Lowell's

The Big 3: Saving the industry

As the Big 3 executives have returned to Washington asking for emergency funds with gestures that are both symbolic (driving in hybrids and taking $1 salaries) and substantive (slashing the numbers of dealers and brands), the question remains: Should we bail out (or invest in) the auto industry?

In my last Big 3 post, I said that I couldn't support a bailout.  But that was before the execs got flamed for their corporate jets and came back to congress in hybrids with business plans...  What do I think now?

I'm really disappointed. 

While many of the figures in the business plans are truly staggering (GM plans to fire up to 35,000 employees), my reaction to the plans is this:  Not enough. Not nearly enough.  My criticism flows along three lines of thought: 

1. There appeared to be no cooperation among the Detroit automakers in drafting their plans, especially with regard to an inspiring "moonshot" style project to create a new generation of vehicles.
2. There was little to address the huge overhang of retiree obligations which created much of Detroit's disadvantage to begin with.  The labor concessions the UAW appears prepared to accept are minuscule by comparison to the ongoing burden the retirees pose.
3. The measures outlined in the plans -- while aggressive on the surface -- offered little in terms of real, structural changes to the way the Big 3 operate.

The current proposals still smack of "life support" rather than a true plan for vibrant growth.

But rather than sit back and take easy potshots at the executives, I thought it might be more productive to outline what I had in mind.  So (using my beloved GM as an example), here is my not-so-modest proposal:

Scale Back the Brands.
GM has proposed scaling back or selling their Hummer, Saab, Saturn and (maybe) Pontiac brands -- leaving them with Chevrolet, Buick, GMC, and Cadillac.  That is still 2 brands too many.

They should pour all mainstream car and truck efforts into the Chevy brand and clearly distinguish luxury vehicles with the Cadillac brand.  Just drop the rest.  To paraphrase John Moore, if Pontiac went out of business tomorrow, would any of us really care?  Buick?  GMC?

I can hear the objections: But Pontiac produces iconic performance vehicles like the Firebird and Grand Prix and GTO, right?  Oh, they don't anymore?  I think the nation will be OK without the G6 or the Torrent, as well-made as they might be...  The Buick brand is surprisingly strong in China, but the appropriate Chevy or Cadillac models should be rebadged as appropriate for that market.

Concentrating on two brands would rid GM of the ridiculous 8x duplication they have today in product development and marketing.

(Ford should drop the Mercury brand, and Chrysler should just become "Dodge" and focus exclusively on trucks and minivans.)

Revamp the Dealer Model.
GM's dealer network is broken -- too many dealers chasing too few car sales, and doing so in the wrong way.  They've proposed cutting nearly a quarter of their dealers, but they should cut closer to half of them. 

One way to speed the process?  Get rid of dealers who won't accept the following: All dealers must accept a flat pricing model with no typical dealer shell games.  By adopting the major innovation that Saturn offered to the market (and which GM is currently offering through their "Red Tag Event"), GM might be able to offer a competitive difference in the notoriously awful purchase experience.  Doing so may draw buyers back to the showroom.

They'd also begin to align the dealer's interest with that of the customer.  The dealers that still want to use smoke and mirrors to drive their profit?  Get rid of 'em.

Moonshot.
Establish a semi-public National Automotive Technology Institute (or some such entity) with the explicit objective of crafting an inspirational next generation of smarter, more desirable, more fuel-efficient vehicles within the next 3 years. 

Force the Big 3 to contribute their energy and talent to the venture.  Connect the Institute to the best private- and public-sector initiatives on energy, artificial intelligence, and vehicle design. 

Motivate the best and the brightest individuals to develop a true national energy program in which we 1) drastically curtail petroleum use, and thereby 2) stop funding despotic regimes who dislike (or terrorize) America the most: Russia, Venezuela, Iran, and Saudi Arabia.

How to fund this?  Any dollars used to fund continuing operations at the Big 3 must be matched dollar-for-dollar with funds for the Institute.

Scale Down Retirees.
The one problem that there is no real solution for is the retiree obligations.  Both the UAW and Big 3 management colluded for years to create monstrous future pension and health obligations for retirees that both sides knew was untenable. 

They are both to blame.  So they both must pay. 

First, the retirees must accept significant reduction in their benefits.  As painful as that might be, it is better than the alternative of no benefits if the Big 3 go belly up.

Second, the company must meet what remains of its obligations to the retirees.  But everyone knows that they can't afford even a reduced set of obligations.  So, in exchange for a federalization of the retirement programs (as well as in exchange for a cash infusion), the companies must give up a significant chunk of their equity to taxpayers, to ensure that they are an ongoing concern.

As long as they abide by the other elements of this not-so-modest proposal, a public investment in the Big 3 should turn profitable within the decade as Americans (and the rest of the world) come back to attractive, affordable, and fuel-efficient American cars.

Have I been over the top?  Perhaps... But really saving the auto industry will not be accomplished through bland half-measures.

[where: Washington, DC]

Driving off a cliff

U.S. auto sales drove off of a cliff in November.

The numbers from Autodata show that the industry as a whole is down almost 37% from last November, and GM and Chrysler are especially hurting, with sales down 41% and 47%, respectively.  Toyota fared better than the industry average, but still lost a third of its sales from last year.

Industry sales have been down all year, but the November numbers were especially shocking. 

In this post, we'll look deeper into the numbers to see what they say about the industry and what they say about the market.

Cars and Trucks
One of the things that jumps out about the sales figures is just how dependent the Big 3 are on truck sales.  Combined, the Detroit automakers derive two-thirds of their sales from light trucks.  Chrysler sells three times as many trucks as it does cars. 

Toyota, Honda, and Nissan get most of their sales from cars.  In fact, I was surprised to see that the "Japan 3" sell more cars in the U.S. than the Detroit 3.  Toyota has the largest share (21%) of cars in the U.S. market.

So when gas prices topped $4 per gallon earlier this year, the sales of gas-guzzling trucks fell off dramatically.  Because of their dependence on trucks, Detroit suffered far more than the Japanese and European automakers.

Essentially, customers shifted their purchase patterns to cars when gasoline prices became a burden, and that helped Japan at the expense of Detroit.

November was different
But what happened in November was fundamentally different from what happened earlier in 2008.  In November, car sales and truck sales both declined at about the same rate.  The truck / car differences we described above disappeared (along with $4 gas).  In November, all of the automakers were hit pretty hard.

So what is going on?

November is different because customers stopped buying vehicles, regardless of whether they were a truck or a car. 

In most of 2008 vehicle purchasing decisions were affected by fuel economy -- and the market shifted to buying cars from buying trucks.  In October and November, purchasing decisions were affected by the overall economy -- and vehicle buyers disappeared. 

All of this has amounted to a fatal one-two punch for Detroit.  Wobbled by disappearing truck sales when gas prices were high, the knockout punch for the Big 3 came when the overall market dried up.  While the economic downturn has hit all of the automakers, Detroit has crumpled under the weight of its legacy burdens.

As the Big 3 executives go back to Washington (this time driving hybrids instead of riding in company jets) to ask for emergency funds, I'm still wondering: What will change?

The Big 3: Thoughts on a bailout

No matter how far you've gone down the wrong road, turn back.  (Turkish Proverb)

In my last post, I chronicled what I think has caused the collapse of the American auto industry: heavy retiree costs; poor timing; and the current economic slump.

As auto executives went to Capitol Hill with hat in hand (after stepping off of their private jets), the question of the day is: Should we bail out the auto industry?  I'll outline my thoughts on that issue here, and would be interested in what you think.

I feel that I pay taxes to contribute to the general well-being of the community, state, and nation (which, ultimately, will pay me back).  My hope is that those tax dollars are allocated to the beneficial initiatives that one person or business cannot afford alone: things like roads and infrastructure, national defense, police and fire protection, and the like. 

I also hope that some dollars are dedicated to the cooperative "moonshot" projects that make our country, community, and industry great.  These include things as grand as the Marshall Plan to rebuild Europe after World War II or actually going to the moon in the Apollo missions, as well as more pedestrian initiatives like DARPA (the defense research agency which spawned the internet and many other technology advancements) and SEMATECH (the government-sponsored semiconductor industry consortium which helped build huge international advantage for companies like Intel and AMD).

So is bailing out the auto industry (and its suppliers and all of their employees) worthy of such "moonshot" status?  I think that it is... IF...  It is in the national interest to preserve the domestic automakers.  The ripple-effects of the collapse of these companies, the loss of so many jobs, and the subsequent social and economic ramifications could push the overall economy into a state of depression.

But....

While I think that preserving the American auto industry is a potentially noble pursuit (worthy of my tax dollars) and I think that it could contribute to the well-being of my country and community, I haven't heard a plan to preserve the industry. 

I don't think a bailout is warranted until 3 basic questions are answered:

1. What is going to change?  Before we can devote tax dollars to companies which are burning cash at record speed, we need to know what is going to change...  None of the executives or labor leaders have offered any ideas on why a big pile of money will change their pattern of losing it.  A government bailout won't help until the companies do business differently.  And the Big 3 haven't talked about doing business differently.
2. Where are the cars?  Where are the market-changing cars that the market wants?  Until Detroit has innovative and desirable vehicles which people will buy, they won't be economically viable.  The Big 3 executives have offered lots of promises, but not much evidence that such vehicles are ready to go.  And there is no talk of an inspiring "moonshot" project to make Detroit vehicles worth buying again.
3. What happens to the retirees?  Detroit is struggling in part because of its massive pension and insurance obligations -- much of it for retirees.  How are they going to restructure those obligations without a) unloading them on taxpayers, or b) depriving the retirees of promised benefits?  So far, I've heard nothing productive in this regard.

A bailout will fail if all it does is prop up an already-failing industry.  Until the companies and the congress talk about permanently and productively changing the way the industry operates, a bailout just staves off the inevitable. 

Detroit has been on the wrong road for 35 years or more, and they're running out of fuel.  We shouldn't give them more gas until they change where they're headed...

[where: Detroit, MI]

The Big 3: Why they are failing

I grew up outside of Detroit, and most of my family still lives up in Michigan.  My grandfather enrolled in General Motors Institute (now Kettering University) on the GI Bill after fighting in World War II, and eventually became an executive with GM.  Many of my aunts and uncles still work in or around the auto industry.  Growing up, my family only owned GM vehicles: My first car was a 1971 Oldsmobile Cutlass which I drove to 200,000 miles.  My second vehicle was a 1971 Firebird, which I still have.

I love GM (even though I'm committed to Toyota now).  And I love Detroit (and all of their pro sports teams - Even the 0-10 Lions.)

So it deeply saddens me to have watched the slow, inexorable slide of the American auto industry as it now approaches complete collapse and its executives beg for bailouts from Washington.  It is a tragedy not only for the formerly-huge companies, but for all of the employees and suppliers and employees of suppliers in Michigan and across the country.

There are probably hundreds of factors in the Big 3's decline.  Here are three which I think are most important:

• Pension, Insurance, and Retirement: Throughout their history, the automakers increased pension and retirement benefits for their employees to avoid boosting wages.  This allowed the companies to skip the short-term pain of paying more for labor, but the long-term effect was disastrous: Many employees had 20- or 25-year careers with generous 40-year retirements paid by the company.  Multiply this by tens of thousands of retirees, and the financial obligation weighs heavily on each car sold.  GM reports that health care obligations alone cost them over $1600 per vehicle.  Toyota's costs are closer to $200 per vehicle.
• Wrong Vehicles, Wrong Time: Something happened to the cars Detroit produced around 1973.  The vehicles got bigger, less powerful, and less well-built -- all just as the energy crisis started to hit.  For the past 35 years, American automakers have had a horrible sense of how customer needs changed.  Their responses have typically been "too little, too late".  In the 70's they missed the need for fuel-efficient cars.  In the 80's and 90's, they skimped on quality as Honda and Toyota offered the world's most popular models.  In this decade, they poured all of their new-product efforts into the highly-profitable SUV and big truck segments.  Then gas hit $3 and $4 a gallon.  Detroit then scrambled to show it planned high-MPG "green" vehicles (like the Chevy Volt) by 2010 to 2012, while Toyota and Honda had well-proven and popular technology in the marketplace.
• The Soft Economy: As the overall economy has weakened, people are buying fewer cars.  The freeze-up in financing has compounded the automakers' ability to entice customers to buy their vehicles.  As sales across the industry have fallen off, the Big 3 are in the weakest competitive position.

These factors, when combined, account for the implosion of the automakers.  As 1) Detroit has failed to deliver what the market needs, and 2) the overall market shrinks -- resulting in a 45% sales drop in just one year for GM -- the industry can't afford to pay for the massive obligations represented by its retirees.

So that's my Cliff Notes version of what's wrong with the Big 3.  In my next post, I'll explore whether a bailout of the industry makes sense.

(P.S. If you are interested in an extended discussion on GM's pension obligations, check out Roger Lowenstein's While America Aged, which devotes about a third of the book to how GM got into this situation.)

[where: Detroit, MI]