Nicolaus Nemeth

Toyota helps General Motors

32 posts in this topic

I have to admit that I am absolutely amazed by the goings on the past couple of days in the auto world. It started when I was watching the nightly news and saw that General Motors was the first U.S. automobile maker that the UAW (United Auto Workers of America, the Unionized plant workers for U.S. auto makers) have finally succeeded in their goal of dragging down the very companies they work for and depriving the world of affordable transportation. GM is set to lay off thousands of workers and totally overhaul its corporate structure in an attempt to reduce costs and expenses. I did not realize that as upset as I was about unions and minimum wage that I could get more upset about this issue. That's when I read this. It's an article that tells of how Toyota is so worried about being blamed for the demise of GM by offering a better product at a lower price that it is going to voluntarily raise its price to help out GM and the other American auto makers! Such an act of selfless devotion to a greater cause, and by non other than big business(!) rips my heart in two.

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That's when I read this. ... Such an act of selfless devotion to a greater cause ...

The argument made by Okuda in the referenced article is not presented as a selfless act. Okuda notes that "General Motors Corp. and Ford Motor Co. are symbols of U.S. industry, and if they were to crumble it could fan nationalistic sentiment. I always have a fear that that in turn could manifest itself in policy decisions ..." Whether his argument is right or wrong, it appears to have been made in order to protect Toyota's long-term interests.

I do not mean any of this as support for Okuda's position, but rather just to indicate that his position does not seem to have been made quite so selflessly in regard to Toyota.

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The argument made by Okuda in the referenced article is not presented as a selfless act. Okuda notes that "General Motors Corp. and Ford Motor Co. are symbols of U.S. industry, and if they were to crumble it could fan nationalistic sentiment. I always have a fear that that in turn could manifest itself in policy decisions ..." Whether his argument is right or wrong, it appears to have been made in order to protect Toyota's long-term interests.

I do not mean any of this as support for Okuda's position, but rather just to indicate that his position does not seem to have been made quite so selflessly in regard to Toyota.

I think that's exactly right. What *is* sickening is the thought of a vastly superior product being harder to get and potentially throttled in order to save incredibly incompetent companies. I had the misfortune to own a Ford Contour which was nothing but problems, including countless Ford recalls. The car I got after that was a used Toyota Camry, which I still own. It has had zero major problems and runs extremely reliably. As far as I'm concerned Ford can go out of business tomorrow and it would be a positive sign. I don't hear a lot of good things about GM quality either.

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The argument made by Okuda in the referenced article is not presented as a selfless act. Okuda notes that "General Motors Corp. and Ford Motor Co. are symbols of U.S. industry, and if they were to crumble it could fan nationalistic sentiment. I always have a fear that that in turn could manifest itself in policy decisions ..." Whether his argument is right or wrong, it appears to have been made in order to protect Toyota's long-term interests. 

I do not mean any of this as support for Okuda's position, but rather just to indicate that his position does not seem to have been made quite so selflessly in regard to Toyota.

I about heard this story on the news tonight. I am absolutely amazed that a CEO doesn't understand simple economics. If people don't want GM products, lowering Toyota's price will have no effect on GM purchases. People will just go somewhere else. Many (if not most) American Toyota cars are made right here in the US. If Toyota really wanted to help GM, they'd close the plants here in the US and sell less Toyotas. Or perhaps they should give their Toyota employees bonuses if they buy GM cars. The Toyota car dealers will still have to match competition from Honda, et al. So raising the manufacturer's suggested retail price probably won't have too much of an effect.

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I about heard this story on the news tonight.  I am absolutely amazed that a CEO doesn't understand simple economics.  If people don't want GM products, lowering Toyota's price will have no effect on GM purchases.

Okuda advanced the idea of raising Toyota prices, not lowering them. Presumably this would make GM products more desirable in those markets where their cars compete with Toyota.

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I've been quite happy with the quality of my corvette. So much so that I have a new one on order.

That's good to hear. They look like fun sports cars to drive though I've never had one.

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Here is a quick example of what tariffs do to imported cars.

In 1990 I was stationed in Okinawa Japan, at that time I bought a used 3 year old Toyota Camry. When you are buying a car in Japan as an American National you must also pay for the time of you stays equivalent in insurance. I also had to buy two different insurances, Japanese and American along with the cost of the car. The grand total of the car and basically six years, three years each, worth of insurance cost me $2,000. Thats right $2000 for a 3 year old Camry and 6 years worth of insurance. Just imagen what a Toyota would cost if it wasn't for the tariffs.

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One thing I've found about build quality is that what matters as much as brand is the location of construction. Generally, the Japanese cars built in Japan are very reliable, especially Hondas and Toyotas.

Mazda is an excellent example. The Mazda3, built in Japan, is very reliable, according to Consumer Reports. Mazda6, on the other hand, is built in the same Michigan plant as the new Mustang. I almost bought a 6, but decided to wait to find out how reliable it would be. It didn't take long for Consumer Reports to stop recommending the vehicle because of its poor reliability. Unfortunately, Mazda plans to move assembly of the 3 to the US.

Now US manufacturers can make a reliable car. The Corvette's mechanical components are very durable, because they are built to handle a greater beating than the 'vette can dish out. So while there may be electrical issues, it is possible to keep a 'vette running for a very long time.

The same can be said for pickup trucks. If you buy one that is built tough enough to go off-roading, but only use it for sedate road driving, you can get many, many miles out of it.

Incidentally, in 2004, the Buick Regal was the most reliable American-brand car, according to Consumer Reports. It's now discontinued.

Boneheads. You finally make a car that actually works, and you stop selling it.

Reminds me, too, of a story from an older engineer, who used to work at Ford Aerospace (yes, there once was such a place). The employees got discounts on Ford products, so most of them drove Fords. My friend's always leaked oil. The dealer told him that's what cars do. Well, he switched to a Toyota (which didn't have nearly the marketshare it does today) and was amazed that it DIDN'T leak oil!

Things have gotten better since, but I still think Detroit is playing catch-up to Tokyo.

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Toyota's move might also be an excuse to raise their prices. (Of course, they don't need any excuse or justification to do so, but with altruism so prevalent today, they might think such an excuse would help them.) I can almost hear a Toyota salseman: "gosh, I can't lower the price any; we have to help GM."

I also wonder if in the past maybe Toyota's practice of moving manufacturing to the US was partly a form of appeasement. They might have been (justifiably) afraid that the US government would try to limit their sales. Making some of their cars in the US would make it harder for the protectionists to pass laws that would hurt Toyota for the benefit of GM.

Aside from that, I can add testimony on the quality of Toyota's cars. Fresh out of college in the mid 1970's, I bought a new Toyota Corolla, which was the cheapest car they made at the time, and was made in Japan. I got quite a few comments from people who supposedly knew cars to the effect that "well, it's OK for your first car, but you can't expect those Japanese cars to last." (Once the car had 100,000 miles on it, the somewhat patronizing comments from people began, to the effect that it was probably on the verge of breaking down, and that besides, the "better people" didn't drive old Toyotas.)

As it turned out, I put almost 400,000 miles on that car in 24 years, during which time I never had to have it towed, never had any work done internal to the engine (i.e., never even a valve job or head gasket replacement), and its oil consumption was minimal. Stuff on that car lasted forever: over 200,000 miles on the original clutch, for example. That was one well-made machine. The men who built it did their jobs well.

.....

Another datum for the discussion: the other day the Wall St. Journal, said that the market share (US or North America; I don't recall) of the "big three" US-based unionized automakers had declined from 68% to 57% since 2000.

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Okuda advanced the idea of raising Toyota prices, not lowering them. Presumably this would make GM products more desirable in those markets where their cars compete with Toyota.

Other things being equal, I'd agree. But suppose the reason people are not buying GM cars is that the quality is not as good as other manufacturers. I have yet to own a foreign car that has not lasted at least 10 years. I like to drive cars until the repair or maintenance costs exceed their worth. The only Ford I owned lasted about 8 years and was undriveable. It's the only car I've donated to charity!!! Never owned a GM car. Price is not everything.

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I also wonder if in the past maybe Toyota's practice of moving manufacturing to the US was partly a form of appeasement.  They might have been (justifiably) afraid that the US government would try to limit their sales.  Making some of their cars in the US would make it harder for the protectionists to pass laws that would hurt Toyota for the benefit of GM.

I have heard that very notion advanced in the past, and it is consistent with the attitude that Okuda expressed now.

As it turned out, I put almost 400,000 miles on that car in 24 years, during which time I never had to have it towed, never had any work done internal to the engine (i.e., never even a valve job or head gasket replacement), and its oil consumption was minimal.  Stuff on that car lasted forever: over 200,000 miles on the original clutch, for example.  That was one well-made machine.  The men who built it did their jobs well.

That's pretty impressive. I seem to recall a similar story about an old Volkswagen Beetle, and when it finally died they had it pressed into a table!

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Price is not everything.

No argument about that. But, price is, undeniably, one major overall factor in car purchases. And, granted that people are purchasing GM cars (even though decreasingly), I think it reasonable for Okuda to presume that raising Toyota prices would make a competitive GM product more attractive.

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Like Stephen, I wouldn't necessarily attribute Toyota's proposed price increase to altruism, most especially in the current political climate. As a fan of Toyota automobiles, I am disapointed though my own Toyota Corolla has a lot of life in her yet. She's six years old and it wouldn't surprise me if she lasted at least six more (though I will probably trade up in a year or two). Haven't had to do anything other than the normal maintenance, unlike my adventures (and many times they were indeed 'adventures') with American cars.

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my own Toyota Corolla has a lot of life in her yet. She's six years old and it wouldn't surprise me if she lasted at least six more

Mine is 18 years old and still going as if she were new.

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This is judging simply by what I have personally observed over the last 20-odd years that I have been driving.

With few exceptions, friends & members of my family with American co. cars never made it to 100,000 miles without a major problem (i.e.: engine, transmission). Most never made it to 100,000 mi. at all; they just died. Those with foreign co. cars usually had them well past 100,000 & rarely had major problems.

I had a used Datsun 510 mini-station wagon when I was a teen; great for hauling around gear. Then I had a used Nissan pickup which I loaded with gear & toured around the country. The odometer broke around 270,000 mi. I kept track of milage though & estimate a minimum total of 500,000 mi. It's parked in my back yard & though it doesn't work very well anymore it does still run. In all it went through 5 clutch replacements but only one original transmission.

5 years ago I bought a 2000 Nissan Sentra. It will be paid for this fall; looks & runs like new. The only problems I had with it were: the radio stopped working & they of course immediately replaced it; then there was a recall notice about a small engine part. I had no problems due to the recall, but I took to the dealership with the notice I got in the mail & they changed the part while I waited.

I suppose I sound like a Nissan ad :D . But, I really do appreciate the value of their products.

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Beating up on GM quality... how "20th century" :D (ok, I'm mostly kidding). Seriously though, the U.S. "big three" have improved over the last 15-20 years. For instance, see the latest J.D.Powers survey. (The interesting graphs and tables are at the bottom.)

This survey is more focussed on recent purchases, rather than with longevity. Longevity is ultimately a price issue. For instance, if a 2000 Accord is worth $2,000 more than a 2000 Taurus, then I factor that into my price/value equation.

GM's big problem is their "legacy costs". Of these, the pensions are a bit of a problem, but not insurmountable. The cost that is really daunting is their retiree health care costs. When GM originally budgeted for their retiree health care costs, they made assumptions that are very different from what really happened. Health care costs have risen much more steeply than other costs and more steeply than most people expected.

This does not absolve GM for having taken on such a risk in the first place. Nor does it absolve the unions from forcing the company into such a position. Just yesterday, the head of the UAW repeated that he does not see any reason why they should accept anything less for healthcare. He pointed out that GM has been profitable for years. There are even strike threats (link). What he did not mention is that GM has over 50 billion in an unrecognized long-term liability related to to retirement healthcare costs.

The way Toyota might see the problem is: GM Healthplans (current employees and retirees) cover over 1.5 million U.S. voters. If GM goes out of existence, who will cover the 1.1 million of those who are retirees? Unfortunately, it is reasonable for Toyota to be nervous about the political fallout is GM were to fail.

Also, market share is not a primary. Toyota might be able to make more profit by charging more per car, rather than trying to get more market share by lowering prices.

(Disclaimer: I am a recent GM stockholder.)

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If one reads or acquires Dr. Gary Hulls' "The Abolition Of Antitrust", they can see even more evidence of why GM and others are having quality problems. In an article in the book, it states that it was widely known that in board meetings the members would specifically state not to make it to good, as to keep the FTC and the DOJ off their backs. So many companies went the route of not "being to good", as to keep out of this light. Just imagen how much further ahead American companies could have been compared to where they are, if not for this fear.

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Today (or at least as of last week), GM is the world’s #1 seller of automobiles; however, it does so at a loss. So GM does sell cars with greater throughput than anyone else, but it does not do it profitably. Meanwhile, Toyota is the #2 seller of the automobiles but the most profitable.

In response to declining fortunes, GM’s CEO and Chairman Wagoner has a misguided strategy that cuts expenses by reducing productive capacity with corresponding losses in revenue, so the company’s overall losses continue.

In response to the media projection that Toyota will soon become both the most prolific and profitable auto seller, GM’s Sales and Marketing VP Mark LaNeve said, “The chapter is over. Japan Inc. passed us up. It’s old news. Our mindset is—we’ve got to fight back.”

GM’s problem is not Toyota, but its own failed management. Instead of being focused on confronting issues of bureaucracy, labor relations, and taking advantage of opportunities to offer value to a changing marketplace, they are engaged in self-mutilation, shaking their fists at cruel fortune, and seeking quick fixes to get them through the crisis of the moment.

Why is Toyota prepared to increase prices? Because, GM has already announced that it plans to increase prices by eliminating incentives; therefore, Toyota can increase profitability without risking reduced sales as it would rather be #1 in profits and #2 in sales. So I expect these pricing changes will make Toyota financially stronger and continue GM’s financial decay.

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jwoodswce: That's not the GM-story I know. Do you follow the company regularly? If so, I'd be happy to be disabused of my ideas and sell now.

My brief take on GM is that Smith inherited an extremely troubled firm in the 1990's and slowly tried to set things right. His focus was on cutting GMs costs. They are now one of the most productive companies if one considers the direct costs. Much of this came from using GMs size as a strength. A large company will always have bureaucracy. Definitely unproductive. However, it also has advantages of scale that can make up for the bureaucratic inefficiencies. In the last decade, GM has eliminated lots of duplication of the same tasks that were happening around the world -- i.e., GM not using its scale.

The GM products were boring. They hired Lutz (ex-Chrysler). His influence is starting to show.

Their pensions and healthcare are huge problems. Wagoner is handling them as best he can -- which is by being extra conservative with estimates with every passing year.

I ask myself what I would have done if I had inherited GM in the 90s. I doubt I could have achieved anything near what they have done.

In GAAP terms, GM has been profitable for years. Also, they have been gaining market share in Europe, Latin America and Asia. Their U.S. losses of market share have been minor.

The only reason why market share is important to GM is because of their retirement costs.

As for raising prices, GM actually announced that anyone off the street can now come into a dealer and get a car for the Employee price.

GMs problem is that Toyota is so good. That does not mean that GM is not getting better.

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It's interesting to compare the recent financial performance of GM and Toyota.

(See GM_statistics and Toyota_statistics)

For example:

Profit margin: 6.31% for Toyota; 0.26% for GM

Operating margin: 9.01% for Toyota; 0.76% for GM

Return on Assets: 4.51% for Toyota; 0.20% for GM

Return on Equity: 13.60% for Toyota; 1.90% for GM

The ironic fact is that in its good days, GM was an engine of growth and responsible for quite a few new innovations. (The two that come to my mind immediately are the automatic transmission and the diesel-electric locomotive.)

If one wants to read about the management that made GM such a successful company in the past, a good book is My Years With General Motors, by Alfred Sloan, who of course was GM's CEO during its period of rapid growth and innovation.

All of which goes to show that in a capitalist economy, a successful company has to keep earning its success. Past greatness is no guarantee of even being around in the future.

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jwoodswce: That's not the GM-story I know. Do you follow the company regularly? If so, I'd be happy to be disabused of my ideas and sell now.

My interest and information about GM is all recent.

My interest began when media reports credited Wagoner promoting government solutions to address GM’s health care cost issues, and continued when their corporate bonds were downgraded to junk status.

For news regarding the company’s financial performance, I relied on recent reports in the Washington Post on GM losses and cost cutting efforts. [Of course, The Post is not the best source for news on the company, but in general I blog on Post reports and came case across the information in that effort].

In my own mind, my concerns about GM’s management were confirmed when I read Wagoner’s recent State of the Business speech[here].

I’m not anti-GM. However, based upon recent results, their planned actions, and the values projected or missing from their rhetoric, I am anti-Wagoner.

Regarding GM’s past success in controlling costs by eliminating waste, two of Wagoner’s four points in his turn around plan are focused on cost reduction. Based upon softwareGuru’s assessment of how productively these costs (other than health care and pension liabilities) are employed, it supports my conclusion that Wagoner is cutting the company’s productive capacity and its chances at growth, which explains how previous Wagoner cuts also reduced revenue.

Regarding pricing, the current discount program has several impacts: (1) it could generate needed cash flow, (2) it may reduce existing inventories, and (3) it attempts to condition consumers to expect that the quoted price is the price.

On future prices, Wagoner said “…we'll go to market with a total value proposition. This means, simply, going back to selling cars and trucks on the basis of the great value that they have to offer customers, with lessening emphasis over time on incentives.” While I agree with his statement, the only catalyst that I can see in his plan toward that goal is retrenchment by reducing inventory and production in an effort to firm up prices.

Regarding softwareGuru’s stake in GM, I do not offer stock advice as I am not qualified. However, I can offer management advice and recommend seeking new managers for the company.

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However, I can offer management advice and recommend seeking new managers for the company.
What key things would the new managers do differently?

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It's interesting to compare the recent financial performance of GM and Toyota.
GM-automotive is not close to Toyota. As I said, GM's "problem" is that Toyota is such a great company.

Nor is today's GM is a great company.

However, I do think that the last couple of CEOs have inherited a seemingly intractable problem. Instead of rolling over and playing dead, they have done a lot of good things. They may not be Hank Reardens, but they appear to be reasonably rational in their attempts to make something out of a terrible situation.

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What key things would the new managers do differently?

Good question. As I was writing those critical posts, I anticipated that I would get called upon to provide a solution to fix GM’s problems without compensation :D Give me a minute to think about it, and I will post something other than a complaint about GM management.

In the meantime, here are some quotes related to GM and it current situation from BTL [J.C. Collins and J.I. Porras, Built to Last – Successful Habits of Visionary Companies (New York: HarperBusiness Essentials, 1994).] In this study, GM was the comparison company to Ford, as the visionary company. The comparison companies were also-rans who are good companies but not great companies. As the authors explained, if the visionary companies are the gold medalists, than the comparison companies are either the silver or bonze medalists.

Now let’s look at a company at the other end of the spectrum [compared to Sony in ‘70s]—an aging giant in a desperate turnaround crisis.  In the early 1980s, Ford Motor Company found itself reeling, bleeding red ink from wounds inflicted during the repeated thrashings it took from Japanese competitors.  Pause for a moment and put yourself in the shoes of the Ford senior management team—a management team atop a company suffering from a $3.3 billion net loss (43 percent of its net worth) in three years.  What should they do?  What should be their highest priorities?

Naturally, the Ford team threw itself into a frenzy of emergency measures to stop the bleeding and keep the company breathing.  But it also did something else—something unusual for a team facing such a tremendous crisis:  It paused to clarify its guiding principles.  According to Robert Schook (who researched and wrote a book on the 1980s Ford turnaround), “The objective was to create a proclamation that clearly stated what the Ford Motor Company stood for.  At times the discussions…sounded more like a college class in philosophy than a business meeting.”  (We found no evidence that General Motors, facing the same industry onslaught and also losing money, paused like Ford did in 1983 to have fundamental philosophic discussions).  Out of this process came Ford’s “Mission, Values, Guiding Principles (MVGP).”  [bTL, p. 52]

Again, we don’t want to paint Ford as being in the same ideological league as Merck or Sony; it has a much spottier historical record on this dimension.  But compared to GM, Ford has been much more ideologically guided.  In fact, GM presents a fascinating case of how a clock-building orientation alone is not enough.  Alfred P. Sloan, chief architect of GM, clearly had a strong clock-building orientation.  But Sloan’s clock had no soul; Sloan’s clock was a cold, impersonal, inhuman, pure business, and totally pragmatic clock.  [bTL, p. 53]

I personally do not like the wording of the end of the last quote, but I think it does have an important identification in that GM’s focus on process it has lost sight of the valuer with whom they must engage in a trade.

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