When I try to diet while on business travel, I get very frustrated by the fact, say, I can't go to a McDonald's and order, say, grass-fed hamburger on a whole wheat bun with lowfat cheese, a side salad with olive oil dressing, and bottled/filtered water. Basically the fast food restaurants will inevitably tell you that their customers don't come to them for healthy food; they are simply serving the consistent quality carb-heavy, high-fat, high-sodium food their customers demand. (And, as you may recall, they rejigger their salad entrees, and their same-store sales explode higher. In other words, they just weren't providing the product in an attractive package to the right audience.)
The American automaker and its unions have been running into a collision course with themselves. I am saying this as someone whom has bought exclusively American models all his life. A female Navy officer and friend with whom I worked at a training program in Orlando had a gorgeous black Mustang. A brother-in-law swears by Corvettes. Frank, an analyst who worked with me in an auto property actuary division while I worked on an end user support team writing programs in an obscure computer language called APL, swore by Cadillacs, insisting if I read bodily injury statistics with smaller cars, I would never drive in anything else. My uncle who is a retired priest loves to drive Lincoln models. Others had tastes for foreign brands; my best friend in the Navy (who married the Mustang owner) couldn't stop talking up Saabs. My middle brother insists on Volvos, primarily for safety engineering. I'm not quite as impressed by fancy cars like many (if not most) guys, but I had a boss in 1998-1999 whom had committed to leasing a Mercedes as a perk to a manager whom he later fired. He decided to let me drive the Mercedes rather than rent a car on my trips to Baltimore. I never truly had a driving experience quite like the Mercedes; it felt as if I was driving on clouds.
What I remember from game shows in the late 60's and early 70's is that already Asian automakers were excelling at small, cheap, reliable fuel-efficient models (I remember some game shows awarding not just 1 but 2 relevant cars.) And it seemed like Detroit's reaction was to shrug its shoulders, note that the profit margins on these car models were so small, they preferred to focus on higher-margin mid-size and full-size cars, SUV's, and trucks. After all, if the Japanese and the Koreans could learn to build a quality small car, they couldn't figure out how to build a quality upscale model to compete for that higher margin, could they?
Then came the 80's, as Japanese companies, which had taken to heart Deming's concepts of total quality management, challenged American automakers as never before, as Detroit scrambled to match reliability standards. A number of American schools started offering Japanese as a foreign language. The Japanese had an interesting variation on quality that went beyond reliability and performance: unexpected quality. It's something that adds to the perceived value of a transaction over and beyond the buyer's intrinsic purchase factors and expectations. For example, you have decided to purchase a compact primarily for fuel-efficiency and price, and you discover after the purchase decision that the car comes with an all-leather interior.
When I purchased my current vehicle (an Oldsmobile model), I agreed to a standard maintenance package which included oil changes at GM dealers. (What I should have considered before agreeing to that is that every dealership service department I've dealt with does not offer extended hour or weekend service.) At the California dealership which sold me the car, I received fairly typical oil change services, but when I moved to Buffalo Grove, IL, I got my services at a dealership (I think in Libertyville) which pleasantly surprised me by doing a car wash after the oil change before returning the car to me. The unexpected nice touch (I hadn't even purchased my car there) was something that left me positively predisposed to shopping for my next vehicle there (had I remained in Illinois). However, there was no special treatment after I moved to Maryland; in fact, I got turned down for an oil change after 3000 miles near the end of my contract when my service plan was audited and they discovered I had come in a little earlier than usual for a prior change. I've taken my oil change business elsewhere.
Anyway, the domestic auto industry played games with mileage standards, insisting they were simply building what the American consumer wanted: gas-guzzling SUV's, trucks, and sports vehicles. Meanwhile, cheaper, more reliable domestic oilfields have matured and are now falling off, while an alliance of Democrats and environmentalists have hamstrung, for purely ideological reasons, domestic energy exploration and production. The US in the meanwhile finds itself buying 60% (and climbing) of its oil from foreign suppliers, some of which themselves are facing declining production; China and Indonesia, like the US former oil exporters, are now net purchasers of oil. One of the bad things about the global recession, which has resulted in a sharp correction of oil prices, is that American consumers may think $4/gallon gasoline was just a bad dream. We are still with a rapidly expanding global middle class, only a fraction of which own a car. The recently announced public works investment/ domestic stimulus program in China includes expansion of highways; you build highways on the prospects of vehicle traffic, largely based on fossil fuels.
Ironically, whereas on one hand you had a Democratic Party constituency very devoted to conservation, including acceptance of high, regressive energy prices/carbon-based taxes as a necessary means to that end, you have auto union members, desperate to retain a globally uncompetitive pay/benefit package, including cash flow-zapping early retirement gold-plated medical insurance, willing to support management's strategic dependence on higher-margin gas-guzzling SUV's, trucks, and utility vehicles. From a globally competitive standpoint, you see that's an industry bankruptcy waiting to happen, even under more optimal conditions: all global consumers face a growing competition for increasingly limited exported energy supplies. If middle-class Americans have problems affording $4/gallon gasoline, how can other global consumers deal with high fuel costs to operate these cars? Second, with a growing number of global suppliers, higher gas-guzzling imports will drive down any margins, in part given the fact they have lower costs (in particular, labor/retiree) to compete in a price war.
I started noticing a glut of SUV's on business travel over the past year, well before we were seeing $4/gallon last July. For example, I would reserve a compact car, and I found a more aggressive than usual offer to upgrade at a modestly higher rate. I would hold them to my reservation and then find out that they had rented the last compact out from under me and handed me the keys to an SUV. In the case of National Car, which had a preferred vendor status under my former employer, there is a unique Emerald Club Emerald Aisle concept whereby you are free to pick among any of the available vehicles for a fixed rental cost (instead of being assigned to a specific vehicle). I would notice anecdotally that fellow renters (as well as myself) would gravitate to whatever compacts or mid-sizes were available, ignoring SUV's (but I often had no alternative but to choose an SUV).
This is not to say that the carmakers don't seem to have some glimmer of understanding; GM has been promoting a number of higher-mileage models and has been aggressively pushing for a 2010 introduction of the Chevy Volt, an electric car model (with gasoline-powered extended range, beyond a target 40-mile roundtrip commute via lithium ion battery). [For most homeowners, this technology would be a no-brainer. I'm more intrigued by the logistics of electrical outlets for open-air parking facilities, apartment dwellers, etc.] But the big story is something like a quarter billion vehicles, and even if Obama reaches his target goal of 1 million electric cars, that's less than 1% of the total number of vehicles in the US--a drop in the bucket. When we're talking about a 60% shortfall in crude oil utilization with the status quo, even a million vehicles is not material. If you go out to their website and look at alternatives like flex-fuel and hybrids, you'll see there's a scalability issue (e.g., limited vehicle production availability) and whereas they do promote a couple of mid-size options (e.g., the Malibu), a lot of what they're promoting are hybrids/flex-fuels for heavy models like SUV's and trucks, where they boast EPA mileage of up to 21 mpg. And for better-mileage mid-sizes, you are looking at list prices near $30K. When you have higher-mileage cars outside the US market targeting a price point near $10K, the only way the American automakers can survive in the global market is to outsource production.
Detroit claims it has won some labor concessions which will help out in a couple of years without dumping its pension obligations, retiree benefits, etc., on the American taxpayer. They say bankruptcy is not an option: they claim that buyers will abandon purchasing durable goods, like cars, without viable, long-term service and parts behind them. They note that we are dealing with upscale financing beyond a cookie-cutter bankruptcy. They also "worry" about the dealership, parts manufacturers, and all the vendors that plug into the Big Three and suggest that the US economy is flirting with a death wish in abandoning the auto industry.
Paleoconservatives, like Pat Buchanan, long known for advocating trade protectionism, naturally side with Detroit in this manner. But this flies in the face of classical economic liberalism. Protectionism simply enables companies to maintain artificially high prices at the expense of consumers as a whole and constitutes the government picking winners and losers in the marketplace. As a lower-carb dieter, I reluctantly use this example, but given the highly-protected sugar industry, businesses like bakeries and candy producers have to pass along their costs to their customers and may find their export markets limited, if not by cost than perhaps by retaliatory trade restrictions.
There is no doubt that the ongoing economic tsunami has created a serious structural problem where all retailers, even financially stronger ones like WalMart, are facing the biggest challenge in decades. Consumer spending accounts for two-thirds of our economy; we are among the lowest net saver economies, and the credit card industry itself is beginning to wobble as unemployment climbs and many consumers struggling to keep up with mounting bills. We could see a vicious circle of layoffs as unemployed people have less money to drive the economy forward.
In terms of the pro-bailout perspective, I seriously doubt, with millions of American-made autos on the road, you are going to see the American service and parts sector implode. Second, it may well be that bankruptcy is the only way you are going to see the kind of compensation givebacks necessary to facilitate longer-term global competitiveness. Union leaders simply would be committing politically suicide by agreeing to the necessary givebacks; in a court scenario, they effectively have a political cover where the judge, not the union leadership, accepts responsibility for the decision. As to the refinancing necessary in a bankruptcy, I think the federal government could play a constructive role in terms of loan guarantees.
Sorry, but I concur with Mitt Romney, Thomas Friedman, and others: The industry needs to be reorganized, an intervention as it were, vs. Obama, Levin, Pelosi, etc., whom are simply putting off the inevitable. There is no doubt that the current environment is challenging, even for financially stable companies. But Detroit has persisted even through the Depression years and several recessions. This is not a mere tactical issue over the short term. Rather, it's a strategic issue. Detroit was aware of the potentially lucrative rapid growth opportunities in BRIC (Brazil, Russia, India, China) as the middle-income consumer populations grow; in fact, they have pursued vehicle manufacturing in those countries. GM has built a large number of flex-fuel vehicles in Brazil, but it's resisted making the technology (estimated at about $100-150 per vehicle) standard. The point is, given a limited supply of exported oil, how did they expect all their potential new customers to run their cars? The fact is, no American auto company sells a viable hybrid model to compete against Toyota and Honda's. (I believe Ford licenses Prius hybrid technology for certain Escape models.) When the Toyota Prius is one of the top-selling vehicles in the country, how could the Top Three argue there is no market for fuel-efficient models? Why did Toyota have a better understanding of the Big Three's own domestic market? Is it a matter of Toyota having superior engineering--or management?
I think it's time for an intervention, a time for tough love, a time for a reality check. Enough is enough. We saw gas lines in the 1970's, when we were producing much more of our crude oil supply; yet within the last couple of years, we had car companies, facing waning consumer interest in their gas-guzzlers, offer incentives capping gasoline costs at about $2/gallon. We need more out-of-the-box thinking by the auto industry.
For instance, major software vendors like Microsoft and Oracle have tried to look at stabilizing cash flow of perpetual license purchases towards more of a subscription service. IBM, AT&T and other vendors will essentially provide technical services for corporate databases applications for a negotiated monthly fee. Verizon Wireless offers new conventional feature model cellphones free every 2 years of ongoing service. Now, of course, you do have financing alternatives like leasing. I'm trying to suggest a broader concept here, including standard maintenance and part failure (assuming good driver operation of the vehicle); for example, if you have a one-stop service concept, you have an implicit incentive to build more reliable cars. A second business model, often used in the high tech hardware industry (e.g., Apple), is the subcontracting out of commodity labor to contract manufacturers (e.g., Flextronics) and focus on your distinctive competencies, such as global auto design. We also need for the automakers to consider licensing hybrid or other innovative technology (e.g., like Ford did from Toyota) from foreign automakers instead of maintaining what appears to be a not-invented-here type technology.
I oppose the use of the financial bailout funds, or a separate bailout for the domestic auto industry. The function of the bailouts was NOT to reward the financial sector; in fact, a share of Citibank at the end of business today (11/20) was under $5--well below its year high of just over $35--over an 80% drop; Goldman Sachs, a premium investment banker, is trading below its IPO price. The bailout had more to do with freeing up credit, which is the lifeblood of the economy. This affects not just the automakers and dependent companies (including employees), but businesses across the spectrum. In part, there is analysis paralysis by lenders, concerned about applicant creditworthiness. However, the financial bailout was not about helping individual companies and the public sector (local and state governments, their operational budgets, and undercapitalized pension funds) from having to make the painful, unpopular decisions one normally has to do in a recessionary environment.
This has nothing to do with the worthiness of hardworking auto workers. At the same time, it is not fair for taxpayer families, many of them struggling to pay their own bills, perhaps without health insurance, to subsidize lucrative wage/benefit/retiree benefits of employees of domestic automakers whom have losing domestic market share for years to better-engineered, more fuel-efficient, reliable foreign-made cars (that in many cases retained more of their original purchase costs). There is some evidence, furthermore, that expensive benefits add almost $2K to a domestic car cost difference from the get-go. Union members need to understand pay and benefits have to be rolled back significantly if they are going to retain any domestic jobs, in any event comparable to compensation consistent with the domestic plants of foreign automakers.
Domestic automakers need fundamental change--in time-to-market, in reacting to competitor moves, etc.; GM has a lot at stake on its Chevy Volt vehicle introduction planned in 2010 (apparently they still have not achieved their battery capacity goal in the development, never mind production stage). In the meanwhile, the next-generation Prius model, not requiring a plug-in, may average over 100 mpg. We need to see more of a long-term competitive plan. If not, maybe venture capitalists should seed an American auto startup, rent out a closed plant, license Toyota or Honda hybrid technology, license other technology (including from the Big Three) and hire new workers at a compensation package similar to local plants for foreign automakers.
Finally, much has been made recently of the domestic carmaker CEO's showing up for a Congressional hearing, each arriving via his company's own private plane. Personally, I think it certainly takes chutzpah to come plead for a federal handout when taking a business-class seat on a commercial flight would have much cheaper. But I'm much more dismayed at the inability of the executives to articulate how much they needed for their business plan to work and how exactly they planned to regain market share. I do not want to risk having to throw good taxpayer money after bad, simply postponing the inevitable for a failing business model. Let's put it this way: the automakers wouldn't be coming to DC if they could find the financing in the private sector. If the private sector doesn't like auto industry chances, why are we asking the American taxpayer to take on the same risk?
