The Big 3 Need to Cram These Lessons

In case you didn’t hear my show today on BlogTalkRadio.com, I spoke about the chairmen of the Big 3 auto manufacturers and their second appearance on Capitol Hill. After suffering a tongue-lashing before Thanksgiving, they returned to beg for money – only this time, with a plan!

Since 2006, more foreign auto makes were purchased than their American counterparts. Losing the high ground was just the beginning. Here are some lessons according to an opinion piece in the Wall Street Journal.

LABOR

Consider labor costs. Take-home wages at the U.S. car makers average $28.42 an hour, according to the Center for Automotive Research. That’s on par with $26 at Toyota, $24 at Honda and $21 at Hyundai. But include benefits, and the picture changes. Hourly labor costs are $44.20 on average for the non-Detroit producers, in line with most manufacturing jobs, but are $73.21 for Detroit.

As a manufacturer, when you pay 40% more for the same hour, you are at a significant disadvantage. Decades ago, you could say that Asian labor costs were cheaper than domestic costs. This is no longer the case. All of the major foreign automakers have assembly plants here in the states. They invest heavily in infrastructure here, hire American workers and make a feature-packed product. One big difference is that the foreign companies have shied away Detroit in favor for Southern right-to-work states. With labor unions at a safe distance, labor costs are manageable.

EFFICENCY

Detroit companies have finally begun to adapt to this real economic world. Last year Detroit struck a deal with the unions to unload retiree health obligations by 2010 to a trust fund set up by the UAW. The trio’s productivity has improved as well. In 1995, a GM car took 46 hours to make, Chrysler 43 and Toyota 29.4. By 2006, according to Harbour Consulting, GM had moved it to 32.4 hours per vehicle and Chrysler 32.9. Toyota stayed at 29.9.

Not only are per hour labor costs higher for the Big 3, it takes 10% more time to manufacture a domestic vehicle. Asian manufacturers, using American W. Edwards Deming‘s ’14 Points’, have honed their skill at manufacturing quality. While the UAW kept a chokehold on the Big 3, the Asians were using robotics. They became the innovators and we were the spectators.

CUSTOMERS

I mentioned on my show today about two similar cars – one domestic (D) and one foreign (F). Car D has a base price of $13,000 and a loaded price of $19,500. Car F has a base price of $18,000 and loaded price of $21,750. So, it costs double just to make your car ‘livable’.

In many cases, car F has more ‘creature comforts’ standard than car D has after loading it up.

When you go to sell it five years later, car F yields 50% more resale value. A lower cost of ownership and more comfortable driving experience creates a brand loyalty for a foreign make that is hard to overcome. For decades, domestic manufacturers have ‘pushed’ cars that Americans reluctantly bought. Now, shrinking domestic auto sales only exacerbate the problem with the Big 3 as a minority. Executives and upper management – not the line workers – said ‘let the consumer be damned’ by offering cars THEY wanted to sell instead of what WE wanted to buy. With respect to a federal bailout, this is the hardest challenge. Without a more loyal sales base, recouping an estimated $50 billion bailout may never be repaid to the American taxpayer.

Full disclosure – I have a Chevy Equinox now. Prior to that, I owned a TrailBlazer. I would prefer to buy domestic, but the next time I shop, all bets are off. The best bang for the buck will get my business. The best mix of quality, features, value, MPG, etc. will all be factors.

Nothing personal – it’s an economic thing.

America’s Other Auto Industry – WSJ.com.