As TTAC approaches its 500th Bailout Watch, the autoblogosphere is abuzz with bailout-related news. But first, a word from a TTAC reader experiencing schadenfreude by proxy. “Robert, I think you are going to need some counseling if GM doesn’t crash and burn. Your little columns are getting more breathless by the week. Best to make some therapy appointments in advance, cause it aint going to happen. Keep up whatever it is, I enjoy glancing at it.” [Jeff, is he saying my therapy sessions ain’t gonna happen?] [Robert, yes, he is.] So, as I remind my electronic correspondent to remember to turn off the lights on the way out, here’s what’s going down in the Motown district of Bailout Nation . . .
Obama plays the class card – President Obama has addressed the pressing political problem we can loosely term “why the NSFW are giving these Detroit guys a second chance?” The Detroit News reports:
Obama on Tuesday defended his decision to give the two automakers more time to resolve their problems, despite harsh criticism from Republicans who said the companies had made no progress.
“We owed that not to the executives whose bad bets contributed to the weakening of their companies, but to the hundreds of thousands of workers whose livelihoods hang in the balance. Entire towns, entire communities, entire states are profoundly impacted by what happens in the auto industry,” Obama said.
Obama’s Fervent Hopes for Change – I suddenly “get” the beauty of Obama’s “Hope and Change” ethos: you can hope for change, but if it doesn’t happen, you avoid the blame. Here’s what I really, really hoped for. But hey, NSFW happens. Don’t blame me. I did the vision thing. AND I did my best to make it happen. They screwed it up. Bad them! Bad bad bad them! (What was my therapist’s number again?)
“It is our fervent hope that in the coming weeks, Chrysler will find a viable business partner and that GM will develop a business plan that will put it on a path to profitability without endless support from the American taxpayer.”
Fiat CEO: No Union Concessions, No Deal – As TTAC commentator PCH101 has pointed out at least 1,245 times, the United Auto Workers’ (UAW) and Canadian Auto Workers’ (CAW) contracts with American automakers are not the be-all end-all of their profitability, or lack thereof. In fact, in this case, the UAW’s genetic recalcitrance may be a convenient excuse for Fiat to extricate itself from the do-or-die (for Auburn Hills) Chrysler—sorry, what do you call it? Merger? Marriage? Co-dependency?
Anyway, The Globe and Mail scores the scoop that Fiat CEO Sergio Marchionne’s ardor for ChryCo isn’t quite so fervent anymore, with less than two weeks to the feds latest hard stop on life-sustaining Chrysler “loans.”
“Absolutely we are prepared to walk. There is no doubt in my mind,” Sergio said. “We cannot commit to this organization unless we see light at the end of the tunnel . . . The minute you talk to me about historical entitlement in an organization that is technically bankrupt, it’s a nonsensical discussion. There is no wealth to be distributed.”
Fiat CEO: True Story. It’s All About Me – I didn’t bother reporting on rumors that Fiat’s CEO was looking to take over the top slot at the ailing American automaker from Bob “You Want Me to Leave? You Gotta Pay Me” Nardelli. I mean, why would anyone expect the Presidential Task Force on Autos to install an Italian CEO at the head of an American automaker looking to for a double-dip of US taxpayer billions? My bad.
Short of injecting funds into Chrysler, Mr. Marchionne said Fiat will do whatever it takes to revive Chrysler, including offering himself up as CEO. “Fundamentally, that’s possible, but the title isn’t important,” he said. “What’s important is that they hear me. It’s possible that I will have to divide my time between running Fiat and running Chrysler.”
GM Retirees Wake-Up to C11 Pension Disaster – Although the federal Pension Benefit Guaranty Corp. (PBGC) has previously warned both GM and Chrysler employees that the companies looted their pension funds (to the point where a C11 would wipe out the majority of their money), The Detroit News serves-up this timely reminder:
“The fact is that people are going to see some reductions that obviously they hadn’t planned for,” PBGC acting director Vince Snowbarger said. “They have had a promise made to them that is not being kept and all we can do is try to step in and help out a little bit.”
Define little? When GM terminates its pension plan, the PBGC says it would assume $4 billion of the $20 billion promised. At Chrysler, the PBGC would assume $2 billion of the $9.3 billion shortfall.
Looks like I’m not the only one who’s going to need some therapy (what’s the bet the feds fund the UAWs?). Oh, wait. This isn’t going to happen. Carry on then.
Will GM & Chrysler file for Chapter 11? Flip a coin. What is a certainty is the fact that the U.S. taxpayers are screwed either way. THAT is the real tragedy here.
As TTAC commentator PCH101 has pointed out at least 1,245 times, the United Auto Workers’ (UAW) and Canadian Auto Workers’ (CAW) contracts with American automakers is not the be-all end-all of their profitability, or lack thereof.
Man, you stopped counting early. I can think of at least another 476 times when I said that.
But if I was Marchionne, I would be doing the same thing. This is cramdown time for everyone, and he is going to have to play hardball to get what he wants. A Chrysler deal doesn’t make sense for Fiat unless the US workforce is much, much smaller.
For what it’s worth, I think that the main deal point is going to be money. Marchionne wants this thing structured so that Fiat contributes nothing. Part of that is probably a bluff, but he is as good as saying that he wants somebody’s government to pay him to take it. I would hope that the US and Canada call his bluff, and require a working capital contribution from Fiat as a condition.
It’ll be very interesting to see what happens on April 30/May 1. So Fiat won’t spend any money on Chrysler (hey, just like Cerberus!), but they will give them technology and will fix Chrysler’s management. Hopefully that works out for them.
That’s assuming the UAW and CAW clue in and make the necessary concessions. I don’t see that happening in the first place. I’d be stunned to see anything besides a liquidation happen in two weeks. Unless Barry decides to give Chrysler another month worth of money for no apparent reason.
So Fiat won’t spend any money on Chrysler (hey, just like Cerberus!), but they will give them technology and will fix Chrysler’s management.
Chrysler would need tens of billions of dollars in working capital before it ever hits breakeven. If Fiat doesn’t cough it up, the list of who’s left to contribute it is pretty short.
Let me translate for the Hopenchange twit “We will continue to buy your votes with the money we steal from you”
Democracy is stealing property from those who don’t vote for you and handing the loot over to those who do. Democracy is just tribal warfare amongst idiot slaves.
Better for all of us (including ‘Merican car guys like me) that Chrysler go away today and spread the volume over some companies that might actually make a buck some day. Daimler took over a company on life support and put poison in the IV bag. The only joy in any of this is seeing DB cry about the value of the last 19%.
Good to know you’re in favor of monarchy or dictatorship, Luther!
This morning on the local Toronto News Radio AM 680 Ken Lewenza, President of the CAW reiterated that there would be no more labor concessions and that ChryCo will not go into bankruptcy. Really.
@MikeInCanada CTV is interviewing Lewenza at 2:00 in front of the TSX no less.
Well, then let’s get out our AK-47’s and take back our government!!!
Or maybe just wait and see what happens?
This morning on the local Toronto News Radio AM 680 Ken Lewenza, President of the CAW reiterated that there would be no more labor concessions and that ChryCo will not go into bankruptcy. Really.
Lewenza got left holding the bag after Buzz Hargrove retired. He’s fighting for his career, and is much the same position Fritz Henderson was put in by Rick Wagoner. The difference is that Henderson is only somewhat better-paid than Lewenza is.
That said, the union is not the problem; Lewenza’s right about that. Talking about reducing costs is not going to fix the real problems, such as:
* The Caravan is selling for nearly half the price of Sienna, and has been for a while
* The Impala is selling for less than the Malibu, never mind the Avalon or Maxima.
If GM or Chrysler could have been bothered to make competitive mainstream vehicles with sane pricing and marketing any time in the last quarter century, they wouldn’t be in this mess.
For what it’s worth, I think that the main deal point is going to be money. Marchionne wants this thing structured so that Fiat contributes nothing.
Ah, lets see, Chrysler has enormous debts, enormous obligations, and not much worth selling. Would any same person actually pay for them or even except Chrysler as a free gift?
Of course, Fiat wants to end up with something that can be worked with and currently Chrysler is not anywhere close to being something that can be worked with.
psarhjinian :
April 15th, 2009 at 11:20 am
That said, the union is not the problem; Lewenza’s right about that. Talking about reducing costs is not going to fix the real problems, such as:
* The Caravan is selling for nearly half the price of Sienna, and has been for a while
* The Impala is selling for less than the Malibu, never mind the Avalon or Maxima.
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So what?
The Avalon is selling for less than a third/quarter of S63AMG.
There will always be a better product out there.
So don’t compete on product. Compete on productivity. Look at Toyota, which of their product is truly great? None.
Yaris is worse than S63AMG.
Corolla is worse than S63AMG.
Camry is worse than S63AMG.
Avalon is worse than S63AMG.
But doesn’t matter, they have the best productivity.
I.e. best car at its price point, or cheapest car at its quality level.
If Caravans can be the best minivan at $14k, what’s the problem?
wsn…
Cause ChryCo cant make a profit on a Caravan at 14k, hence the situation they are in.
The Avalon is selling for less than a third/quarter of S63AMG.
…
If Caravans can be the best minivan at $14k, what’s the problem?
You’re being disingenuous.
The problem isn’t that Caravan isn’t selling for the same money as, oh, let’s say the Audi Q7. It’s that the Caravan isn’t selling for the same profit margin as the Sienna.
It may very well be a good van at $14K, but it’s not a moneymaking van. It might be a moneymaking van at $25K, or $30K, or whatever. The problem is that it’s not making $3K per unit. The reason it can’t be sold for profit isn’t to do with productivity**, but that Chrysler, even if they were magically as productive as Toyota, can’t sell the vehicle at a profit because they’ve a) made it inferior and b) so undermined the price through rebates, resale and fleet.
If Mercedes were so insane as to sell the S63AMG at Avalon prices, they’d be in the same boat: they might very well still be more productive, but they’re still selling the vehicle for less than the cost to make it. And that’s what Chrysler and GM (and to a lesser degree, Ford) have been doing.
** Especially not since Chrysler was, ostensibly, Asian-level profitable before Daimler wrecked them. GM has also claimed world-class productivity at some of it’s plants (Oshawa comes to mind) while still losing money on every sale. So either they’re grossly misstating their productivity, or the problem isn’t productivity at all.
# 26theone :
April 15th, 2009 at 12:53 pm
Cause ChryCo cant make a profit on a Caravan at 14k, hence the situation they are in.
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They can, if they pay $15/hour (there will be plenty applicants, so no total American jobs lost) and discard all that debt through C11.
** Especially not since Chrysler was, ostensibly, Asian-level profitable before Daimler wrecked them. GM has also claimed world-class productivity at some of it’s plants (Oshawa comes to mind) while still losing money on every sale. So either they’re grossly misstating their productivity, or the problem isn’t productivity at all.
Excellent points
I am nostalgic in such that I don’t want either GM or Chrysler to fail. What I want and what I receive can be two different things.
That said, I work for a company that is ultimately owned and operated by Marchionne. Chrysler may want to survive via an alliance with FIAT, but what they would receive in the form of disorganized direction, increased inefficiency and micro-management could conceivably make bankruptcy more psychologically satisfying.
On another point, didn’t Marchionne say at one point that only six manufacturers would escape the downturn and that each would have to have a production level of at least 6 million? If FIAT only produces 2.1 million, doesn’t pulling out of this alliance help to start filling out FIAT’s death certificate?
I must confess my former belief that Fiat and C would actually merge. Now I think Fiat will wisely dump C at the altar and choose to remain breathing, rather than have the life sucked out of them by yet another Chrysler celebrity marriage.
Too bad, because I like the 500 and wanted to see it come over. But my emotions have clouded the reality slap that Fiat’s boss has verbalized.
I guess when C folds, the UAW can declare victory.
Lost in all this discussion about giving away product: the fact that a huge component of this is the constant and endless speculation about the financial health of GM and Chrysler.
The case in point here is a minivan, and frankly, I’ve driven Chrysler’s. It isn’t quite as quick on its feet as, say, a Honda Odyssey, but the Chrysler also has a lot of features and details the Odyssey doesn’t. The differences are subtle and subjective, but do they account for a 25-30% price difference between the two vehicles? No way. The fact is that Chrysler has to give this vehicle away because people are scared to death to buy it.
Ditto for the 300C, which is a car I actually considered. I drove a fully loaded model which stickered for #45,000, and they offered me a price of $35,000 without haggling – an absolute steal of deal. Frankly, if I wasn’t convinced Chrysler was on its way out, I’d have written a check then and there.
Ditto for GM, where I’ve been shopping Cadillacs. The deal on a CTS – a car that’s 100% competitive with anything offered by German or Japanese makers – is about eight grand off.
The problem is that even their great products – and GM and Chrysler have some – have to be given away to sell.
Chrysler will be gone by the end of this year, and GM will be in C11 on some serious life support. It kills me to even see Chrysler at auto shows. Well, it kills me to see GM at the shows as well, especially when they’re pushing crap like GMC and Saab when it shouldn’t even exist anymore, but that’s beside the point.
Chrysler needs to be figuring out how best to liquidate their assets in a manner that will pay their taxpayer (it’s OUR money, I will not call it government money) loans off, and when they’ve got that straight, they need to polish up the ol’ resumes and pack their desks.
Meanwhile, GM needs to figure out how to get this C11 thing to work, because the taxpayers are pissed off, and they’re going to have one shot at getting it right. The stage is set, they’ve got a good start with some of their offerings, but they’ve still also got a lot of braindead execs making decisions like they would have 25 years ago. Note to GM: It’s not the 1980s. Americans have lots of compelling choices out there, you’d better make this thing work, or you’re toast.
I’d love to see both survive this mess and prosper in the long run, but I don’t see it happening no matter how much of our money the NSFW PTFOA pisses away.
What is Fiats incentive to take over Chrysler the way it currently exists? If I was Mr. Marchionne I would let Chrysler fail and then pick up the pieces for pennies – minus the UAW/CAW. No headaches, low purchase price and I bet they would have the full support of the government just to pick up the remainders. I doubt that Fiat will touch Chrysler before June 1, why would they?
D
Below are 2007 fiscal year figures for GM and Toyota. These make it quite clear that revenue is the real problem here. ($ X 1000)
Toyota –
Revenue from vehicles sold: $241,305,000
Other revenue: $21,079,000
Total Revenue: $262,394,000
Operating Expenses: $239,733,000
Operating Income: $22,661,000
GM –
Revenues from vehicles sold: $181,122,000
Other revenue: $2,923,000
Total revenue: $262,394,000
Operating Expenses: $185,512,000
Operating :
Notice two things from the above: The revenue gap is enormous, and it is Toyota that had the higher operating expenses. Listening to Wagoner, Lutz, etc., you’d think that it was the opposite, but run the numbers, and you can see that Toyota has far higher operating costs than GM does.
Here are number of units sold for the same period:
Toyota – 8.913 million units
GM – 9.370 million units
Divide the revenue from vehicle sales by the number of vehicles sold, and you get average revenues per unit:
Toyota – $27,071/ unit
GM – $19,018/ unit
The difference: $8,053/ unit, or about 42%. For every $1.00 that GM takes in from selling a car, Toyota takes in $1.42.
Now, let’s see what would have happened to Toyota in 2007 if it had sold the same number of vehicles and had the same expenses that it did, but if it had sold its vehicles at GM prices. You guessed it — Toyota would have been a huge money loser:
Revenue from vehicles: $169,525,615
Other revenue: $21,079,000
Total revenue: $190,604,615
Expenses: $239,733,000
Operating Loss: $(49,128,385)
Next, look at how GM would have done had it kept all of its expenses and sold the same number of vehicles that it did, but was able to get the $27,000+ per vehicle that Toyota did:
Revenue from vehicles: $253,661,322
Other revenue: $2,923,000
Total revenue: $256,584,322
Expenses: $185,512,000
Operating Income: $71,072,322
Strip away the political BS and get to the numbers. This problem is very, very obvious if you just look at the financial statements. Sell Toyotas at GM prices, and Toyota becomes a basketcase. Sell GM vehicles at Toyota prices, and GM is doing quite well.
The obvious question to ask is why GM can’t sell cars for the same amount of money. This was obviously an issue before the economy melted down — these are 2007 figures — so you can’t blame the credit crunch.
Cutting operating costs is obviously not going to be the saving grace here. In theory, GM is already more productive — its operating costs per vehicle are lower. But nobody wants to pay for that sort of productivity. It’s more lucrative to make better cars, and to sell them for more money.
Sorry, some of those numbers got mixed up or deleted somehow, and I can’t edit them. Here are GM’s actuals for 2007:
Revenues from vehicles sold: $178,119,000
Other revenue: $2,923,000
Total revenue: $181,122,000
Operating Expenses: $185,512,000
Operating Loss: -$4,390,000
Pch101 :
April 15th, 2009 at 2:53 pm
Toyota – $27,071/ unit
GM – $19,018/ unit
Tata Nano is priced at $2500. So it must be doomed? Actually no. It’s surviving now and it’s going to make money in a better economic situation.
Next, look at how GM would have done had it kept all of its expenses and sold the same number of vehicles that it did, but was able to get the $27,000+ per vehicle that Toyota did:
Revenue from vehicles: $253,661,322
Other revenue: $2,923,000
Total revenue: $256,584,322
Expenses: $185,512,000
Operating Income: $71,072,322
It doesn’t add up. Please explain why GM lost tens of billions in 2008? They should have a profit by your numbers.
Oh, RiR used creative accounting and didn’t include legacy labor cost (in the form of pension/health obligations) as operating expense. And you fell for that?
PCH-thanks for the data.
I think it illustrates a great deal of the problem. On a simpler level I had realised that 2007 was GM’s either no.1 or 2 sales year ever. I therefore concluded that sales per se were not the problem.
You have illustrated what many here have said over and over, you have to build a vehicle that enough people will buy at a profitable price.
People really do seem to get the difference between value and price. Just look at the sales drop percentage vs. incentives. Of the majors Honda is lowest in both categories (generally).
Some say they are overpriced-the buyers, who have the only truely relevant opinion, disagree.
Bunter
Pch101 :
Now, let’s see what would have happened to Toyota in 2007 if it had sold the same number of vehicles and had the same expenses that it did, but if it had sold its vehicles at GM prices. You guessed it — Toyota would have been a huge money loser:
Uh, do you see the flaw in your logic?
If Toyota sold at GM prices (i.e. no Tundra no Camry more Yaris), they would have a lower revenue, but the expense at Toyota would have been even lower.
Bunter1 :
April 15th, 2009 at 3:35 pm
You have illustrated what many here have said over and over, you have to build a vehicle that enough people will buy at a profitable price.
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That part I do agree. But what I disagreed with Pch101 was about why GM/Chrysler couldn’t do that.
For him, it’s because GM cars are priced too low.
For me, it’s because GM’s productivity is low. Toyota cars are priced lower than BMW and Tata is priced lower than GM. But they make money because their productivity is high, i.e. more cars per unit resource spent or less resource spent per unit car.
Maybe the Tata vs. GM example was too extreme. Let’s get some very real comparison. In terms of price:
Passat > Camry > Serbing (they are all very main stream)
By Pch101’s logic, Passat must be enjoying the largest margin, right? Wrong, VW loses money big time. Camry is the real money maker here.
If you say, Camry is enjoying success by under cutting Passat, then Serbing must be enjoying success by under cutting Camry, right? Wrong again.
If the Carmy is priced just right, why aren’t Passat and Serbing priced right on Camry’s price spot and make sure their cars are as good as the Camry? After all, both companies are capable of making a better car than the Camry if they really want to (Phaeton, 300C prepared for the CEO, etc).
Guess what? The cost of Passat and Serbing will be substantially higher than the Camry if they are made as good. That’s called low productivity.
Tata will make money because demand far outstrips supply. Tata will make cars att 100% percent capacity. And, effectively, the low price in India is subsidized by a higher price in other markets, like Europe. Even with double the price, the Nano will be the cheapest car on the market. It’s a win-win.
@wsn: For him, it’s because GM cars are priced too low.
No, what Pch101 is saying is that GM has too thin a margin, not that their cars are priced too low. The reason their margins are low is because the price per unit unit is too low.
For me, it’s because GM’s productivity is low.
No, and the reason for that is in the operating expenses Pch101 quoted. If productivity was killing GM, operating expense would be higher. By those numbers, GM actually pays less operating overhead per vehicle.
The problem is that the gap (the revenue, above) between what GM is selling them for (price less rebates/incentives/etc) and their operating expenses is smaller. Or rather, it’s negative: GM is selling cars for less than what it costs to produce them, despite it costing them about the same to produce as Toyota.
Why is this? Because they’ve painted themselves into a corner. They’ve gotten into a vicious cycle of rebating and incentivizing (and plainly insane pricing scheme that seems MSRP plummet yearly) that results in their selling vehicles below profit. The only time they were able to cope was when they were selling very low-cost, high-price vehicles (trucks and truck-based vehicles) in large enough volumes to make up for the bloodloss across the rest of the product line.
Productivity has nothing to do with it. At all.
If you say, Camry is enjoying success by under cutting Passat, then Serbing must be enjoying success by under cutting Camry, right? Wrong again.
It’s not about undercutting, it’s about margin. Let’s make up some numbers (Canadian dollars, just to make things easy for me):
Passat: Sells for $30K, Costs $28K
Camry: Sells for $27K, Costs $23K
Sebring: Sells for $20K, Costs $21K
See the problem? VW makes money on the Passat, albeit not as much as Toyota. Chrysler loses money on the Sebring despite it costing less than the Camry because buyers will not pay even $23K for a piece of crap like the Sebring.
If Toyota sold at GM prices (i.e. no Tundra no Camry more Yaris), they would have a lower revenue, but the expense at Toyota would have been even lower.
You obviously don’t follow the point.
Toyota and GM are both mainstream automakers with luxury divisions. They should be able to sell a similar mix of cars for comparable prices.
Clearly, they can’t sell cars for comparable prices. Anecdotally, you can see the gap in the newspaper ads and in the showrooms if you look at the giveaways being offered on domestic product. On a macro level, you can see how those low prices add up in the per-vehicle revenue gap of 42% that I have presented above.
Toyota couldn’t survive on GM’s price points, either. That’s why they would work hard to make a better product — because they can turn that superior product into profit.
Your assessment of “productivity” is clearly off the mark. It isn’t about cost reduction, it’s about getting enough revenue to hurdle the costs. That’s why before Carmeggeddon showed up, Toyota was swimming in cash while GM was drowning in losses.
psarhjinian :
April 15th, 2009 at 4:01 pm
No, what Pch101 is saying is that GM has too thin a margin, not that their cars are priced too low. The reason their margins are low is because the price per unit unit is too low.
I had already stated, a Camry’s price per unit is lower than a Passat, yet it’s has a better margin.
For me, it’s because GM’s productivity is low.
No, and the reason for that is in the operating expenses Pch101 quoted. If productivity was killing GM, operating expense would be higher. By those numbers, GM actually pays less operating overhead per vehicle.
The “operating expenses” was RiR’s creative accounting.
The “operating expenses” was RiR’s creative accounting.
Your explanation of accounting above suggests that you aren’t familiar with standard accounting rules. Sorry.
psarhjinian :
Passat: Sells for $30K, Costs $28K
Camry: Sells for $27K, Costs $23K
Sebring: Sells for $20K, Costs $21K
See the problem? VW makes money on the Passat, albeit not as much as Toyota. Chrysler loses money on the Sebring despite it costing less than the Camry because buyers will not pay even $23K for a piece of crap like the Sebring.
Of course I see the problem. Both VW and Chrysler’s productivity is too low.
If the Passat is made to Camry’s spec of quality (+reliability, -handling), the cost would be about the same, at $28k. Both would sell at $27k.
If the Sebring is made to Camry’s spec of quality, the cost to Chrysler would be like $30k. Both would sell at $27k.
So, they lose because of low productivity.
Pch101 :
April 15th, 2009 at 4:13 pm
The “operating expenses” was RiR’s creative accounting.
Your explanation of accounting above suggests that you aren’t familiar with standard accounting rules. Sorry.
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I am perfectly aware of the rules. The very same rules that was responsible for a lot meltdown.
The entire GM (or even US) pension/health system is a Ponzi scam, i.e. it depends on “new blood” to feed retirees.
In that sense, all those pension/health obligations are in fact “operational”, as they share the same coffer with operations.
Even though the tax law didn’t recognize that fact, and allowed RiR and others do creative accounting, the truth in the fact and the consequence is undeniable.
Pension/health is not part of real operational cost only if:
1) operations never ever draw money from those funds
2) those funds never ever draw money from new members to pay old members (i.e. everyone self sufficient, like a real saving account, fund can pay retiree even if company shut down tomorrow)
Before that happens, those obligations may not be a “US tax law defined operation cost”, but they are “operation costs.”
The revenue gap is enormous, and it is Toyota that had the higher operating expenses. Listening to Wagoner, Lutz, etc., you’d think that it was the opposite, but run the numbers, and you can see that Toyota has far higher operating costs than GM does.
I agree that it’s revenues that GM really needs. And that is something that won’t be able to grow for generations since many buy the domestics when the price is right.
Could the reasons that Toyota’s operating costs are higher are due to shipping cars from overseas? Not just from Japan to US, but Japan to Europe, Japan to South America, etc. Plus, Toyota is still building plants in the US, though even at $1B, it won’t make up the $55B difference.
GM, Chrysler and Ford did their pricing based on “Contribution Cost” rather than fully accounted. Contribution Cost for those who aren’t Accouuntants is the variable cost to make a vehicle – the material and freight. All the fixed costs tend to be ignored on the assumption that the if a product is making a positive contribution to fixed cost then eveything should be ok.
In theorey this works if some of the vehicles are making a fully accounted profit which they were when everyone was buying SUVs and other trucks. In the new reality, the money-makers are sitting on the lots, so where’s the sales making the fully accounted profit to offset those only making a positive contribution……
This is why the D3 carried on discounting in order to get the sales – they were getting a positive contribution on each sale, but not what everyman would recognise as a profit!
Could the reasons that Toyota’s operating costs are higher are due to shipping cars from overseas? Not just from Japan to US, but Japan to Europe, Japan to South America, etc.
I doubt that shipping is much of an issue. Delivery is a fairly small proportion of the cost structure.
My guess is that a lot of it is probably in parts costs. GM has squeezed parts suppliers in order to lower its costs in ways that Toyota has not. GM tries to pay bottom dollar, while Toyota negotiates a balance that creates a profit for the supplier, under the theory that the alternative of doing it in-house would involve more risk and higher costs than outsourcing it.
Some of it may also go to content. Those parts cost more for a reason; it’s because they’re better.
Plant and equipment, such as new factories, are booked as capital expenditures. The numbers above are operating numbers (money made from selling cars and other stuff, and expenses incurred from making and selling them, such as parts and labor; interest expense, taxes and depreciation are not included.) New factories wouldn’t show up in these numbers at all; they go onto the balance sheet.
Dave :
April 15th, 2009 at 5:01 pm
GM, Chrysler and Ford did their pricing based on “Contribution Cost” rather than fully accounted. Contribution Cost for those who aren’t Accouuntants is the variable cost to make a vehicle – the material and freight. All the fixed costs tend to be ignored on the assumption that the if the product is making a positive contribution to fixed cost.
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Dave puts this more professionally than I do. GM/Chrysler regarded pension/health as fixed costs. But in effect, they are real and closely tied costs that seriously affect operation. The accounting scheme that didn’t treat this as operation cost hide the fact that GM is not as productive as Toyota. It’s like shoveling garbage under sofa and pretend it’s clean.
GM/Chrysler regarded pension/health as fixed costs. But in effect, they are real and closely tied costs that seriously affect operation.
That, once again, is false. Pensions are not classed as “operating costs.” Not every dollar taken into a company is “revenue,” and not every dollar spent is an “expense.” So your point is, again, inaccurate.
You continue to miss the issues being raised here. We are discussing the operations of the business.
GM loses money on its operations, even before we start talking about pensions. If GM had zero retirement costs, it would **still** be losing money! The $4 billion operating loss doesn’t include retirement costs.
If you look at those operations, we can see that while both companies sell similar volumes of product, one of those companies takes in far more dollars doing it. Similar activities, very different results.
Toyota’s operating costs are more than $7,000 per unit higher than are GM’s. But it doesn’t matter, because Toyota makes up for the higher costs with even higher revenues. They can pull margin out of the extra spending, so they spend it.
These numbers make clear that GM’s complaints about pensions are a distraction and a lie. If they had no pensions to fund, there would still be losses. The product lineup is inadequate, so revenues suffer. Whatever savings they get is more than lost by a greater loss of revenue.
The business problem is very clear, except for those who don’t want to see it because it upsets their ideological apple cart. The pension situation makes the problem even worse, but fixing that by itself would not cure what you see above.
If GM, from the start, recognize that the “fixed cost” is actually “operation cost”, they would realize where to reduce cost to match Toyota’s cost, and still keep quality up.
All in all, it’s about whether the interest of UAW is touchable.
If it’s touchable, they should have received cost cutting long ago.
If it’s not touchable, then it’s all “fixed cost” and then we have today’s mess.
Pch101 :
April 15th, 2009 at 5:29 pm
GM loses money on its operations, even before we start talking about pensions. If GM had zero retirement costs, it would **still** be losing money! The $4 billion operating loss doesn’t include retirement costs.
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That’s due to their uncompetitive products, which in turn was due to lack of R&D in earlier years, which in turn was due to higher “fixed cost” before.
So, it’s the pension/health costs. It’s just grew so big for so long, you didn’t even recognize it.
Pch101 :
April 15th, 2009 at 5:29 pm
That, once again, is false. Pensions are not classed as “operating costs.”
Yes, they are not classed as “operating costs” by RiR or the US government, but they are “operating costs” when you really want to do a viable business plan.
PCH, you are getting right to my point – that GM can’t sell its cars for the same price that other automakers can.
Why? Because many of their vehicles are perceived as lower quality and/or inferior to drive, so they have to be sold for less.
Product, product, product.
But that was 2007. Today, because of all the rumors swirling around GM, nobody will buy one without a huge discount – even their best products, like the Caddy CTS, are highly discounted when they don’t need to be.
Then how do you explain Lexus is perceived as lower performance/prestige than MB/BMW and selling for less, but still make more money per car?
A better example would be the Hyundai Sonata, it’s priced below Camry and not any more expensive than Malibu.
Why Hyundai can make money with the Sonata and GM can’t with the Malibu?
Not to mention that several years back, Sonata was really cheap (and not perceived well) but still made a profit.
WSN – do we have figures to prove that Lexus makes less per car than M-B and BMW?
But if the European brands are less profitable, I suspect the unfavorable Euro / Dollar exchange rates might have something to do with it.
By the way, WSN, I don’t think Lexus is perceived as a lower prestige alternative to Mercedes or BMW anymore.
WSN – Have you looked at Sonatas lately? They suffer from rebate-itis, just as GM does.
In that market segment, the domination of the Camry and Accord are tough to crack, even though neither car is as good as it used to be.
you are getting right to my point – that GM can’t sell its cars for the same price that other automakers can.
Why? Because many of their vehicles are perceived as lower quality and/or inferior to drive, so they have to be sold for less.
Product, product, product.
Right. I would add service, branding, and unnecessary overhead that produces no value (redundant brands, etc.) to the mix, but sure, that’s it.
Some of this loss that we’re discussing is fairly blatant — it’s in the incentives. To stay consistent with the pre-Carmeggedon numbers, here is an example, using average incentives as of January 2008:
Chrysler Group $3,616
General Motors $3,322
Ford $3,055
Nissan $2,129
Toyota $1,031
Honda $998
http://www.theautochannel.com/news/2008/03/03/079408.html
However you choose to look at margin wrt productivity, it’s basically a snapshot of where GM is now or in the recent past. Are we assuming those numbers will at least stay the same under restructuring? Yes, they’ll have some positive moves on paper, but we don’t buy paper cars – we buy cars made on a assembly line by the UAW. How will the workers handle huge and unfair (they think) wage concessions? Won’t we return to those wonderful days of the Seventies when Chrysler workers packed Coke bottles into the doors? It’ll be like buying years of Monday-made cars.
Jaywalker :
How will the workers handle huge and unfair (they think) wage concessions? Won’t we return to those wonderful days of the Seventies when Chrysler workers packed Coke bottles into the doors? It’ll be like buying years of Monday-made cars.
I doubt it…people are too scared for their jobs these days to pull stuff like that.
PCH – Honda’s number looks ridiculously low, but keep in mind their incentives usually involve special below-market financing, not cash rebates.
I wonder how much all those $199/mo Accord leases cost them?
OMG! The Coke bottle in the door myth.What was the last year a door innner was thick enough for a coke bottle?1958 maybe.Monday/Friday cars?More mytholgy.
Hey did you here the one about the pissed off ex wife.Seems she sold her cheating hubby’s prized{insert super expensive sports car here}to a kid knocking on her door for a $1000 or whatever figure comes to mind.
I know its true cause it was my brother inlaws buddy’s friend’s uncle.
The biggest difference between GM and Toyota is that Toyota is a low cost producer (relatively) selling a product with some degree of a premium. GM is a high cost producer selling a product at a discount. It’s the old retailing cliche, once you discount the Brand, there’s no going back.
The biggest difference between GM and Toyota is that Toyota is a low cost producer (relatively) selling a product with some degree of a premium. GM is a high cost producer selling a product at a discount.
As the numbers above indicate, GM has **lower** operating costs than does Toyota. The money that GM saves on operating costs are more than eclipsed by the revenue that it loses on its sales.
It’s quite possible that a successful GM would need to increase its costs, in order to put the money in places where the customer will see, feel or believe in it enough to pay for it. Cutting costs without increasing product appeal forces them to cut prices while losing sales, which only deepens the losses.
As the numbers above indicate, GM has **lower** operating costs than does Toyota. The money that GM saves on operating costs are more than eclipsed by the revenue that it loses on its sales.
I have a hard time believing that GM’s overall costs are less with the overhead related to their 49 brands,legacy costs et al. GM’s true cost/unit has to be significantly greater. Granted, their direct per unit material costs are probably lower, but not overall.
No doubt in my mind that GM would have to increase their material costs to even have a chance of returning to parity with Toyota. And I even question that – I think their reputation has fallen too far to recover. They’re doomed to be a value brand in whatever market segment they’re in except possibly Full Size Trucks.
Thank you gentlemen, for a very interesting and educational discussion.
So, if you’re (the Good) GM after the flood, what do you build?
Cadillacs and ? Do you keep the Aveos and the Cobalts (et al)?
What’s the road to recovery?
Lokki :
April 15th, 2009 at 8:42 pm
Thank you gentlemen, for a very interesting and educational discussion.
So, if you’re (the Good) GM after the flood, what do you build? Cadillacs and ? Do you keep the Aveos and the Cobalts (et al)? What’s the road to recovery?
Glad you asked. Here’s what I would do:
FIRST AND FOREMOST, make world class cars that with reliability on par with the imports. Easier than it sounds, but if Ford can do it…
SECOND, GM needs to be a high-style zone to differentiate itself from Toyota and Honda. Nissan has found success doing this, and frankly, if GM styling can crank out stunning-looking cars like the Corvette, Cadillac CTS, Chevy Malibu and the upcoming Buick LaCrosse, it will create all kinds of buzz for their products. NO MORE IMPALAS.
Third, GM needs to make sure that all of its cars have the kind of involving driving dynamics you find in the Malibu and CTS. No more snoozemobiles like the Lucerne, DTS or Impala based on two-decade-old platforms.
1) Prune brands. Saturn, Hummer, and Saab need to go far, far away. And here’s where the heartache begins- what to do with Buick, GMC and Pontiac? You hate to get rid of brands, but if there’s a time to do it, it’s now, during BK. It’s tempting to keep Buick around as a kind of entry-level lux car, but wouldn’t it make sense to introduce an entry-level Caddy equivalent to the Lexus ES350, based on a midsize FWD platform like the Chevy Malibu’s? Therefore: dump Buick, keep Pontiac and GMC as makers of specialty cars and trucks. And for God’s sake, keep GM Europe – it’s a pipeline for well-designed small and midsize platforms that can be adapted for American use.
2) Chevy’s line is in pretty good shape. The Aveo is made fun of, but frankly, all minicars pretty much suck, and the Aveo’s mechanically decent. What it needs is to be is a trendy, youth-oriented entry level car instead of a boring commuter-mobile. The Cobalt, which is actually very, very competent mechanically but boring to look at and cheap inside, is being rebodied and replaced by the Cruze, which is a very nice looking piece and should sell well. That should set them up at the bottom end. The Malibu is a winner and will stay in place. Their trucks, SUVs and crossovers are all new, fresh product except for the Trailblazer; I’d rebody it on a shortened version of the excellent Traverse chassis. The product that most needs replacing is the Impala (more on that in a moment). The Volt won’t sell in volume, but it’s an important “Halo” car, as is the Camaro.
3) Resurrect the Zeta platform (which underpins the EXCELLENT Pontiac G8 and Chevy Camaro), adspt it for AWD for wintry climates, and restyle it into a Chevy Impala / Buick Lucerne replacement.
4) Make Cadillac a mirror of Lexus, but with ballsier styling and European driving character (versus Lexus’ snoozemobiles). With the demise of Buick, introduce a new entry-lux car like the Lexus ES, based on a volume platform like the Malibu (just as Lexus bases the ES on the Camry). The SUVs, crossovers and compact / midsize sedans are in good shape, and they can carry the load for now, as long as the STS is freshened and perhaps enlarged a bit. In a few years, introduce an all-new premium large sedan on its own platform (you can’t cheap these out and make it a Zeta derivative or some such nonsense).
It will take time, but I think GM can use this lineup and turn things around.
@ PCH101
Wow, it’s amazing to think you’re having to explain some fairly basic business principles for people.
Thanks for your tireless effort.
It still brings to mind the unspoken GM Moto “We lose money on every deal, but we make up for it in volume”.
@FreedMike…Yeah the Impala has reached the end of the road.But for value, nothing on the market today,can touch it.
Untill recently the Impala was GM’s number one seller.So it might of run its course,but it did the job it was intended to do.
Their trucks, SUVs and crossovers are all new, fresh product except for the Trailblazer; I’d rebody it on a shortened version of the excellent Traverse chassis.
I disagree with this simply because the market segment for Unibody CUVs is overcrowded as it is. On the otherhand, there are fewer and fewer BOF SUVs. If Ford gets rid of the Explorer, GM could end up the only domestic in the market segment.
The product that most needs replacing is the Impala (more on that in a moment).
The W-Car is solid and proven. Some people just want a big, reliable, affordable car. There was an interesting write up on here a while ago – the Impala is actually doing better for Chevy than the Malibu. I’d keep building it as long as possible.
The W-Car is solid and proven. Some people just want a big, reliable, affordable car. There was an interesting write up on here a while ago – the Impala is actually doing better for Chevy than the Malibu. I’d keep building it as long as possible.
I’ve read that, and the problem is that the Impala, while selling more units, is selling at a much thinner (or outright negative) margin even in good times, while the Malibu is not.
If GM is taking a bath, in net terms, on the Impala, who cares if it’s outselling the more profitable Malibu?
I have a hard time believing that GM’s overall costs are less with the overhead related to their 49 brands,legacy costs et al.
I don’t disagree with that. I was pointing out with the exercise above that GM loses money before we even cover those items. Those make a big problem worse; they aren’t the core problem, just bad icing on a big rotten cake.
I’ve read that, and the problem is that the Impala, while selling more units, is selling at a much thinner (or outright negative) margin even in good times, while the Malibu is not.
I would argue that the Impala is a brand killer. If GM wants to rebuild its rep, it needs cars that are more similar to the new Malibu (good styling, strong interiors, new engines, conspicuous build quality) than the Impala (old tech, non-descript styling, high fleet sales), even if the Impala generates decent margins today.
Why Hyundai can make money with the Sonata and GM can’t with the Malibu?
Not to mention that several years back, Sonata was really cheap (and not perceived well) but still made a profit.
Hyundai is organized and planned properly for its position on the value curve. Consistent with this, it’s constantly improving its quality and raise prices somewhat. If you had noticed, Hyundai swallowed up Kia which was the failed example of low price/quality (as was daewoo).
Ironically, conglomerates like Hyundai were created through close “collaboration” with the government. Again ironically for you, they have a union.
I would argue that the Impala is a brand killer. If GM wants to rebuild its rep, it needs cars that are more similar to the new Malibu (good styling, strong interiors, new engines, conspicuous build quality) than the Impala (old tech, non-descript styling, high fleet sales), even if the Impala generates decent margins today.
The Impala has a few things going for it over the Malibu that I like. 1) In production longer, so GM should have the fixed costs covered (like Ford with the Panther). 2) It has a substantial Fleet business as cabs and police cars, which gives a base to the volume (again, like Ford with the Panther). 3) It’s substantially bigger than the Malibu which differentiates in the market more than the Malibu (I think the latest Gen Accord is the only FWD Sedan with similar interior volume).
I don’t buy in to the argument that older models damage a brand. Nissan is still selling the B13 Sentra/Tsuru in Latin America and it hasn’t hurt them (It’s basically the Crown Vic of Latin America). Jeep sold the XJ for 15 years and, if anything, they damaged the brand when they discontinued it.
Attractive vehicles are attractive vehicles.
FreedMike :
April 15th, 2009 at 6:15 pm
WSN – do we have figures to prove that Lexus makes less per car than M-B and BMW?
But if the European brands are less profitable, I suspect the unfavorable Euro / Dollar exchange rates might have something to do with it.
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I did see news from MSM that the top profit/car brands are Porsche and Lexus. But that’s before the crash.
Easy to understand, both ES and RX shares a lot with their Toyota siblings—productivity at work. So Lexus make more per car even though it’s cheaper than MB.
agenthex :
April 16th, 2009 at 7:24 pm
Hyundai is organized and planned properly for its position on the value curve. Consistent with this, it’s constantly improving its quality and raise prices somewhat. If you had noticed, Hyundai swallowed up Kia which was the failed example of low price/quality (as was daewoo).
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Let’s look at the keywords “improving”, “organized”, and “planned”. They are either cause or symptoms of better productivity.
So you do agree with me.
agenthex :
April 16th, 2009 at 7:24 pm
Again ironically for you, they have a union.
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What’s the irony? I never said union is the problem.
I said productivity is the problem.
In the case of GM, the productivity problem is largely related to the union.
With Hyundai, their union didn’t hurt productivity badly, yet, to show an effect. Case in point, their worker are paid substantially less than GM UAW workers.
Knowing Malibu is at the same price/quality point as the Sonata, getting GM workers paid the same as Hyundai workers should be part of the solution.