Friday, May 02, 2008

Bad management in Detroit 

The American automobile makers are, for the upteenth time in my adult life, caught slack-jawed and flat-flooted by entirely forseeable and forseen changes in the market:

Soaring gas prices have turned the steady migration by Americans to smaller cars into a stampede....

The trend toward smaller and lighter vehicles with better mileage is a blow to Detroit automakers, which offer fewer such models than Asian carmakers like Toyota and Honda.

I am 46 years old. It has been obvious to me since I was 12 -- 1974 -- that we would go through at least temporary periods -- perhaps lasting many years -- of very high gasoline prices. Six years after the first Arab oil embargo Chrysler still had not figured out how to compete, and a Democratic president and Congress bailed it out by putting the full faith and credit of the United States government behind its debts and buying thousands of Chrysler vehicles for the American military. Back in 1979, it was reasonable to think that, automobile design cycles being what they are, the car industry would need a good decade to adjust to the new fact that very dangerous and greedy people now controlled the marginal production of the world's oil.

Today, thirty-five years after the first Arab oil embargo, it is hard to believe that there is any explanation for the competitive failure of Ford, General Motors and Chrysler other than rank incompetence.


By Blogger The Leading Wedge, at Fri May 02, 08:39:00 AM:

Same age as you and have had the same thoughts since I was, well, about 12. I decided long ago, however, that the U.S. automakers won't ever get it or, if they do, it will be too little too late. It is really incomprehensible. Luckily, there are plenty of other good cars to choose from. From a Subaru owner.  

By Anonymous Anonymous, at Fri May 02, 09:41:00 AM:

Perhaps the money spent on R&D has a lower return than that spent on lobbyists.

But it's probably more a matter of corporate culture. How many of the well-educated elite in this country would aspire to work at a place like Ford (aside from management level)? Nowadays, the smart and energetic are drawn to companies like Google or Goldman Sachs, not old-world manufacturing. Contrast this with Toyota, which would surely be on the list of most highly prized places to work in Japan.  

By Anonymous Anonymous, at Fri May 02, 10:07:00 AM:

At one level it is hard to disagree with Tigerhawk. On another level, I think TH underestimates the difficulty of making the necessary transformation at the formerly Big Three.

Though technically for-profit corporations, they became de facto inhabitants of a no-mans land between corporation and quasi-governmental authority. Because of their huge employment, the collective bargaining history, and (less obviously) their large and politically-protected dealer networks, Detroit was subject to constraints not even the steel industry had to deal with. A visionary corporate leader devising the right strategy would likely have failed in execution.

GM for example closed one excess division, Oldsmobile, at a cost of billions and years of delay because entrenched dealer interests fought this modest transformation.

As for the product, low fuel prices left buyers strongly preferring large and wasteful vehicles. Ford and GM made some attractive cars in Europe, American buyers were not interested as long as fuel prices were low. Only when fuel prices spike does demand then rapidly shift away from the previous cash cows.

Given high labor and benefit costs and the difficulties in paring capacity and costs, in the intervening years Detroit had to make what sold today, not what might sell tomorrow in a different fuel cost world.

Yes, they have screwed up, but it would take external shocks to change the balance of power between company, labor, government regulators, and independent dealers to allow a strong leader to actually execute a sound plan. We may be seeing Alan Mulally finally having the window of opportunity at Ford. If GM could shutter Pontiac, Buick, GMC, and Saab (and maybe Saturn) by snapping their fingers, they stand a chance as well. Chrysler is a lost cause, however.

Dan D  

By Blogger Dawnfire82, at Fri May 02, 10:13:00 AM:

Also, it wasn't that long ago when Americans were buying increasingly gigantic trucks and SUVs. When I was a kid, my mom's Jeep Cherokee was a big car. Now, that jeep could fit inside the beds of a whole host of trucks.  

By Anonymous Anonymous, at Fri May 02, 10:24:00 AM:

"Trucks" and regulated differently than "cars". Dan D has it right when he says that car companies are "de facto inhabitants of a no-mans land between corporation and quasi-governmental authority". GM builds a mini van in China that gets 43 miles to the gallon and costs $5,000. Building that vehicle in the US would be impossible, because of environmental concerns, unions, safety regulations and a host of other reasons, none of which have anything to do with the quality of GM engineering or manufacturing methods.

One additional point that distorts causes our situation to stray from the norm. The United States is still the worlds 3rd largest producer of oil. Part of our problem exists because we are the only major manufacturing country that has historically had large reserves of oil.  

By Anonymous Anonymous, at Fri May 02, 10:25:00 AM:

Sorry- "trucks are regulated..."  

By Anonymous Anonymous, at Fri May 02, 10:55:00 AM:

Today, thirty-five years after the first Arab oil embargo, it is hard to believe that there is any explanation for the competitive failure of Ford, General Motors and Chrysler other than rank incompetence.

Incompetence? No. For nearly twenty years gas was cheap and the market in the US demanded ever bigger SUVs as status symbols. Now the market demands small cars, and countries which already produce them for their own markets are ready to fill the gap. But the gap will soon close when the American economic system shifts gears (no pun intended) and steps up with homegrown hybrids and electrics, because the market demands that now. In fact, the gap will close faster here than would be thought possible in the more planned economies overseas.  

By Blogger TigerHawk, at Fri May 02, 11:16:00 AM:

But look, the cheap American fuel and the demand for trucks here and the strong dealer protective laws and the unions did not stop the Big Three from becoming serious competitors outside the United States. If they had invaded the rest of the world when the Japanese and the Europeans started gunning for us, they would have much higher quality cars with much better efficiency notwithstanding the SUV era in the United States. The problem is not really that the Big Three are not competitive in small cars. It is that German and Japanese car companies are competitive here notwithstanding labor costs every bit as high as ours, but Big Three cars are not competitive in Germany and Japan. We lost because of management that was too damned focused on a US customer base of shrinking importance and declining loyalty.  

By Blogger Cardinalpark, at Fri May 02, 12:06:00 PM:

Actually, TH, on your latter point, that's not quite fair. And I buy many of Dan D's excellent comments. Consider for example that non-US markets in the post WWII period were exceedingly protectionist -- with our tacit compliance -- in an effort to rebuild their economies. Because protectionist legislation is inherently brittle, it wasn't gotten rid of in the 60's and 70's, when might of been a fair time to allow US companies to compete.

Consider also that the US, for similar reasons, supported in general undervalued European and Asian currencies to the US dollar to spur those devastated WWII economies. We derived great consumer and economic benefit from a strong dollar, but to the detriment of the auto industry, especially when coupled with foreign protectionism.

I would respectfully suggest that certain auto industry leaders in the US actually were quite effective. Iacocca, Lutz, Red something or other (ran Ford during the Taurus era), all did a commendable job, especially as high cost producers.

The auto industry in the US naturally gravitated to a market - large SUVs and pickups - where they had a dominating competitive advantage and customer perceptions of superior product. Unfortunately, because they were also operating as government contractors, they could not reduce capacity and shut down non-competitive products and facilities. They ran for full production and employment, not maximum profitability. The success they generated in certain business (big cars and trucks and finance) masked their massive lossmaking capacity.

But government and union contracts and defined benefit pension liabilities prevented capacity reduction. And if you have to carry massive lossmaking capacity, you eventually die.

SO I think you are unfairly rough on auto mgmt. They are no better or worse, on average, no more or less competent, than any other mgmt in my view.  

By Blogger Georg Felis, at Fri May 02, 12:15:00 PM:

Gas prices are only A factor in buying a car, not The factor.

Recently I compared my ’99 Taurus to a friend’s Prius and we came to the conclusion that it would cost me about four times as much in car as I would save in gas to switch. In other words, gas will have to hit $12+ a gallon to make it even close to a break-even proposition for me to switch cars for something without a trunk and no real space for the kids. Think I’ll be driving my “Ivory soap” car a few more years.  

By Anonymous Anonymous, at Fri May 02, 01:57:00 PM:

GM and Ford were very competitive in Europe, competing on that market's terms, holding between 12% and 15% of the market, each of them.

Remember that Europe and Japan markets were defined by their respective societies, and the widespread scarcity they faced, especially post-WWII. The American market is shaped by a widely diverse continent, and a psychology of optimism and opportunity, rather than scarcity.

Much of this country is rural and rugged, where I live most people own trucks. They could probably get by with a high-MPG car like I do, but when the nearest repair shop is a long ways off and many homes are off the beaten path, the appeal of crude, heavy trucklike vehicles is obvious.

What is crazy is the suburban and metro-area types piggybacking on the functional needs of the dispersed rural population and all heading off to the mall in Tahoes and Tundras and conversion vans. Those people will only respond to price signals from high-priced fuel.

The Detroit automakers have to engineer and build tough trucks for the country cousins anyway, and in times of low fuel prices they could get profitable volume selling to the metro-area folks who would more rationally be served by world-competitive fuel-efficient cars.

Toyota's home base is fuel-sippers, they learned over many years to also provide the North American market with thirsty rugged trucks and vans. GM and Ford worked in the opposite direction, but had to establish offshore subsidiaries to capture Ford Europe and Opel customers.

Structurally, Toyota was in a much stronger strategic position. If fuel prices rose, events played to their strengths, while GM and Ford are screwed.

If prices remained low, Toyota and Honda are profitable enough at home to afford to develop Tundras and Odesseys and Pilots and Lexuses. But smaller cars are less profitable, so with low prices GM and Ford can't afford to develop good small cars in North America, the cash flow just isn't there.  

By Anonymous Anonymous, at Fri May 02, 02:18:00 PM:

None of the commenters above have noted the obvious: Detroit carmakers can't survive by making and selling small cars. Detroit bears a burden in terms of labor cost on a per car basis. That means that it makes a lot more sense for them to sell big expensive cars, e.g. SUV's, than it does to sell small cheap ones.

That doesn't mean that Ford and Chevrolet management isn't at fault; it is. But the decisions that allowed the work rules and compensation plans in place now were made years ago.  

By Anonymous Anonymous, at Fri May 02, 03:08:00 PM:

at the end of the day, the management of these companies (gm, ford, chrysler) have profound and immense contempt for their customers. they (management) have no interest in cars per se, and it shows. where is the american equivalent of a bmw 3 series, or a honda accord? they don't exist and i can't see any signs that they ever will. given that the existing american auto makers are in terminal decling, and the immense capital (and knowledge) costs of starting a new auto company, this seems like a market the u.s. will soon be abandoning.

to me, this issue is a symptom of the growing disconnect between the "over class" and the rest of the population. the same thing is happening in hollywood.  

By Anonymous Anonymous, at Fri May 02, 06:33:00 PM:

Short term profit over long term market penetration strategies are also to blame. Overseas manufactures have been using Lee Iacocca's Mustang strategy against us for decades. Produce a good, sexy car for the youth and they will come back and buy a station wagon from you years later.  

By Anonymous Anonymous, at Fri May 02, 09:18:00 PM:

There is no reason to have forward looking vision and innovative products if you are bailed out by the US government and the taxpayers when you get in trouble.

In the early 70's the big three manufacturers protested the inexpensive imports from Germany and Japan. The Ford bosses said that they couldn't beat Toyota and the other Japanese manufacturers because Ford needed at least three new paint shops that could use robotic paint machines. Each of those paint shops would run about $50,000. Congress took the bait, hook, line and sinker imposing heavy sanctions on German and Japanese imports. That same year Ford paid its junior executatives individual bonuses of $50,000.


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