Detroit Closing Productivity Gap – And Consumers Could Benefit

June 5, 2008

Detroit's Big Three automakers haven't had much to be thankful for lately, but they're receiving a healthy helping of good news in the latest Harbour Report, an annual measure of factory floor productivity. Not that long ago, it took the domestic manufacturers nearly twice as much manpower to build a vehicle as their Japanese counterparts, which added up to an average $3,000 more in production costs for every car, truck, or crossover. But the latest Harbour study finds that Detroit has largely closed the productivity gap and, in some cases, Big Three automakers are running more efficient operations than their Asian archrivals.

Overall, Chrysler tied Toyota, the longtime industry leader, each requiring just over 30 hours of labor to produce an automobile. General Motors required just under 32 hours, just behind Honda, and ahead of Nissan. While Ford lagged among the so-called "Big Six," it was still within 5 hours of the industry leaders.

"Productivity improvements and employee buyouts are bringing Detroit's three to near product parity with their Asian rivals," declared Ron Harbour, the analyst overseeing the study. Not that many years ago, Harbour pointed out, the Big Three required, on average, twice as much labor as the best of the Asian makers.

But he cautioned that productivity alone won't save Detroit. The American automakers still lag far behind when it comes to the bottom line, Harbour stressed, during a presentation to the Detroit Automotive Press Association.

"Despite productivity gains," he warned, "Profitability is not guaranteed."

Harbour drove that point home with a chart comparing the pre-tax profits of the Big Six in 2003 and in 2007. Earnings plunged for all but one maker during that five-year period--Honda showed a modest increase--but the gap between Asian and Detroit automakers remained substantial. Nissan and Honda tied at $1,641 per vehicle, with Toyota earning $922. But all of the American makers were deeply in the red in 2007, with Ford posting the biggest deficit of $1,467. Nonetheless, the study, on the whole, showed that Detroit automakers have made a serious push to address what has long been one of their most serious problems, and in the long run, Harbour suggested, that could give them a new competitive impetus. Where the average Big Three once was saddled with an average $3,000 in added labor costs, the gap fell to just $606, last year, and should virtually vanish early in the next decade.

There are a number of reasons why Detroit is gaining ground. For one thing, the automakers are learning to design vehicles that are easier to build. They're fixing factory bottlenecks, and in a significant development, they have won substantial concessions from the United Auto Workers Union. The benefits from the latest UAW contract, inked last autumn, is just beginning to show up in Harbour's numbers.

Detroit has also made a serious bid to resolve quality problems, said Harbour, noting, "Those making the biggest gains in productivity are (also showing) substantial gains in quality." The one notable exception is Chrysler; while it led the latest Harbour Report in terms of productivity, it came in near the bottom of the latest J.D. Power Initial Quality Survey. Released earlier this week, the IQS is a measure of vehicle defects during the first 90 days on the road.

Improving productivity has an obvious payoff for a manufacturer, as it translates into lower costs and, potentially, higher profits. But consumers also benefit, Harbour suggested, as those savings can also be translated into additional vehicle content--or lower prices.

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