Legacy Costs Are Only Part of the Story

James Surowiecki writes in The New Yorker:

But, while legacy costs help explain why American automakers are decidedly unattractive as investments, they’re only one reason—and not the most important one—for the automakers’ current struggles. If Cerberus is going to turn Chrysler around, it will have to do a lot more than pay less for health care.

To be sure, paying less would help. A 2006 report by the Harbour-Felax Group, a well-respected automotive-industry analyst, concluded that in 2005 Chrysler’s health-care costs were about eleven hundred dollars more per vehicle than Toyota’s. But even if that gap were closed Chrysler and other U.S. automakers would be far less profitable and would be growing more slowly than their foreign competitors. Ultimately, American manufacturers sell too few cars for too little money, and have to offer too many incentives—thousands in cash back or low-interest financing—on the vehicles they do manage to sell. That same Harbour-Felax report found that, on average, Japanese automakers’ profits for 2005 were twenty-nine hundred dollars more per vehicle sold in the U.S. than those of American automakers. And most of that profit comes not from lower production costs but from the Japanese automakers’ being able to charge more, because their cars are better designed and more reliable, and because their mix of products is smarter. Honda’s revenue per vehicle, for instance, was twenty-six hundred dollars more than Chrysler’s.

Read the whole thing.

2 responses to “Legacy Costs Are Only Part of the Story

  1. I agree with the article. From a consumer point of view, quality is what is killing the American Automakers. I accept that logistics and bad policy are a problem (the legacy cost issue), but even if those issues were resolved today, the “big three” will remain doomed if they don’t figure out how to make products that people want to buy.

    My experience: I have found my 25 year old Toyota to be far more reliable than my 12 year old Chevy. Many of the bells and whisles have failed on both, but the engine and drive train on the Toyota are still going strong while the Chevy has required repeated repairs. The one thing that keeps us with the chevy though is the capacity. With a family of 5, a small sedan is not a viable option. When we’re in the market again for a replacement, if we find a foreign vehicle that meets our capacity requirements, it will be the favored option unless signifigant changes take place in how the domestic manufacturers build their vehicles.

  2. Detroit’s problems are in the factories where they build their cars. I worked as a first line supervisor at Ford where we built transmissions that killed 200 people, injured 1400, and resulted in Ford Motor Company being the only corporation ever charged with reckless homicide. You can read about it in my book “A Savage Factory.” Oh, yeh. Detroit has bigger problems than legacy costs

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