Why GM's small car experts threw in the wrench
Since Henry Ford designed the Model T's in 1908, the US auto industry has boasted of its ability to produce low-price cars.Skip to next paragraph
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So it was a major break with tradition when General Motors last week announced plans to import from Japan a new low-priced subcompact. In 1984 the 1, 600-pound car is expected to replace GM's least expensive model, the Chevrolet Chevette.
''It (the GM/Japan deal) is an admission that the cost problems in the industry cannot be solved overnight,'' says automotive cost analyst James Harbour of Harbour & Associates.
The picture of GM unable to produce small cars in the United States at a competitive cost overstates the industry's woes. Detroit has made significant progress in cutting Japan's vaunted $1,700 advanatge in subcompact car production costs. In fact, Rath & Strong Inc., a Lexington, Mass., consulting firm, now says the gap has been narrowed to $500.
But trimming Japan's cost advantage further will take time. So other car companies may decide to buy car lines overseas rather than make them in the US, analysts say.
''The industry is moving quickly to a worldwide orientation . . . outsourcing cars from one country to another,'' says John Hammond, director of Automotive Service for Data Resources Inc. (DRI), an economic consulting firm.
In an international battle for car sales, the players with the lowest production costs usually win. So James Harbour shook up Detroit in 1980 when he published calculations showing Japan could land a subcompact in the US for $1, 700 less than one could be made here.
Since that time, ''very considerable progress has been made,'' in closing the cost gap, says John B. Schnapp, vice-president of Harbridge House, a Boston-based consulting firm.
''It is not possible to account for (precise savings) from new labor agreements . . . and replacing old plants with new plants,'' says David E. Cole, director of the University of Michigan's Center for the Study of Automotive Transportation. ''But the gap has closed dramatically.''
Earlier estimates of Japan's lead may have been overstated, notes LeRoy H. Lindgren, vice-president and cost consultant at Rath & Strong. But he puts Japan's cost advantage on subcompacts at $400 to $500.
Of course, a $500 cost penalty is still high since it equals the entire profit a domestic carmaker might earn on a subcompact. For example, Mr. Lindgren estimates that the 200,000 subcompact cars GM has agreed to import from its affiliate, Isuzu Motors Ltd., starting in 1984 would be priced at about $5,000 each. The expected profit would be $500 a piece.
GM officials will not disclose the price of the car, the brand names it will carry, or whether it will, in fact, replace the Chevette. The company also refuses to discuss its ability to compete with Japan in subcompacts.
It is clear, however, that the small car sector is where the auto industry faces the toughest cost pressure. ''It is where the hard knocks occur . . . there is less [potential revenue] to spread costs over,'' Mr. Cole notes.