Will Detroit Have To Raise Prices? (F, GM)

Includes: F, GM
by: Douglas McIntyre

In the current issue of Newsweek, Allan Sloan, on of the most astute business writers around, makes the case that the problem that GM has in its competition with Toyota is not just one of cost. It also results from not being able to charge as much for a GM (GM) car as a Toyota (TM).

That's pretty tough math. Sloan's numbers for legacy costs of pensions and healthcare may not be exactly right, but based on other estimates from financial institutions, let's say the deficit is over $2,000 in Toyota's favor. That's a very big gap for every car. And, Sloan's more important point is that GM gets, on average, $1,500 less than Toyota per car sold in the U.S.

This makes the problem Detroit has more than twice as tough. The UAW has not walked into any of the car companies and offered to cut the pension and healthcare costs enough to solve the cost problem. Getting parity with Toyota on that side could be a long and very hard fight.

And, it leads to a strange conclusion. If you loss money on most of the cars you sell, why not raise prices? The obvious answer is that sales will drop. It is an answer both obvious, and, most likely, true. However, perhaps that is the only way the Detroit car companies get "right sized" to use consulting jargon. There is no reason to believe that overall cars sales are going to rise rapidly in the next few years. The economy is pretty good now. In addition, a lot of car reviewers and consumers think Detroit's cars are pretty good products.

To some extent, these issues go hand-in-hand with the omnipresent specter of a Chapter 11 filing by one of the big Detroit car companies. If you want to see if you can survive, price your products at a level where you can make money. Frightening, but perhaps the only real answer to the Rubik's Cube puzzle of whether GM and Ford can ever operate as profitable, standalone businesses again.