Automotive suppliers breathed a collective sigh of relief yesterday when news reports leaked that General Motors had rejected plans for a global alliance with Renault and Nissan Motor Co. As I speculated in previous posts, the parties recognized that the proposed synergies were less than originally expected. (Specifically, Renault-Nissan was touting that the alliance would bring synergies of $10 billion, while GM estimated the deal would only bring $3 billion in savings.) GM also feared that joining up with Renault-Nissan would preclude an alliance with other automakers — such as joint-ventures with Japanese automaker Toyota. 

The news was welcomed by U.S. automotive suppliers who feared any global alliance would bring yet another round of aggressive cost-cutting and supply base rationalization. As noted in previous posts, GM and Ford both announced plans to reduce total supply costs by 2% - 3% this year. However, experts agree that the reprieve will be short-lived.

Reports of the end of GM alliance talks revitalized speculation that Renault-Nissan may link up with Ford Motor Co. In confirming past alliance discussions with Ford, Renault-Nissan CEO Carlos Ghosen reaffirmed his commitment to joining forces with a U.S. automaker. Yesterday’s run up in Ford’s stock seems to suggest that Wall-Street is betting that Ford is the likely candidate.

However, any merger for Detroit automakers will be difficult for one key reason: profits. Neither Ford nor GM have them. And Daimler-Chrysler CEO Dieter Zetsche is blaming financial declines on the company’s “poor peforming North American operations” (i.e., Chrysler). These factors make Detroit automakers a questionable investment — without some major restructuring.

To illustrate the profitability challenge U.S. automakers face, I pulled together a side-by-side comparison of beleagured GM and Ford operations versus high-flying and profitable Toyota. (NOTE: These are 2005 numbers. Just last month, Toyota pulled ahead of GM as the world’s leader in vehicle sales, widening the profitability gap even further.)

And it doesn’t look Detroit can close this gap anytime soon. A new report from the Harbour-Felax Group reveals that GM, Ford, and Chrylser make $2,400 less profit per vehicle than Japanese automakers, Toyota, Honda, and Nissan. This profit difference is usually chalked up to higher labor wages, health care, and pensions paid by Detroit automakers. However, the study reveals that there are a number of factors contributing to the (less) Big Three profit disadvantage:

• Product and manufacturing engineering – Japanese automakers are way ahead of U.S. firms in collaborative design and parts standardization and reuse. U.S. manufacturers also struggle to produce more than one vehicle platform per plant, pay nearly 50% more to build and equip factories, and have high costs for excess capacity. (Although Detroit is desparately making moves to catch up in these areas.)
• Labor practices — Production workers at U.S. automakers get more paid time off than their Japanese counterparts. Uncontrolled absences are also higher among workers at U.S. firms. In addition, workers at Japanese automakers get fewer breaks, but are more productive overall.
• Higher health care and pension costs– Detroit firms pay $900 to $1,400 more per vehicle due to higher health care costs for active and retired workers. Job bank programs (which pay union workers who have lost their jobs) and supplemental employment benefits (which pay union workers who are temporarily laid off) raise costs and force U.S. automakers to produce more vehicles than necessary — which leads to price discounting.
• Price discounting – To boost factory output (generally in response to the aforementioned labor rules), Detroit firms have relied heavily on discounted sales, especially to corporate fleets and rental agencies.
• Unfavorable currency exchange rates – Harbour-Felax calculates that Japanese automakers gain or lose $174 per vehicle for every one-point change in the yen rate. The depreciation of the yen in 2005 added $5.8 billion in profits for the Japanese automakers.
• Supplier relations – as noted in previous Supply Excellence posts, Japanese automakers have long embraced true collaborative and consistent supplier development methods and platform and systems standardization, giving them advantages in product innovation, supply assurance, and costs. By contrast, U.S. automakers have wavered in their approach to supplier relationships over the past few decades, alternating between an iron fist and a velvet glove. This has strained supplier relationships. Harbour-Felax adds that many U.S. auto suppliers suffer from the same ailments as the Big Three — poor manufacturing performance, weak leadership, and a lack of engineering process.

These issues portend continued turmoil in the automotive industry for years to come. By necessity, GM and Ford will enter into new global alliances — the only question is with whom. Regardless of who commander’s the wheel at GM and Ford, one thing is certain, big changes are afoot. New development, manufacturing, and supply management approaches will be mandatory to regain profitability. (And union concessions will also be in play.) The resulting mega-automaker will definitely not be your father’s Detroit.