Legacy costs hit GM and Ford where it hurts

THIS?week US carmaking giant General Motors ceded its place as the world’s largest auto manufacturer to Japan’s Toyota. The change in ranking marks the end of GM’s 76-year run as global leader in the car and truck business.

Last Wednesday (19 April) GM announced record first quarter sales for 2007 of 2.26 million cars and trucks with strong sales increases in Asia and Latin America. But the performance cannot overshadow the relative decline in fortunes of General Motors and fellow US carmaker Ford. Sales of Japanese and Korean cars in the US market overtook those from US manufacturers three to four years ago. While GM still sells the highest number of vehicles in the US, with a market share of 22.9% in the first quarter of this year, Toyota is snapping at its heels with 15.6% of US sales, ahead of Ford with 15.4%.

There are a number of reasons for the US manufacturers’ decline in their own heartland. One cause of their poor financial performance has been the burden of workers’ pensions and healthcare coverage, for which car firms are directly liable, unlike in Europe where the states are largely responsible for these costs.

These so-called legacy costs have been a major drag on US carmakers and have raised questions about their financial viability. As credit ratings agencies have downgraded their assessment of the auto behemoths’ ability to repay loans, the carmakers’ borrowing costs have risen.

This has also made it difficult for them to compete against Asian and European rivals, producing models on US soil to sell in the north American market.

"Pensions and healthcare costs are a huge legacy burden for north American carmakers when they have to compete with manufacturers in greenfield sites in the US’ southern states which are largely un-unionised", says Mike Steventon, head of automotive research at UK business services group KPMG. Workers at the new sites opened by non-US vehicle makers also tend to be younger, on average in their mid-30s, than those in the north-east, the traditional industrial heartlands of the auto industry.

Steventon adds that the big US firms are unable to shift production to the cheaper locations in the southern US as they are struggling with overcapacity at their sites in the north.

One of the other problems for the US giants is, paradoxically, the success of sales of the four-wheel drive sports utility vehicles (SUVs). For several years, these vehicles accounted for more than half of US carmakers’ sales. They benefited from being classified as light trucks so being exempt from a range of fuel efficiency and safety laws, but rising petrol prices, even from low levels compared to Europe, have prompted consumers to turn away from SUVs. The strong sales had made US automakers complacent and they failed to innovate with other models. In the meantime, non-US carmakers have been ready with vehicles like Toyota’s hybrid powered Prius, which respond to the growing, albeit limited, environmental awareness in the US and a more widespread desire to cut fuel consumption.

THIS?week US carmaking giant General Motors ceded its place as the world’s largest auto manufacturer to Japan’s Toyota. The change in ranking marks the end of GM’s 76-year run as global leader in the car and truck business.