,000 to $5,000 in rebates or other bribes to customers to take your cars and trucks, there goes the profit. For example. If GM sells 4 million cars and trucks and spends $3,000 in giveaways on each, that’s $12 billion in lost profit. Toyota and Honda give away a few hundred.

Efficiency. The brands I mentioned are building at capacity, while the Detroit companies aren’t. A great cost in this business is the tooling, the factory, the overhead. When you build a capacity you lower the cost of all this per vehicle. When you aren’t building at capacity, these costs per vehicle go up. And Detroit is continually cutting back, closing factories, paying off workers. Any money in Detroit seems to go into these payoffs to get workers to quit and go away, or now, in billions to dollars to be paid to the union to take over medical care costs.

Legacy costs. Those heritage costs, meaning the cost of supporting former workers who aren’t needed, or the army of retirees. If the Detroit companies were running full blast, these burdens wouldn’t be as heavy, but since they are always cutting back, the burdens grow except when they pay out huge sums to get workers to go away. The foreign companies have younger people on the payrolls, practically no one retired on pension, and better medical care systems because their employees are mainly non-union and it’s easier to dictate than to bargain.

Is there any answer to this? So far there hasn’t been but we can always hope. Even the three problems mentioned above are just symptoms of the real problem. The car business still is a product-oriented business. The customers turned against Detroit’s product. After all, if the product is right, the producer needn’t pay the customers to take its cars and trucks. Production levels will rise and the producer will operate at capacity. And the heritage costs won’t grow because the company will be hiring instead of pushing workers out.

For years the main recovery action in Detroit was cutting costs. But it is difficult to make cost cutting the route to prosperity. Instead, it became an endless cycle of cost cutting, even killing brands: Oldsmobile at GM, Plymouth at Chrysler, Aston sold at Ford, Jaguar and Land Rover to go, and Mercury seems doomed unless a member of the Ford family steps forward to save it. And, of course, assets get sold off, as GM sold half of GMAC, or put up as collateral as at Ford.

But finally, some good news: the product has come out into the spotlight. Every Detroit carmaker talks about improving the product, and there are signs that they actually mean it for a change. We do see signs of great improvement at General Motors. I personally feel that GM will be gaining market share this year, not much, but enough to show that the turn is underway. At Ford and Chrysler, as they say, “the issue is still in doubt.”

And it takes more than just building a better car and truck. The buyers aren’t angry at Toyota, Honda, BMW or Mercedes. They like the cars they bought from the foreigners, so getting our people to switch back is almost impossible, or a long, year-after-year process, winning customers among the newer generations who don’t carry a grudge going back 20 years. So winning them back will take a decade or more, so it means continual improvement of the product and the marketing, too.

GM, and Ford are doing better overseas, making profits in Europe, in Brazil, in China. But they aren’t enough. The new contracts with the union will reduce the heritage costs, and even the wage costs as new lower-paid workers are brought in to replace the veterans. That will no longer be an excuse for the failure here in the U.S.

We’ll see if these Detroit executives understand that it is the attractiveness of the cars and trucks that will determine whether their companies live or die, and if they have the talent to create such vehicles.--Jerry Flint

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