A new study has found that lack of profitability at Ford, Chrysler and GM can be attributed to structural, cultural and philosophical factors.
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Jim Harbour, whose studies of Japanese manufacturing techniques in the early 1980s launched the lean manufacturing revolution in Detroit, and Laurie Harbour-Felax, found that in 2005, Toyota had a $US2,985 profit per vehicle advantage over GM and $2,165 over Ford with $1,570 over Chrysler. Although the Big Three have implemented strategies to close the gap, that are generating results, Harbour and Harbour-Felax conclude that they need to accelerate change.
The study identified three key areas as having the most impact on profit per vehicle: revenue and pricing; design, product and manufacturing engineering; and labour issues.
Revenue and Pricing
One of the major contributors to the difference in each automotive manufacturer’s profit is revenue per vehicle. The average domestic automaker’s achieves $21,597 or 11% below the average Japanese automaker, $24,289. The primary reasons for the disparity per vehicle are the steep discounts domestics offer in incentives and employee pricing and significant discounts for fleet and rental car sales, which average 25% of total domestic sales.
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By GlobalDataDesign, Product and Manufacturing Engineering
The study concludes that the Big Three are not maximising cost reductions through ‘commonisation’ of platforms and/or body architectures. Toyota saved approximately $1,000 per vehicle over the last five years commonising commodity components and plans to save more than 30% on the commonisation of non-commodity components.
Additionally, the study points out that commonisation will positively impact several pivotal areas in vehicle development – investment, quality and warranty costs. Investment costs for new programmes will decrease, which is critical as the industry moves to more models from fewer platforms.
Quality will improve as fewer unique parts are needed for each vehicle, and as quality improves, warranty costs will decrease. For example, the study shows Toyota’s warranty costs at $348 per vehicle versus GM at $512, Ford at $585 and the Chrysler Group at $595.
In addition to the OEMs, suppliers stand to benefit from this change in engineering and manufacturing and can achieve significant savings by commonisation of parts and processes. Suppliers that adapt commonality planning have a stronger chance of sustaining and growing in the future. Also, it allows them to better align themselves with the OEMs that have begun integrating commonality.
“GM, Ford and Chrysler won’t succeed in this revolution unless their suppliers join them,” said Harbour-Felax. “But many suppliers today are unaware of the need to change their business models. Those who fail to take this next big step face bankruptcy, but successful companies should be able to achieve levels of sustained profitability that haven’t been possible in the current environment.”
Labour Issues
The study found that labour issues, including the jobs bank, supplement unemployment benefits, restrictive work rules, assembly line relief time, uncontrolled absenteeism and the level of holidays and paid days off account for hundreds of dollars per vehicle in competitive disadvantage for the domestic manufacturers.
For example, the domestics require more people to build the same number of vehicles as the Japanese automakers due to the differences in absenteeism, holidays, work rules and relief time. The penalty for holidays to the domestics are as much as $138 per vehicle with uncontrolled absenteeism accounting for up to $70 per vehicle. The domestic automakers have three times as many worker classifications in their operations than comparable operations for the Japanese manufacturers.
Additionally, the domestics have approximately $203 per vehicle in assembly line relief cost with an average of 46 minutes, while the Japanese average 30 minutes or approximately $133 per vehicle.
Health care also plays a significant role in the labour-cost gap. Detroit automakers pay a heavy penalty for health care benefits for both active and retired workers. The study sites Toyota’s competitive advantage in this area ranges between $900 and $1,400 per vehicle.
“It’s time for the Detroit Three and the UAW to get together and resolve these problems,” Harbour said. “In addition, the government must step up and find a way to eliminate the huge cost penalty for health care for active workers and retirees.”
“The goal of the study is to stimulate public discussion of competitive issues in the automotive industry and encourage everyone with a stake in Detroit’s future to work for solutions,” said Harbour. “These companies have overcome adversity many times in the past. We hope that shining a spotlight on competitive issues will help them do it again.”
In addition to revenue and pricing; design, product and manufacturing engineering; and labour issues, Automotive Competitive Challenges: Going Beyond Lean also investigates the impact of capacity utilisation and flexibility; interest expenses; and, the yen exchange rates have on North American automotive manufacturers.
