U.S. Automakers Narrow Productivity Gap with Asian Rivals

Chrysler ties Toyota for title of most productive manufacturer taking 30.37 hours to build a vehicle.

The Big Three U.S. automakers have nearly erased a once gaping productivity gap with their Asian rivals, consultant Ron Harbour said in a report on factory efficiency released on June 5. He said General Motors, Ford and Chrysler would probably have been forced out of business were it not for their major productivity improvements.

"It takes about one third less people to build the same number of vehicles as it did in 1990," he said. In the past seven years, Chrysler has managed to slice nearly 14 hours off the average time it takes to build a vehicle. The improvement allowed Chrysler to tie Toyota for the title of the most productive auto manufacturer in the U.S. at just 30.37 hours to build a vehicle.

Honda came in second with an average of 31.33 hours per vehicle, followed by GM at 32.29, Nissan at 32.96, Ford at 33.88 and Hyundai at 35.10.

"Driven by more consistent, leaner processes and buyouts of tens of thousands workers, the Detroit Three automakers in 2007 nearly erased the productivity deficit against their Japanese-based competitors, despite declining production and shrinking market share," Harbour said. "Improving productivity in the face of lower production is a huge accomplishment, especially with the pressures created by rising gas prices."

Harbour said the historic new contract GM, Ford and Chrysler reached with the United Auto Workers union last fall will further reduce the total labor cost gap between Detroit's carmakers and their competitors over the next three years. Just a few years ago, the Big Three were spending about $1,200 more on labor than what their Asian competitors paid in non-unionized U.S. plants. That gap has now narrowed to $606 per vehicle and is likely to drop to just $97 by the end of the contract in 2011, Harbour said.

And it is becoming increasingly less meaningful in light of rising material costs. Labor will soon account for less than 10% of a vehicle's cost, down from 15 to 18% at the beginning of the decade, he said.

The creation of a lower-tier wage classification for some jobs could also allow the Big Three to bring production of certain components and modules back into their assembly plants that have been out-sourced to suppliers able to pay their workers considerably less, Harbour said.

But as volumes drop because of a drop in demand for gasoline guzzling trucks and large sport utility vehicles, there will be less room to improve productivity, he said. "You can't make big jumps in productivity anymore because you can't use any more automation and the reduction in volumes will make it even harder," he said.

Unfortunately, the profitability gap between Detroit-based and Japan-based automakers remains wide. Honda and Nissan led the six largest North American automakers, each earning a pretax profit of $1,641 per vehicle on their North American production, followed by Toyota at $922 per vehicle. Chrysler lost $412 per vehicle in the first nine months of 2007, while GM lost $729 and Ford lost $729 per vehicle for the full year. When calculating profitability per vehicle, Harbour looks only at operating costs and revenues and does not account for special charges such as plant closures or vehicles imported from Asia and Europe and sold in the United States.

This profitability gap reflects that fact that the Detroit Three still pay more for health care, pensions and sales incentives and support more dealers relative to their respective market shares, than Toyota, Honda or Nissan. Harbour said much of this profitability differential could be erased once the Big Three eliminate their retiree health care obligations under a deal reached last fall.

Copyright Agence France-Presse, 2008

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