Editor's Page -- Let's Stop Crying Over Costs

Feb. 1, 2004
Many [U.S. manufacturers] are so worried about competing on cost, their greatest weakness, that they are failing to compete on innovation, their greatest strength.

It's become an undisputed truth in manufacturing: Low cost, high quality and fast delivery are the measures by which a manufacturer will succeed. Fail on these fundamentals, and your customer will go to a competitor, right?

Not so fast.

If that's so, then how does one explain the popularity of the Toyota Sienna minivan compared with GM's, Ford's or Chrysler's offerings? In the past year, the U.S. Big Three gave cash rebates, cut-rate financing and other incentives to entice buyers and pump up their market shares. Meanwhile, Toyota Sienna buyers were paying full ticket price, waiting months for delivery and boosting Toyota's growing slice of the U.S. automobile market. Why?

Product innovation.

An article in The Wall Street Journal last month detailed Toyota's and other Japanese automobile makers' strategies compared with the U.S. Big Three's. To avoid profit- and brand-killing financial incentives, Toyota stuffed its vehicles with new features -- automatic doors, extra audio speakers and remote power door locks -- and held the line on price.

It worked: Toyota and other Japanese car makers spent a meager $931 on incentives on average (the U.S. Big Three average was $3,445) and grabbed another 1.4% of market share from the U.S. in 2003.

That's why the intense focus by U.S. manufacturers on costs has me worried. Almost daily I get letters from manufacturers highlighting their cost disadvantages and asking, "How can we possibly compete?" And it seems every manufacturing organization focuses on the issue. At the end of last year, the National Association of Manufacturers (NAM) released a study that concludes U.S. manufacturers labor under a cost burden that is, conservatively they say, 22% more than that of their main foreign competitors.

I agree with the letter writers and the NAM report's conclusions: U.S. manufacturers face a dramatically higher cost structure than their competitors, and the structural costs have become more burdensome with increased competition from low-cost countries. I even agree with some of the policy changes that NAM calls for to offset these cost disadvantages.

But U.S. manufacturers need to channel most of their fear of cost competition and their anger at the unfairness of it toward what they must do to overcome the high costs they face.

Many are so worried about competing on cost, their greatest weakness, that they are failing to compete on innovation, their greatest strength.

As a result, they should be more frightened by the competitive challenges detailed in Senior Technology Editor John Teresko's report on Asian innovation than they are of those described in the NAM report. Even if U.S. public policy makers act boldly to address the concerns in NAM's report, it's unlikely that they will dramatically alter the competitive landscape. U.S. manufacturers still will be forced to overcome very big cost differentials.

The manufacturing industry's earlier run-in with competition from low-wage countries presents a noteworthy precedent: The U.S. government didn't ride to the rescue with dramatic roll-backs of the U.S. minimum wage or suspend overtime rules to reduce the cost of labor. The cost and standard of living in the U.S. wouldn't allow it. Now that the cost imbalance results from taxes, regulation and health care, it will be no different.

Luckily, we know how to compete. U.S. car manufacturers, for example, have demonstrated leadership in the past decade not with low prices, but with the successful creation of two entirely new categories of vehicles: the minivan and the SUV, as well as with the dramatic updating of that old American icon, the pick-up truck. Unfortunately, many of our competitors are now doing the same.

Which is all the more reason we must focus on innovation.

Patricia Panchak is IW's editor-in-chief. She is based in Cleveland.

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