By Allan Sloan
Tuesday, February 28, 2006
Auto racing isn't about just the car and the driver. If you've got to haul around a ton of stuff and the other guy doesn't, it's hard to be competitive.
For years now, we've heard General Motors complain that it's being lapped in the United States by Toyota because it's got five retirees in the back seat for every two people actively building its vehicles, while Toyota's U.S. operations are virtually retiree-free. GM is weighed down by heavy "legacy costs" for pensions and health care, while Toyota has no pension plan, and its health care costs per vehicle are barely a tenth of GM's.
But it's not quite that simple, race fans. GM has another serious performance drag that has nothing to do with legacies. It has to do with price. Because GM vehicles aren't as attractive to buyers as comparable Toyotas, you can generally buy them cheaper.
And as we'll soon see, the revenue difference, which almost no one talks about, may soon be larger than GM's cost difference, which everyone talks about. The reason: GM has managed to reduce legacy costs by pressuring workers and retirees. But it can't simply muscle buyers into paying up for its vehicles. It has to persuade them, which is lots harder.
Now, let's go crunching. Because Toyota sells more smaller vehicles than GM does, and fewer big ones, you need a "mix-adjusted" number to be able to compare apples with apples. Ron Tadross, Banc of America Securities' chief auto analyst, puts the Toyota premium (or GM discount, if you prefer) at $1,500 a vehicle in the United States. GM won't confirm that number -- but doesn't dispute it, either.
Tadross also says that despite being $1,500 cheaper, GM vehicles generally are higher-cost than Toyotas, because GM's resale values are far lower. Lower resale values, of course, are one reason that GM can't charge as much as Toyota does.
The disparity in the small and mid-size car prices has become so great that Mark LaNeve, GM's sales and marketing chief, is seizing on it as a virtue. He said he hopes I write about the GM discount. Why? Because, LaNeve says, "many consumers think Japanese cars are cheaper than our cars. And they aren't."
LaNeve says GM is trying to close the pricing gap by improving its vehicles, marketing them more effectively and reducing the used-car disparity. He says that three-year-old GM vehicles used to sell at 40 to 45 percent of original cost, compared with 50 percent for a Toyota. Now, he says, GM has moved up to the 42 to 46 percent range. "Unfortunately for us, we're trying to turn the tables in a very competitive marketplace," he said.
This isn't the place to talk about how GM came to have a price disadvantage. What matters is that it's here and it's big. And unlike the legacy disadvantage, it's not scheduled to shrink.
Here's the math. In 2004, GM says, its health care costs were $1,528 a vehicle and pension costs were $695 a vehicle. Total: $2,223. Toyota's comparable costs: $201 for health care (according to A.T. Kearney) and perhaps $50 for matching workers' 401(k) contributions (my estimate). GM refuses to provide legacy costs for its 2005 vehicles. But by my estimate, they were $1,850 for health care, $700 for pensions. Total: $2,550. (I'm using GM pension and health care numbers and WardsAuto.com's vehicle-production stats.) Numbers Toyota gave me indicate its U.S. health care costs stayed at about $200 a vehicle. And let's use the same, probably-too-high $50 for 401(k) costs.
This produces a horrendous $2,300 gap. But watch. If GM's deal with the United Auto Workers goes through as expected, it will save $3 billion a year on health care costs. GM has also imposed $900 million of cuts on its nonunionized workers. Had those savings been in effect last year, they would have totaled $1,200 a vehicle. That would have shrunk GM's cost disadvantage to about $1,100 -- less than its price disadvantage.
The bottom line: Shedding costs isn't enough. To prevail in its home market, GM also has to close the price gap. Otherwise, it might as well forget about ever taking the checkered flag.
Sloan is Newsweek's Wall Street editor. His e-mail email@example.com.