Wednesday, March 01, 2006
Price Gap More Like Price Chasm
It is known that Toyota vehicles sell for about $1500 more than GM products. Of course, GM sells more high price vehicles where Toyota sells more low priced smaller vehicles. This makes it hard to just go to the dealers and calculate yourself. There are three factors for this $1500 price gap: resale value and market perception. The first factor is a concrete fact where a consumer can actually see the benefit of buying a Toyota (of course I would tell the person trying to make money reselling a car to invest in mutual funds). The second factor is more abstract: It is a result of good marketing by Toyota and a vengeful market place. For example: "I bought a Ford Escort in 1980 and it really sucked, so I'm not going to buy any more American cars". The third factor is the perception that Toyota's cars have more quality and reliability, which has yet to be proven by J.D. Powers. Consumer Reports doesn't count because it's based on public opinion (refer to second factor above). So now that we see there is a $1500 price gap you would hope that GM could produce their cars at a $1500 discount. Unfortunately this is not true. Because GM is paying for 5 retirees per every 2 workers on an assembly line their costs are high. GM says in 2004 that its health care costs were $1,528 per vehicle and their pension costs were $695 per vehicle. This comes up to $2,223. Toyota's comparable costs are about $201 for healthcare and $50 for matching 401k, for a total of $251. This means that Toyota on a playing field is going to have a $3500 advantage. At best if GM works out a plan with U.A.W., they may be able to drop their costs to $1100 per car. This still leaves a gap of $2400 per car. Don't expect GM to start walking all over Toyota just because it has its labor prices under control. The only way that everyone is going to benefit (and when i say benefit I mean the US consumer, GM workers, GM retirees, and investors) is if GM can make headway in the original $1500 perception gap. This doesn't mean GM needs to go convincing every Camry owner to switch to an Impala. What it does mean is that when a GM customer goes into a dealership, they would think, "Wow I'm getting a great deal, and this is a nice car!" GM can then sell the car for more which would help resale value as well. If you take a look at other technology segments such as the Apple iPod and Google, my best guess on how GM would be to able to "WOW" the customers is to seduce them with engineering and features. Combine that with some top notch marketing and things could come around.