Ford and GM – Are Costs The Real Problem?

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Jerry Flint from Forbes is saying that costs aren't the reason that GM and Ford are struggling.

Just seven years ago, in 1999, Ford held 24.8% of the market. That year, the company posted a record pretax profit of $11 billion and a net profit of $7.2 billion. Maybe Ford skewed those results by not investing enough in its future models, but they give you an idea of the company's potential. In GM's best year, 1997, it had 31.3% of the market and earned $6.5 billion.

One thing is clear: GM and Ford did not lose a million annual sales apiece because their costs were too high. Those sales were lost because the product, particularly the passenger cars, did not hit enough high spots. Until recently, Detroit's light trucks were quite successful.

The problem with getting profitable by cutting costs while losing sales is that this process never stops. I have witnessed numerous cost-cutting binges in which companies shut factories and slash overhead. The problem is that these steps do not stop the sales declines. Like a perpetual motion machine, the companies have to go back again and close factories, fire employees and cut costs.

He makes some good points, and I agree to an extent. The big picture is that the problems at Ford and GM are multifaceted. The auto industry is going through some major changes, and these are events every student of business should follow. The winners will ultimately be the companies that can stay lean, customer focused, and can keep experimenting to see what customers like.

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