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The Big Three's 2005 cost challenges
- By Bernard Swiecki
- April 11, 2005
- Article
- Shop Management
A decline in the Big Three's market share, combined with rising health care and retiree costs, is contributing to extreme cost pressures for the Big Three and their suppliers.
The Sales Situation
2004 was a tough year in Detroit. The overall U.S. market for light-vehicle sales increased more than 1.4 percent, but combined Big Three sales of North American-produced vehicles fell 1.7 percent. As a result, the Big Three's market share fell from 59 percent to 57.2 percent.
At the same time U.S. market share of Japanese-produced vehicles in 2004 rose to an all-time high of 33.1 percent from 30.9 percent in 2003.
Disappointing 2004 sales are on the heels of a market share slide spanning more than two decades even though the overall U.S. market has grown to approximately 17 million units.
The Big Three's sales slide is creating some serious financial implications for Detroit.
Cost Implications
When the Big Three sell fewer cars, they have fewer vehicles over which they can spread their fixed costs. Certain costs, such as assembly facilities and tooling, can be eliminated by closing a plant. However, the automakers' largest expense—labor legacy costs—doesn't go away after a facility is closed.
Under United Automotive Workers (UAW) contracts, the Big Three must provide health care and retirement benefits after retirement or termination. These costs weren't considered a burden in the past because they were spread over a larger number of vehicles and health care costs were lower.
However, the last two decades of decreasing market share have put the Big Three in an extremely difficult position. They now have the sales of companies much smaller than the Chrysler, Ford Motor Company, and General Motors Corp. of 20 years ago.
Because this problem can't be solved by closing plants, early retirement, or layoffs, solutions are harder to come by. As a result, U.S. automakers are trying to cut costs through productivity and efficiency improvements.
Rick Wagoner, chairman and CEO of GM, has been quoted as saying that he estimates that health care costs add approximately $1,400 to the price of each GM vehicle sold. Most analysts place Ford and Chrysler's cost at about $1,200 per vehicle.
According to CNW research, average incentives on GM vehicles were more than $4,600 per unit by the end of 2004. Combined with health care costs, that adds up to more than $6,000 for every vehicle GM sells. The incentive figure is lower for Ford and Chrysler—about $4,600 and $4,500, respectively. Although when health care costs are added, the total costs are comparable to GM's. This incredible price pressure has forced the Big Three into a host of cost-cutting measures. Not surprising, they're pushing some of the pressure down to their suppliers.
Incentives are an increasingly difficult challenge for the Big Three to overcome. Despite all the announcements, incentives are continuing to grow, and there is no reason to expect that will change this year. While foreign-owned brands also are increasing their incentives, they are not near the levels of the Big Three's.
At the same time, Asian and European competitors are constantly adding new models to their U.S. market offerings. This places further price pressure on the Big Three to continue increasing incentives to sell more cars.
The Implications for Suppliers
The situation isn't likely to improve in 2005. Industry analysts, as well as the Big Three's own economists, expect the U.S. vehicle market to shrink slightly. The Big Three also are expected to post another slight market share loss in 2005, although each is expected to turn a profit.
Suppliers, of course, are facing their own cost pressures. They shoulder the price cuts demanded by their customers while, just like the automakers, they also are forced to pay increasingly higher prices for steel and health care costs.
2005 does not bring with it any reason to believe the situation will improve.
About the Author
Bernard Swiecki
1000 Victors Way Suite 200
Ann Arbor, MI 48108
734-929-0484
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The Fabricator is North America's leading magazine for the metal forming and fabricating industry. The magazine delivers the news, technical articles, and case histories that enable fabricators to do their jobs more efficiently. The Fabricator has served the industry since 1970.
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