Domestic Automakers Need to Get Radical

What’s the difference in value between General Motors, the world’s largest carmaker, and Toyota, which makes about 30% fewer cars? Huge, but not the way you may think. At current prices you could buy all of GM’s shares with a spare $22 billion. The totality of Toyota’s shares, on the other hand, would cost you a cool $140 billion.

In investor land, where product or brand loyalty counts for nothing, money is flowing to Toyota at a time when it is trickling toward GM, Ford and DaimlerChrysler. Investors are attracted to Toyota’s higher production efficiency, lower labor costs and lower debt. Meanwhile, market share for the three domestic automakers continues its free fall, prompting analysts and pundits to intone: ‘Hello Detroit? The lights are on but who, if anyone, is home?’

In 1960 GM had more than half of North America’s auto market; today it has between 27 and 28% of that same market. Ford, surpassed last year by Toyota as the world’s number two automaker, has seen its market share drop 3.5% in three years to 19.7%. And make no mistake about it, this erosion of market share hurts the bottom line big time: Each percentage point of U.S. share is worth about US$1 billion of profit.

Toyota, Honda, Nissan and other Asian carmakers show no signs of growing content with their current successes. Rumor has it that Toyota is aiming to dethrone GM as the world’s largest automaker by 2010. This might be a stretch, but then again, it might not be. In the past five years, Toyota sales have jumped 36% in North America and 54% in Europe. The company has achieved this with rebates and incentive packages generally half the cost of those offered by the domestic competition.

The response of GM, Ford and Chrysler to this shellacking has been, by and large, lethargic and unimaginative. Yet there are signs executives at these companies now realize the situation is critical.

There has been a concerted effort by GM, Ford and Chrysler to improve their domestic passenger car lines, a strength of Asian automakers, as opposed to just focusing on SUVs and pickups. GM has introduced three new sedans, the Cadillac STS, the Buick LaCrosse and the Pontiac G6, and will introduce a new crop of small sports cars, the Pontiac Solstice, next year. Ford launched seven new models this fall, including the redesigned Ford Mustang, the Five Hundred Sedan and the Freestyle crossover wagon. DaimlerChrysler’s chunky sedan, the Chrysler 300, has been a modest hit.

Getting the product right is absolutely critical. To stop the bleeding, however, domestic OEM carmakers need to acquire a greater sense of urgency, a “war room” mentality. Here are a few ideas:

Begin partnering with, as opposed to merely extorting, suppliers.

Fire all top executives over the age of 45. When you’re losing percentage points of market share every few years, nothing is too rash. Younger, empowered managers will be owners, not caretakers. They will also have fewer ties to the staunch, conservative management style that has defined domestic automakers.

Hire the competition: turn-around style managers are generally not subject to non-compete clauses.

Establish a worldwide, 5% across-the board cut in wages and benefits for both salaried and hourly staff. Domestic carmakers, and their unionized staffs, simply have to come to terms with the non-competitive nature of their cost structure.

These actions may be radical but they aren’t desperate. Doing the same old — that’s desperate. That’s giving up.