_:n285680dc83da4c0586e388a3911ac7f3xb0
<http://schema.org/articleBody>
"+++dropcap\n\nWhen Chrysler announced that the private-equity firm Cerberus Capital Management would be acquiring it, in a complicated deal valued at $7.4 billion, market analysts and pundits argued that Cerberus’ most urgent task would be to control the cost of pension and health-care benefits that Chrysler owes current and former workers. These so-called legacy costs, the argument went, have made it impossible for U.S. automakers to compete with Japanese and German manufacturers, and have led to huge losses in the past two years. (In 2006, Chrysler had operating losses of $1.5 billion, while Ford lost $2.8 billion.) Recently, Lee Iacocca, Chrysler’s former chairman, [wrote](http://www.businessweek.com/autos/content/may2007/bw20070517_870308.htm) in *Business Week* that legacy costs “are crippling our big manufacturing companies.”\n\n+++\n\nOr so it seems. As Malcolm Gladwell [wrote](http:///archive/2006/08/28/060828fa_fact) last year, benefits for retired workers certainly are a major hindrance for the big companies that still offer them. The present value of Chrysler’s future health-care obligations—in other words, the amount Chrysler would need today in order to cover all of its future obligations—is around eighteen billion dollars. And things are worse for its competitors: together, G.M. and Ford are on the hook for close to eighty billion dollars in future health-care costs. (Toyota, by contrast, is almost entirely free of these burdens, at least in the U.S., because its workers are much younger and their benefits are much less generous.) But, while legacy costs help explain why American automakers are decidedly unattractive as investments, they’re only one reason—and not the most important one—for the automakers’ current struggles. If Cerberus is going to turn Chrysler around, it will have to do a lot more than pay less for health care.\n\nTo be sure, paying less would help. A 2006 report by the Harbour-Felax Group, a well-respected automotive-industry analyst, concluded that in 2005 Chrysler’s health-care costs were about eleven hundred dollars more per vehicle than Toyota’s. But even if that gap were closed Chrysler and other U.S. automakers would be far less profitable and would be growing more slowly than their foreign competitors. Ultimately, American manufacturers sell too few cars for too little money, and have to offer too many incentives—thousands in cash back or low-interest financing—on the vehicles they do manage to sell. That same Harbour-Felax report found that, on average, Japanese automakers’ profits for 2005 were twenty-nine hundred dollars more per vehicle sold in the U.S. than those of American automakers. And most of that profit comes not from lower production costs but from the Japanese automakers’ being able to charge more, because their cars are better designed and more reliable, and because their mix of products is smarter. Honda’s revenue per vehicle, for instance, was twenty-six hundred dollars more than Chrysler’s.\n\nThis disparity should not be news to anyone who’s bought a car or a truck in the past decade. Since 1996, the market share of the American manufacturers, the so-called Big Three, has fallen by almost twenty per cent; in fact, they no longer deserve the name, since Toyota now has a bigger share of the market than Chrysler and will likely soon surpass Ford. And, while Chrysler’s market share has not fallen as much as, say, G.M.’s, Chrysler has held on only by offering bargains, piling on incentives, and relying on discounted fleet sales to rental-car companies, businesses, and government. In 2006, Chrysler’s average incentive was twenty-eight hundred dollars more than what Toyota was offering. That’s two and a half times the difference in health-care costs. Even without legacy costs, Chrysler would be in trouble.\n\nWhy has Chrysler lost so much ground in the past decade? In part, it’s a consequence of chronic problems with quality, productivity, and penetrating foreign markets. (To be fair, the Big Three are more productive than they’ve ever been, but they remain less efficient than the Japanese.) Chrysler’s biggest difficulty, though, is that it is stuck selling the wrong kinds of vehicles. In the mid-nineties, Chrysler actually earned more profit per vehicle than any other car company in the world, almost entirely as a result of booming sales of trucks, minivans, and S.U.V.s. But, as I [pointed out](http:///archive/2002/11/25/021125ta_talk_surowiecki) a few years ago, the emphasis on S.U.V.s allowed the Big Three to ignore structural problems and encouraged consumers to look to foreign manufacturers first when they thought about buying a car. Now that oil costs almost seventy dollars a barrel, consumers increasingly want smaller, more efficient vehicles. And, with a few exceptions, notably the stylish 300, Chrysler’s cars have failed to attract consumer interest.\n\nCerberus, then, is going to have to do more than run a tight ship; it’s also going to have to figure out how to anticipate and react to fluctuations in consumer taste. That’s especially challenging in the auto industry, where change generally does not happen quickly: designing and building a new model takes years, retooling factories is complicated and expensive, and union contracts make it hard to shut down or trim back operations. In other industries, like steel, private-equity firms have restructured companies, cut back on (or, via bankruptcy, eliminated) pension and health-care obligations, and watched profits soar. But brand identity and cool design are not factors in the steel industry, so reducing costs and increasing production solves most problems. At Chrysler, Cerberus could slash health-care costs and still be saddled with a losing proposition. You could say that Chrysler is suffering from two different kinds of legacy costs: the cost of its obligations to past workers and the cost of its infatuation with S.U.V.s. Getting the first under control will help. But it’s only if Chrysler comes to terms with the second that it will flourish again. ♦\n\n"
<https://www.newyorker.com/magazine/2007/06/04/car-trouble-2>