Business Forum: Focus on short term hurt U.S. carmakers
Balancing current profits with future success is difficult - but Toyota has demonstrated that it can be done.
Today's anticipated announcement about the fate of Ford Motor Company's St. Paul plant, and the possible loss of nearly 2,000 Minnesota jobs, is a vivid reminder of how difficult it is for corporations to balance current profitability with future success.
Among U.S. auto companies, Ford has done the best job of changing to meet the future, embracing lean manufacturing techniques in the 1990s and producing the first hybrid SUV (the Escape). Yet it still finds itself cutting manufacturing capacity to reflect shrinking market share.
Ford's competitive position ranks somewhere between those of GM and Toyota. Toyota has become the benchmark for success in auto production and profitability. Its success in the hybrid market represents only its latest milestone.
In contrast, General Motors has traded its perennial status as a challenged corporate icon for that of a terminally ill giant. Recent talk of GM declaring Chapter 11 bankruptcy as a means of reducing its labor costs and pension obligations has become commonplace.
"Toyota's momentum just continues to snowball," Gordon Wangers, president of Automotive Marketing Consultants Inc. told Bloomberg News this month. "If I'm one of the guys running Ford or GM, at this point I'm deeply concerned about how quickly Toyota is accelerating."
Toyota, second only to GM in global auto sales, sold 2.26 million cars and trucks in the United States last year, an increase of 9.7 percent. According to Bloomberg News, Toyota's market value of $190 billion is about 18 times higher than GM's.
Hybrids are only a footnote in the 30-year war between Toyota and General Motors. Toyota's lean manufacturing expertise has played a much bigger role. But General Motors has demonstrated a consistent pattern of sacrificing the future to protect its current interests.
In the 1970s, GM ignored the subcompact market in favor of full-sized vehicles with higher profit margins. When gasoline prices rose drastically following the 1973 oil embargo, high-quality Japanese subcompact manufacturers went from niche players to preferred choices for many categories of car buyers.
In the 1980s, GM adopted lean production halfheartedly, even after it became clear that total quality management produced more reliable cars than Detroit's mass production model.
In the 1990s, GM's overreliance on SUV sales for its profits may be seen by history as its third strike. Yes, low gas prices made SUVs popular with U.S. consumers.
But the Energy Policy and Conservation Act of 1975, passed by Congress following the 1974 oil crisis, mandated higher average mileage. The SUV's low mileage was enabled by a legal exception for commercial light trucks. American manufacturers lobbied fiercely to maintain this loophole whenever Congress attempted to close it.
GM was captivated by its profitability in the SUV market, and was in denial that nearly every one of its car brands was no longer profitable -- a fact disguised by its huge size and complexity. Toyota also had success in the consumer SUV market, but did not lobby against closing the SUV mileage loophole.
Until recently, detractors would call attention to Toyota subsidizing the sale of hybrids by several thousand dollars per car. But in doing so, Toyota was priming the pump, creating a market in which it has become the leader and technology standard-setter.
In contrast, GM extended its below-cost "employee discount program" to consumers for no strategic reason but simply to move excess inventory.
To its credit, GM has invested large sums attempting to create revolutionary electric and hydrogen-powered vehicles. But these technologies are not yet viable. Toyota's success with hybrids, in contrast, integrated existing technologies and leveraged its lean manufacturing expertise.
Is there a capitalist case for alternative energy? The goal of a business is profitability (within the bounds of the law), not improving society. But Toyota's current success in the hybrid auto market suggests that companies that pursue incrementally "green" strategies may dominate the markets of the future.
There are, of course, critical social motivations for pursuing energy alternatives, chiefly environmental goals and national security. From a national security perspective, our reliance on foreign oil finances a range of toxic societies and ideologies. Ecologically, the scientific consensus continues to grow that industry is contributing to global warming.
But even if global warming is somehow a statistical glitch, common sense suggests that the rapid growth in China and India will strain the planet's resources. What happens when every family in China wants a refrigerator and car?
Hybrid cars have gone from curiosities five years ago to plausible alternatives in 2004 to a near-mainstream technology in 2006.
Toyota said in September that all its vehicles eventually would be run by hybrid gasoline-electric motors.
Toyota's operational excellence enabled it to be profitable in the present while making a small bet on the future.
That bet is now paying off. Companies that wish to dominate markets of the future should take note.
