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.


ChrisS said...

The question is "Can GM create a sustainable competitive advantage?" They put themselves behind the 8-ball resulting in the 5 fully pensioned retirees for every 2 current employees (BTW, are those current employees working, or just collecting from the Job Bank? Regardless, what does that ratio become after the bailout and proposed cuts to headcount?).

In order to become profitable on a level playing field, they need to have a competitive advantage in the marketplace. They made the playing field unlevel for themselves, so it will take even more to succeed. I agree engineering plays a role, but GM will need to make continual investment in being the quality leader through engineering for this approach to have an effect, likewise, what response do you think Toyota et al will have to improved quality at GM? (I'm not making any statements about current GM quality, good or bad.) If Toyota is able to keep pace, this isn't a sustainable advantage, and thus will fail if this is the only approach.

GM's major advantage prior to Toyota and Honda building plants here in the US would have been cost. GM would not incur the high logistics costs of transporting vehicles across the Pacific Ocean that Toyota and Honda paid before. This is formerly what sales reps would point to for the cost difference between imports and domestics. Thus, the higher price in the marketplace would not equate to higher profit margin, just higher revenue. The lower price point to market would have generated higher volume of sales due if price elasticity was moderate to high for seemingly equal products. GM will need to change consumer sentiment (the customer is never wrong, even when he is) such that Joe Car Shopper believes the Toyota and GM cars are similar in quality, thus the cheaper car in the marketplace makes sense to buy. Attempting to approach Toyota pricing in the marketplace would come further down the road, once they can again start to leverage customer loyalty following their good experience from the GM they bought 5-7 years ago that they enjoyed with a reasonable cost of ownership.

Cope said...

Thanks for the comment, Chris. You are exactly right that GM (and the Other Two) are hiking uphill. I have heard that, aside from striving to produce the best and most desireable vehicles available for any given price, the Big Three are very conscious of how they are regarded by the buying public. I expect to see massive image-building efforts in the near future, and in fact GM has already publicly apologized for their past transgressions.
Whether or not these tactics work is something we'll have to wait to see.