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Gold Index
Thoughts on Automakers
There was a time when the phrase "What is good for General Motors is good for
the country." With the rest of the country now "facing the music" for the era of
living on credit, it is probably time for the automobile industry to do the
same. Here are some thoughts.
U.S. Automakers Can Execute
While the media tends to portray the U.S. manufacturers' problem as building cars "no one wants," that portrayal is more of an emotional angle designed to make a story more appealing.
As an example, consider this list of the top-selling cars in the U.S. for 2008 (through end of November, total of 11 months). (Source: car companies)
| Company | Model | Units | MSRP | MPG |
| Ford | F-Series | 473,933 | $21095 | 16 |
| Chevrolet | Silverado | 431,725 | 24460 | 17 |
| Toyota | Camry | 411,342 | 18570 | 25 |
| Honda | Civic | 352,248 | 14810 | 29 |
| Honda | Accord | 350,638 | 20360 | 24 |
| Toyota | Corolla/Matrix | 328,878 | 14045 | 29 |
| Nissan | Altima | 252,357 | 18620 | 26 |
| Chevrolet | Impala | 244,692 | 21975 | 22 |
| Dodge | Ram | 229,222 | 22150 | 16 |
| Ford | Focus | 184,152 | 14395 | 28 |
The most striking thing about this list is that pickup trucks with poor gas mileage are more than one-third of the volume of the top 10 selling vehicles.
When a politician argues that Detroit's problem is that they aren't building fuel-efficient small cars that are clearly what people want, they are ignoring the hard facts of this market data. The best selling vehicle in the U.S. is a pickup truck with gas mileage of 16 MPG.
The more important thing to note, however, is that cars from the Big Three U.S. manufacturers make up about half of the total volume of the best selling 10 cars.
Detroit is capable of making cars that U.S. citizens want to buy. Any plan to help the struggling domestic automobile companies that ignores this fact and attempts to force the manufacturers into building certain types of cars that politicians want, is not likely to help the industry in the long run.
Excess Capacity
There is a lot of focus in the debate over the auto industry on union wages,
health care costs, management bonuses and lifestyles, but those issues are also
primarily designed to create an emotional response.
The real problem with the U.S. automobile industry is excess capacity.
Detroit's infrastructure is simply too big for the market demand. In addition, most of the automakers make too many of each of their models.
Some of this might be due to the fact that there are simply too many dealers in the U.S. For example, GM has approximately 6,700 dealers in the U.S., representing more than 14,000 franchises. (A single dealer often sells more than one GM brand.) Toyota, by comparison, has only 1,200 dealerships and 1,600 franchises.
Since every dealer needs to have some "on-lot" vehicles, GM simply makes too many cars. In addition, since every dealer has the ability to return an unsold vehicle to the manufacturer (for a fee), there is only a modest incentive to keep dealers from ordering too many cars.
This is stark contrast to the situation for imported cars, where some models routinely sell for more than the sticker price.
The net result of this is that the profit margin on U.S. cars is compressed by excess supply which the manufacturers themselves created.
In addition, much of the car industries infrastructure was established in an era when new cars had a life expectancy of less than four years. Today, the average age of a car on the road is well above seven years.
This means that even loyal, devoted U.S.-brand car customers simply don't buy a new car with the frequency of prior decades. Have the U.S. manufacturers reduced capacity to reflect this trend? We couldn't find solid evidence to back up this idea, but we tend to think it probably plays a role.
The recent news that GM will close all factories for two weeks at Christmas
instead of the usual one, with some factories closing for a month, is prima
facie evidence that they have too much manufacturing capacity.
Bad Marketing
On top of this, the way U.S. cars are marketed is antiquated.
Many best selling foreign cars come with essentially one option: color.
Most of the Detroit models, however, come in a dizzying array of options, with as many as three engine choices, four or five audio options, sunroofs, roof racks, multiple wheel upgrade options, and more.
While maintaining inventory and manufacturing capacity to fulfill this array of options is probably very expensive, the real problem is dilution of the model's brand.
The difference between a base Pontiac G6 and the top of the line G6, for example, is staggering.
The G6 sedan is available with a 164 hp four-cylinder engine, a 219 hp V-6 engine, and a 252 hp turbocharged V-6 engine. The performance differences between these three "versions" of the same model are astonishing.
However, if you happen to rent a "Pontiac G6" at a rental agency, you are likely to get the least powerful engine with modest interior appointments. Any impression that you might get from this "base model" G6 would likely remove any motivation for you to try the more powerful version of the same car with the 252 hp engine and more luxurious interior.
What type of image does that leave for a Pontiac G6?
To make matters even worse, the somewhat similar looking, but completely different model car with a V-8 engine is called the Pontiac G8. Despite incredibly good reception by automobile critics, the Pontiac G8 will find it hard to build any type of brand image with the lesser Pontiac G6 also in the market.
This type of model positioning problem simply does not exist with imported cars, but it has likely gone a long way to making it hard for Detroit to generate an image that they can build a decent car.
What is wrong with Detroit's marketing?
Detroit Can Execute
Ironically, in recent years, it appears that changes in the right direction are
occurring at the major car companies, but slowly.
The Pontiac Solstice, for example, a model with limited option choices, routinely has a waiting list, as demand exceeds GM's capacity to build them.
The Buick Enclave has also proven to be a strong competitor in the crossover SUV market, with a lower price and extremely high ratings when compared to similar models from Lexus and BMW models. In its first year in 2008, the Buick Enclave's entire production line capability had been sold in only four months.
Both of these models point to the right direction for Detroit: establish brand through specific models targeted at specific niches with clear demand.
The "single-platform" that can change into any type of car is an approach that has to go.
We don't think anyone in Washington is viewing the automobile industry with this type of perspective, however.
Bankruptcy is OK
If the problem is viewed as "excess capacity," allowing the automobile manufacturers to file bankruptcy is probably the correct approach.
The U.S. airline industry went through almost the same problem in the past 10 years. The "major" airlines, with higher labor and infrastructure costs faced lower cost, simplified offerings from regional airlines.
The primary effect of the regional airlines (including Southwest) was the creation of excess capacity for the major airlines. They simply had too many flights scheduled to many cities.
After emerging from bankruptcy, however, the major airlines have all followed the same approach: cut back schedules, use innovative approaches to revenue, and, most importantly, "fill every plane."
The U.S. automobile manufacturers need to take a lesson from the airlines and do the same thing. Simplify their offerings and lower capacity to meet market demand.
In order to do this, bankruptcy filings are probably the best way to make this major adjustment. It will mean renegotiation of contracts with all union members, the inevitable closing of some factories, and a complete redesign of how U.S. cars are offered.
Federal bailout of the U.S. automakers probably would not accomplish the critical business model changes needed to make Detroit sustainable, in our view.
The media tends to portray bankruptcy as meaning that GM, Chrysler, and Ford all disappear overnight. This is also intended to provoke an emotional response, but is not entirely accurate.
After all, nearly every major airline today went through bankruptcy and emerged. The companies were changed, of course, but they did not vanish.
Conclusions
To survive, Detroit needs to go back to the simple business principle of aligning their expenses to their income. To do this, they need to get back to the simple marketing principle of adapting their output to meet market demand.
The sales figures in certain market segment, such as pickup trucks, shows that Detroit is capable of executing, even with the current union contracts, health benefits, and other "higher-than-foreign-companies" expenses.
Detroit's success in other, smaller niche markets, such as the roadster market and the crossover SUV market, shows that they can create models and brands that are competitive.
But the days of Detroit being able to succeed -- or even compete -- in every market segment of the industry are clearly over.
The sooner this concept is embraced, the sooner the U.S. automobile industry can start its return to a healthy existence.
Such a change would be good for GM -- and good for America.
Comments may be e-mailed to the author, Robert V. Green, at rvgreen@briefing.com
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