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.

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.

So even if Japan's cost lead in subcompacts has been trimmed to $500, it still means a Japanese producer has appealing options in product pricing. For example, he can drop the price below a competitor's, forcing opponents to sell at a loss or give up market share. Or the Japanese producer can sell at the same price as a higher cost US competitor and pocket large profits.

New DRI research shows the Japanese now are pricing subcompacts 30 percent above their costs. At the same time, Ford Motor Company's price on its Escort and Lynx models at best only allows it to break even.

And DRI estimates that by 1984, US automakers will have to charge prices which outpace the growth in overall prices. Meanwhile, Japanese car companies ''could undercut growth in inflation . . . by 10 percent, '' Mr. Hammond says.

The Japanese cost advantage will persist for some time even though the US industry is making major investments in new plants and production equipment. These investments ''take a long time to work their magic on costs,'' Harbridge House vice-president Schnapp argues. One reason for the delay is that it takes at least two years to learn to run a new facility at maximum efficiency, industrial management experts say.

The Japanese also are likely to keep a cost advantage as a result of their ''just in time'' inventory system. Suppliers ship parts to assembly plants at the last possible moment. This allows Japanese car companies to hold down their inventory financing and handling costs. US companies have started to implement similar systems but the Japanese are far ahead in driving down inventory costs. And they also hold a lead on labor costs despite the auto companies' new contract with the United Automobile Workers.

With costs still in excess of Japan's, GM is likely nervous about launching a new subcompact model--especially at a time when there is considerable uncertainty about the kind of cars buyers want. In the last months of 1981 and early 1982 the market share of full-sized and luxury cars increased slightly as fuel costs moderated. Even with gas prices rising now, ''there is real uncertainty about what the market will be like,'' Mr. Cole says.

If the market for subcompacts takes off, GM could opt to make the car in the US. But in the meantime, other companies could decide to import new car lines from Japan in a bid to limit risk. Already, Ford owns 25 percent of Toyo Kogyo and plans to import a subcompact from the firm in 1984 to augment its subcompact line.

Increased sourcing of cars from outside the US is likely to boost protectionist pressures, analysts note. GM's move ''is going to cause an intensification of the effort in Washington to push through a local content law, '' Mr. Schnapp argues.

How Japan beats the US in carmaking costs Maximum amount saved by Japan in its production of each subcompact car Production technology $73 Quality-control systems $329 Production methods, inventory control $550 Material handling engineering $41 Other productivity improvements $478 Union management relations $182 Wage and fringe rates $550 Total manufacturing cost advantage $2,203 Less Japanese ocean, freight, duty, and port cost ($485) Net Japanese landed cost advantage $1,718 Source: Harbour & Assocites Inc., Berkley, Mich.

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