The Real Problem With U.S. Automakers

A new report offers interesting figures about the gap between U.S. and Japanese automakers. However, the report only touches on the real reasons behind the gap.

            Prepared by the Harbour-Felax Group, a consulting firm, the report notes, as one example of the figures, that Toyota has a profit-per-vehicle advantage over competitors ranging from $1,570 (over Chrysler) to $2,985 (over GM). The advantage over Ford is $2,165.

            The usual suspects are lined up here: Steep discounts and incentives offered by the U.S. automakers, a need to use more common parts across vehicles, the higher costs in the U.S. brought about by a wide range of labor issues, from health insurance for retirees to excessive absenteeism to guaranteed jobs for those laid off.

            All of this is true, and there is value in what Harbour-Felax group has done, providing details and numbers that bring into focus areas to be addressed.

            But the real issue is the fact that the Japanese follow a lean strategy. Lean is an integral part of their corporate DNA. It is how they think.

            Consider two items in the report. It notes that “Kaizen, or continuous improvement, remains a driving force for the Japanese automakers. Toyota, for instance, wrung $1,000 per vehicle out of its cost of North American and worldwide production simply in the initial phase of an all-out effort to increase the number of standard commodity components across its vehicle lineup. Toyota, Japan’s No. 1 automaker, has set a goal of reducing major non-commodity component costs by 30 percent.”

            Another section of the report discusses flexibility: “Maximum assembly flexibility, where more than one platform can be built in one body shop and on one assembly line, requires common body architecture and common assembly standards. Detroit firms historically have organized product development around unique platforms, with little common focus.”

            These two statements are both absolutely true, but the real question is why? Why, for so long, have the Japanese been focused on continuously reducing costs and improving flexibility? It’s because they think that way, and their U.S. counterparts don’t.

            Perhaps the most telling section of the report is this one, labeled Investing for the Future:

            “Toyota spent $21.4 billion in research and development and capital expenditures on its worldwide automotive operations in 2005. That’s 47 percent more than GM and 42 percent more than Ford. Toyota’s outlay represented 12.6 percent of automotive revenue, compared with 9.8 percent for Ford and 9.2 percent for GM.”

            We often hear how the Japanese are more focused on the long term. Those figures are the evidence.

            In a posting commenting on the Harbour-Felax report, fellow blogger Mark Graban says that Detroit needs more than lean; it needs to design exciting cars and earn back a quality reputation.

            I agree completely. I would suggest that until Detroit’s leaders genuinely become true believers in lean, they’re going to have difficulty doing that.

            By the way, the report also offers a pessimistic view of the outlook for U.S. automotive suppliers. It states, “Pressure on all suppliers is huge, and likely will grow, particularly for the smaller, privately-held suppliers that service the Tier One supplier group. The in-house restructuring we believe is necessary to restore the Detroit based automakers to full health could take years, while suppliers continue to offer the OEMs immediate opportunities for cost reductions through price cuts.”