Save a Penny, Lose a Dollar

Penny pinchers have been dominant forces in the automotive industry since its earliest days.

Like Benjamin Franklin, their creed is "a penny saved is a penny earned," and little else matters.

That may be good advice if you're spending foolishly, or if you're focusing only on your own turf and not the whole. You can save, for example, by using cheaper materials for an instrument panel or by selecting window cranks over electric windows.

But if your direct competitors use better, higher- cost materials that are more pleasing to customers, or automatic window lifts where customers have come to expect them and you fail to do so, you may well lose in the marketplace. Then you're forced to pay the price in the form of rebates and other incentives. Save a penny, lose a dollar.

I've seen numerous examples of this kind of thinking. My favorite took place in 1981 when Ford Motor Co. introduced a sporty coupe version of the Escort called the EXP, and its Mercury LN7 twin. It wasn't a bad design, except for the frontal treatment: A pair of bulging headlamps jutting out from the fenders, looking very old-fashioned, and mindful of a frog's face.

I asked a Ford official why sleek hidden headlamps weren't chosen, clearly a design more befitting sporty cars like the EXP and LN7. "We thrifted that front end," was his simple, wry reply. The coupes started out fairly well, generating a combined 72,719 sales during their first year. In 1982, however, they sank to 52,128, dropping like a thud to 24,288 in 1983, rebounding to 31,213 in '84, and then trailing off to 17,927 in '85. The EXP remained in production until 1988, but from 1986 on it was lumped together with total Escort sales, clearly an admission it was going nowhere.

Ford's penny-pinching wasn't entirely to blame, of course. Originally designed as a 2+2, Ford - citing safety standards - eliminated rear seating, and wound up with a 2-seater, a configuration that limited its appeal.

In the end, no amount of marketing cash could have saved the little coupe.

And that's my point: Automakers spend billions on rebates and incentives to move sluggish-selling cars and trucks: $500, $1,000, $1,500 and even $2,000 per vehicle are not uncommon these days. Market conditions often trigger rebate wars, of course; everybody is trying to move the iron.

But what if some of this marketing and advertising cash were to be invested up front during product development, where penny-pinching has become both an art and science that has everyone from engineering, design, purchasing and manufacturing zeroing in on sometimes minute amounts?

It's as though separate companies are involved: On one side are the misers with their little coin bags tightly drawn shut, on the other big spenders with fat wallets who may pinch millions but certainly not pennies.

And why? Because in many instances the vehicles they are charged with moving - you might say at any price - can't compete due to excessive scrimping up front.

Now don't get me wrong. I think it's vital to eliminate waste, run lean and otherwise battle costs wherever that makes sense. And sometimes it's necessary to keep an assembly line moving for other reasons, producing excess inventories that must be cleared.

But during those early stages when the products are being developed for an increasingly finicky buyer in a highly competitive market, doesn't it also make sense to consider what it will cost you down the road if you don't deliver what customers want - or indeed demand?

Take the two best-selling cars in the U.S., the Toyota Camry and Honda Accord. Neither one is a glamour puss, but you can scrutinize them down to the most inaccessible bolt and have a tough time finding any evidence they have been "thrifted." Customers have come to expect pleasing, if not radical, designs and quality engineering and manufacturing - the up-front stuff - as given in Camry and Accord, and are willing to pay the price. Rarely is either car heavily incentivized, saving Toyota and Honda tons on the marketing side. And the halo they provide over other models also is a boon to both automakers.

They are glowing examples of the total cost equation: Do it right at the outset, even if it costs a bit more, and save down the line.

General Motors Corp.'s Saturn subsidiary was founded on this principle. The idea was to build good cars and focus on developing an exceptional relationship with buyers. After nearly 10 years, it has worked quite well. In a crowded, competitive small-car market, however, even Saturn has been forced to offer incentives.

"Pricing is terrible, and marketing costs (rebates et. al) are soaring," says Merrill Lynch automotive analyst John Casesa. "But you can't get away with nickel-and-diming consumers anymore. A vinyl roof is not enough; you've got to have real content."

That's another way of supporting the view that by changing their penny-pinching mindset in the early stages, automakers just might save big bucks after the car-haulers roll. Ford, for one, apparently now understands how this can work.

"They've put an awful lot of content in the (new) Focus," says Mr. Casesa. "The market changed faster than most people expected because the Japanese came in with more content."