Other Editorials

Costs Aren't The Real Problem

Tuesday, August 8, 2006

From Forbes.com
Backseat Driver
Jerry Flint 08.08.06, 6:00 AM ET

General Motors and Ford Motor are focusing the turnaround plans on cutting costs. Here is some news: The biggest problem is not costs. Yes, medical costs, pension costs, the costs of closing plants and then paying people for not working (the Jobs Bank) are an issue. Nevertheless, there is nothing wrong with GM and Ford that another million sales a year for each of them would not cure.

Am I living in a fantasy world? Not at all. Both companies had those extra million sales only a few years ago. Winning back those units, by the way, would raise GM and Ford's market share about 6 percentage points each, up from 24.3% of the current market for GM and 18.4% for Ford.

Just seven years ago, in 1999, Ford held 24.8% of the market. That year, the company posted a record pretax profit of $11 billion and a net profit of $7.2 billion. Maybe Ford skewed those results by not investing enough in its future models, but they give you an idea of the company's potential. In GM's best year, 1997, it had 31.3% of the market and earned $6.5 billion.

One thing is clear: GM and Ford did not lose a million annual sales apiece because their costs were too high. Those sales were lost because the product, particularly the passenger cars, did not hit enough high spots. Until recently, Detroit's light trucks were quite successful.

The problem with getting profitable by cutting costs while losing sales is that this process never stops. I have witnessed numerous cost-cutting binges in which companies shut factories and slash overhead. The problem is that these steps do not stop the sales declines. Like a perpetual motion machine, the companies have to go back again and close factories, fire employees and cut costs. In this latest round of disembowelment, GM sold half of GMAC and Ford sold Hertz. What will they sell off during the next downturn?

My friend Steve Kichen, Forbes assistant managing editor, says that I have a point, but there are other factors. "BMW can worry less about costs, but it is a niche player here, not a mass marketer," he says. "There's a big difference."

Well, Steve is right, but I will stick to my position. The big problems are creating killer products that people want and being able to sell them. I am beginning to see some at General Motors (nyse: GM - news - people ): Example: That new Pontiac G6 convertible is gorgeous. It has a metal roof, a big back seat and bit of trunk room. OK, the G6 is not a Mercedes CLK ($60,000), but it is quite good for a $30,000 hardtop convertible.

The problem is that Pontiac only expects to sell 25,000 G6 convertibles a year. Why not 50,000? It's the best convertible bargain in the world. And if I were looking for family sedan for myself, I'd probably take the Chevy Impala over the six-cylinder Toyota (nyse: TM - news - people ) Camry or Honda (nyse: HMC - news - people ) Accord. The Impala has more room and a lower price.

As long as I am complaining about Detroit's overemphasis on costs, I must say a few words about false economies. In today's market, there is no excuse for selling mainstream sedans with pushrod engines or four-speed transmissions. Another road to ruin is flogging suppliers to save every fraction of a penny. The obsession with costs helps explain why companies such as GM have forgotten how to sell carsall they can do these days is offer rebates, discounts and other enticements.

GM's second quarter loss in North America was only $85 million compared to nearly $1.2 billion a year ago. Several men deserve some credit for that improvement. The first is Rick Wagoner, Jr., GM's besieged chief executive. Second is Robert Lutz, vice chairman who has pushed hard to improve the cars, outside and inside. Third is Gary White, the creator of the new big pickups and sport utility vehicles. These SUVs are off to a promising start despite the sharp increase in gas prices. While I am praising GM executives, I believe that Mark LaNeve, who heads sales/marketing, is the best man in that post at GM in half a century. You read me right, half a century.

Ford Motor (nyse: F - news - people ) lags GM on improving its cars and trucks. Based on what I have learned about Ford's future product plans for the next few years there does not seem like there is enough to turn the tide. This fall there are new "crossover" sport utilities, the Ford Edge and a Lincoln model. Every manufacturer now has such vehicles, so the competition is fierce. Also coming this fall are updated versions of the big Ford Expedition and Lincoln Navigator SUVs, but these trucks look quite like the ones that they are replacing.

For 2008 and beyond, Ford plans to reskin a number of current vehicles, but such touch-ups rarely turn into home runs. Ford has an alternative to the minivan in the works for the 2009 model year and a new Lincoln sedan is in the pipeline. Yet from what I know, it may not be until 2010 before Ford has much in the way of brand new vehicles. That is a long time off.

Again, it is going to take dramatic designs and better engines and transmissions to save Detroit. I believe that the home team is capable of building such vehicles. However, if they do not move in this direction, the downward spiral will continue.

Another old truism in the car business: You don't stand still. You go upor down.