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Competitive Challenge: State of the Industry

As I write my first column for Automotive Design & Production, I am troubled by the current state of the industry that I am so passionate about.

As I write my first column for Automotive Design & Production, I am troubled by the current state of the industry that I am so passionate about. The North American automotive scene today is marked by a strange dichotomy. Surveys show that the three major Detroit-based automakers have dramatically improved manufacturing performance, particularly in quality and productivity, but they continue to lose market share amid consistently weak profits. Many of their major suppliers are bankrupt, and some analysts have raised the alarm that GM, Ford and Chrysler are headed down the same path. Meanwhile, their three major Japan-based rivals are rapidly gaining ground while recording strong and consistent profits. Today, the average profit gap is $2,400 per vehicle.

This imbalance is usually explained by a crushing burden of so-called “legacy costs” —health care and pensions for the Detroit firms’ large group of retired workers. But there’s far more to the story. There are many reasons why Detroit is failing to defend its home turf, most of them in fundamental aspects of the automotive business where the Detroit-based companies haven’t yet fully addressed structural and cultural barriers.

In many ways, the current crisis for Detroit automakers mirrors the situation in 1981, when my father, James E. Harbour, issued his landmark study comparing the manufacturing efficiency of Japanese and American automakers. That study showed that the Japanese, Toyota in particular, evolved a powerful production system that was able to market high-quality small cars at a manufacturing cost at least $1,500 per vehicle below comparable models from Detroit. At the time, flaws in Detroit’s production systems were like an iceberg—the vast majority were submerged in the automakers’ complex bureaucracies and hadn’t been exposed to public discussion. That first study explained publicly how advanced the Japanese were in lean production and how quality was a primary manufacturing ethic. For example, American manufacturers required 40 to -50 labor hours to build a typical vehicle, compared with 20- to 30 hours for the Japanese. At about the same time, J.D. Power studies showed that Japan-built cars were substantially more trouble-free than their American counterparts. For every one problem reported by Japanese car buyers, American vehicle owners reported four to five. The initial reaction of these disclosures to the Detroit Big Three was, in many cases, denial. But eventually Detroit executives realized they were faced with deep-rooted problems that needed a total renovation of the vast organizations required to design, build and market a modern car or truck. And they went to work, refocusing on the fundamental issues of first-time quality; elimination of wasted labor and materials; effective design; and customer satisfaction.

These changes also directly affected automotive parts suppliers, who in many cases were caught off guard during the turmoil of the 1980s and 1990s. Some disappeared, others sought refuge in mergers and consolidations and many continue to struggle today on the brink of bankruptcy. In short, few of these firms fully appreciated the dangers of the new environment and prepared their organizations for product and geographical diversity, and financial stability. Structural problems faced by the OEMs have been magnified in the supplier community.

Now, 25 years later, GM, Ford and Chrysler have closed the productivity/quality gap substantially. Many products from Detroit today score higher in the quality rankings than the Japanese group, and some of the most productive plants in North America wear GM, Ford and Chrysler logos. Indeed, without these improvements, whispers of bankruptcy would have been heard long before now. The manufacturing organizations of the Detroit-based automakers can be proud.

But there’s still a significant competitive gap, much of it hidden from public view (again, the proverbial iceberg). GM, Ford and Chrysler remain behind in many key areas—product engineering, manufacturing flexibility, labor practices, supplier relations, steep price discounting, unfavorable currency exchange rates, and high costs of health care and pensions OEMs forced many of these pressures down to suppliers and relations between the two groups are more difficult. Some suppliers have grown negative and unconstructive in outlook, and in many cases stand today as part of the problem rather than the solution. The process, in short, is broken.

Public discussion of the domestic auto industry today is largely a grim recital of lost market share, plant closings, layoffs and supplier bankruptcies. I hope through our new study “Automotive Competitive Challenges—Going Beyond Lean,” which was released in early October, and our extensive work with suppliers, we will shed light on the structural issues and challenge the industry to improve as my father did in the 80’s and 90’s. Long-term survival now demands an all-out effort to attack these structural problems similar to the largely successful quality and productivity drives of the 1980s and 1990s. 

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