What's REALLY plaguing the US automakers.
Costly parts only add to Big 3's losses
Automakers - A study says common components give Japanese companies the edge
Tuesday, October 03, 2006
TOM KRISHER
TROY, Mich. -- One of Detroit's automakers is about to come out with a new model that has 81 side-view mirror options.
A comparable model built by Honda Motor Co. has only two.
According to a new study of the domestic auto industry's woes, the mirrors are one costly example of why Detroit-based carmakers made an average of $2,400 less per vehicle last year than their Japanese competitors.
The study, released Monday by the Royal Oak-based Harbour-Felax Group, also blames high labor costs, huge employee- and retiree-benefit expenses, bad pricing strategies and the low value of the yen to the dollar as factors that make the Big Three's vehicles more expensive to produce than those made by Japanese competitors.
The domestic automakers are at a point where they must quickly reduce their labor and manufacturing costs or they may not be in business over the long term, company President Laurie Harbour-Felax said.
"If they don't do this, they have their own problems to deal with in terms of long-term viability," she said.
The key to making more money is using common components and car underpinnings on multiple models, similar to what Toyota Motor Corp., Honda Motor Co. and Nissan Motor Co. are doing, said Jim Harbour, founder of the consulting company known for its annual report that tracks auto-plant productivity.
By using common platforms, body architectures and components, Toyota has saved about $1,000 per vehicle over the past five years, the report said. In addition, when fewer unique parts are needed for each vehicle, quality improves, reducing warranty costs, it said.
Domestic manufacturers have yet to fully grasp the savings from such commonality, the report said. One manufacturer has 41 seat frames, compared with five for the most streamlined carmaker, Laurie Harbour-Felax said. Another U.S.-based automaker has 100 catalytic converters in its exhaust systems; the most efficient company has five.
The 81 mirrors vary by color, whether they fold or not and whether they are heated, driving up the manufacturer's costs tremendously, Laurie Harbour-Felax said.
"Think about 81 mirrors," she said. "I've got to have more designers to design them. I have to have more product engineers to package them. I have to have more purchasing people."
The domestic manufacturer, whom Laurie Harbour-Felax would not identify, has five people who buy mirrors, while Honda has one, and that person also buys five other commodities, she said.
Cutting white-collar staffs, she said, won't fix the problem because the 81 mirrors still exist.
Profit gap
Another major contributor to the profitability gap is revenue per vehicle. On average, domestic automakers take in $21,597, 11 percent less than the average revenue of Japanese automakers, which collect $24,289 per vehicle, the report said. The authors attributed that disparity to steep discounts that domestic manufacturers use to fuel sales, as well as discounts for rental and other fleet sales, which average 25 percent of total domestic sales.
The study also pointed to labor issues as a major factor in the profit gap, including generous health care benefits and contracts that allow workers to continue collecting wages when there is no work for them.
The Big Three are making progress in common components, and they must address the labor and health care cost issues in 2007 negotiations with the United Auto Workers, said Laurie Harbour-Felax, who is Jim Harbour's daughter.
"I personally don't think one of them is going to go away," she said.
The domestic company closest to manufacturing like the Japanese is General Motors Corp., followed by DaimlerChrysler AG's Chrysler Group, then Ford Motor Co., Harbour said.
Based on 2005 numbers, GM lost $1,271 per vehicle in North America, while DaimlerChrysler made $144 and Ford lost $451, according to the report. Nissan made $2,135, while Toyota made $1,715 and Honda made $1,259. The figures exclude special write-offs made by the companies during the year that would reduce their earnings.
The domestics lose $590 to $630 in profit per vehicle because of labor issues including health care, absenteeism and inefficient work rules, Harbour said. They lose $490 to $705 per car because of retiree health care costs and $250 to $940 because of discounted pricing. Interest and other costs amount to $200 to $580 per vehicle, and capacity problems such as paying workers while plants are idle amount to $50 to $350, the study said.
Working for change
Ford spokeswoman Anne Marie Gattari said she had not seen the report and couldn't comment other than to say that Ford is working to improve.
"Rest assured that Ford is making progress transforming its plants and processes into leaner, more efficient and competitive operations," she said.
GM has made progress but still faces challenges that it needs to address for long-term profitability and growth, said spokesman Dan Flores. For example, the company has reduced the number of sun visors in its models from 32 to 18 as it increases the number of common parts, he said.
Chrysler said in a statement that it is not satisfied with the profitability gap per vehicle between North American automakers and the Japanese and the Harbour-Felax report is one of many measures it looks at to help improve operations and remain competitive.
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