What has made US car-makers look so gloomy?

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Last updated at: (Beijing Time) Thursday, November 13, 2003

What has made US car-makers look so gloomy?

What happened to "America-made" brands? Why could Nissan, BMW, Honda, and Toyota make many more cars and earned much more money in the US than their American peers, CHRYSLER, Ford, and GM?

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American car-makers have been playing a preferential policy card this year. The discount they offered on their cars reached a record high. This move certainly pushed their sales value by a few percentage points. But when they "settle accounts after autumn", they found that their losses invariably outstripped their surpluses. Take Ford��s Taurus and Nissan��s Altima for example. Manufactured in the United States, both dominate the low-end market and sell well. But Taurus generated far less profit than Altima did. Ford's promotion package, including installment payment, interest cut, plus a disguised discount of 87 percent, and the deduction of retailers' profits, left nothing but loss to Ford. Contrary to that, Nissan earned US$1,500 from the sale of each of its Altima, a gross profit margin of 10.8 Percent. Worse still, the market share of American car makers is also shrinking. The three giants had to see their market share plunge to a record low of 61.7 percent in 2002, and a further decline of 1.6 percent in the first quarter of 2003.

Then here comes the question: what happened to ��America-made�� brands? Why could Nissan, BMW, Honda, and Toyota make many more cars and earned much more money in the United States than their American peers, namely CHRYSLER, Ford, and General Motors? Last year, the three giants all had their books placed in the red. They managed to get a measly 1.8 percent profit only after adding their overseas sale earnings. In comparison, Honda, Toyota and Nissan enjoyed high profits.

It is widely assumed that this situation is caused by lower salaries and less welfare offered by foreign-funded auto manufacturers to their American workers. But this is not true. The real reason for their success in the American market is really thought-provoking: more efficient production system, more harmonious labor-capital relationship, closer partnership with component suppliers and first-rate quality.

Productivity of foreign-funded auto plants is generally higher than that of American plants. The time that the three American auto giants spend on the production of each auto is 8 hours on average more than their Japanese peers, Honda, Toyota and Nissan do. Of the three Japanese plants, Nissan is the fastest, 18 hours for an auto. Chrysler is the slowest, 31 hours. Too much time on production per car costs the three American makers US$300-US$ 500 higher than that by their Japanese counterparts. This discrepancy is big enough to bring the meager profit to naught in a market of cutthroat competition.

Elastic production is the secret of success of foreign auto makers in America. They spent several decades developing assembly lines with more flexibility so that they excel the three American giants in this respect. Elastic assembly means producing various models from the same production line to eliminate the need to design a new line for a new model. Costs can be brought down by 20 percent in this way and output for a certain model can be regulated according to market needs. A Toyota plant in Princeton, Indiana, uses one production line to make Sequoia SUV and Sienna mini-vans. The novelty in it is that two different techniques must be applied respectively on the two models. It is the first line in North America that is capable of assembling two models with completely different structures. By 2005, five out of nine Toyota's lines in North America will be able to turn out autos with different styles. This amounts to 71 percent of Toyota��s total output in this region. By then, only 34 percent factories of the three American giants will be able to reach elastic production. In fact, elastic production is the catalyst for the rapid growth of foreign-funded auto plants�� market share since 1998.

Of the US$1.5 billion of investment in a new plant in Canton by Nissan, one-third was spent on the installation of elastic production lines. Relying on the robots and computers on the lines, Nissan can quickly change its models. Component orders are available to suppliers (some even are placed in the auto complex) 90 minutes before the production, this makes it possible for both the plant and the supplier to cut down inventory cost. Nissan��s components suppliers, on the other hand, get some fittings ready and have them delivered to various sections of the production line. The painting workshops of Nissan are also designed with an aim to increase elasticity. Painting is done for different models by robots under computer control. Nissan can produce 400, 000 autos a year in full capacity.

But putting elastic production line in place is one thing, while their good or bad operation is another. The effective operation of the lines is key to success. Some plants under the three American auto giants have similar techniques and modes of production and are carrying out multi-faceted modifications. But an engineering professor in Michigan University said that high discipline is necessary in auto plants to maintain the original production order and sufficient supply of raw materials for every parts of the production line at the time of model changes. In this respect, the three American giants are not as advanced as their Japanese peers.

Comparatively more harmonious labor-capital relations are another factor for foreign-funded auto plants outdoing American auto manufacturers. People tend to think that foreign-funded auto plants, without trade unions (except those joint ventures with American shareholders), offer less attractive salaries and welfare than the unionized American players. The fact is that their staff members are given almost the same treatment. Annual salary for an employee in foreign-funded auto plants, whatever job he holds, ranges from US$45,000 to US$100, 000, with dividends hooked up with his company's profits. There is not much difference in terms of medical welfare and paid holidays between the two. However, there are more types of work in foreign-funded plants than in American ones. This means that workers have to receive a variety of job trainings and to face frequent changes of work-posts, so they have less chance of feeling depressed or overtaxed muscles caused by repeated body movement. Besides, they have to receive training in vehicle overhauling. In Toyota, anyone working at the production line is entitled to halt the operation as soon as he finds anything wrong. More importantly, this is encouraged by managers.

The relationship between the three American auto giants and the United Auto Workers Union has long been not so satisfactory. Under a nit-picking operation system, every work, no matter how simple it is, must be done by a ��technician��, even it is just as easy as changing a fuse wire. Such systems vary among the auto factories as details of the systems must be discussed with local union leaders. A worker may be punished for "transcending his power" by trying to repair a machine. But it is especially important for a flexible work team to maintain the speed of the production line operation which needs to switch among models. After a job transfer, a worker may complete the installment of a bundle of electric wires in 90 seconds instead of two minutes. With approval, he can perform other duties in the remaining time. But in the plants of the three American giants, talks with union leaders are necessary before any new duties are given to a worker. The union leaders may make a list of attached conditions, which indirectly increase the cost of adjusting the output of various models.

Foreign-funded auto plants, especially Japanese ones, maintain closer relations with suppliers than their American counterparts. Due to their trust in Japanese auto plants, both American and Japanese component suppliers are showing more willingness now to invest in the development of equipment of new science and technology. They believe that Japanese car makers will not unreasonably cancel their partnership or stop scientific research cooperation before they reap returns on their investment. The three American tycoons have the same intention to offer R&D opportunities to component suppliers. But because cost is the first consideration, more often than not, the signing of short-term contracts is preferably chosen and renewal of the contract may be rejected due to better choice, and thus leading to the breaking of relationship.

Quality is another key factor central to the America's disadvantageous position with their foreign competitors. Japanese autos apparently demonstrate higher quality than American ones. Tests and tracing survey conducted by the America Auto Association shows that Japanese autos boast a long-term stable quality and performance. It is well known in America that Japanese brands are their best choice for a second hand auto as the performance of a Japanese auto with 5 to 6 years driving record is still expectable while an American one may be too damaged to drive.

Given the shrinking auto sales, America's three leading auto makers do not live on auto sales income. Financial services become the main source of their profits. For example, housing loans generated 3 times revenue over auto sales for General Motors in the past quarter.

An article written and translated by PD Online

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