With a potential bailout of the auto industry imminent and the high probability that if it doesn't happen GM and Chrysler will have to seek Chapter 11 reorganization, and Ford will not be far behind because of shared suppliers and other vendors who will have to seek Chapter 11 or worse Chapter 7 Bankruptcy protection. I want to address a few things that the manufacturers, the broadcast media and others are just getting plain wrong about how we got here.
The comments and reporting on this crisis has reached just about a fever pitch and will be front and center until a decision is reached on the matter. As you read this article the executives from the Big 3 (GM, Ford and Chrysler) have met with congress to plead there case before a panel designed to hear there case.
I understand that there will be opinions for and against the matter, however in order to fully understand what is transpiring I want to note that a lot of opinion has been based on a narrow perspective and not fully objective. Now I have not fully quantified the impact and the magnitude of a total collapse of the auto industry, although I have read several opinions on the issue. I do know that it will be big and far reaching, we are talking a global impact that will take a scholar with more mathematical skills than I have to assess.
Other opinions on why the industry has collapsed range from blaming the industry for poor decisions, blaming the unions and blaming poor quality and design. While we all have strong opinions, I feel it is best to look at those decisions that have impacted the industry the most in its downward spiral.
To blame the Big 3 entirely on this current mess is really shortsighted, the lion share of the blame in it's current state goes to the financial industry which has not only crippled this industry but is crippling industries far and wide. The financial machine (banks, finance institutions, insurers and brokerage firms) has provided false data to it's shareholders and to our government for years. You would never be able to understand your own financial position if your finance institution gave you a false since of security, of which you thought you had a partner to assist in your financial plans. Most companies, including it appears our government was blindsided by the amount of AAA rated security instruments that were hiding bad loans, these loans were on financial institutions balance sheets as great assets.
Lets be fair, Toyota, Nissan and Honda are not out of the woods yet, I have said for years that Toyota will teeter towards disaster faster than even I expected if the economy doesn't turn around or if there is a supplier meltdown in the coming days and months and Nissan will not be far behind. Honda should escape this mess because of there manufacturing and supplier model and there costs to operate. It should be noted that the manufacturers (including suppliers) dependence on the finance industry is heavy and the tightening of credit in a heavily dependent business on easy access to credit is stifling, not only towards the manufacturers ability to conduct there daily business but particularly with the retail network to provide credit to customers and that same network securing credit lines to finance the inventory. The impact of what has transpired with the finance institutions is much more far reaching than anyone has been able to accurately detail.
I have been amazed at how an industry which enjoyed huge sales and even bigger profit opportunities reached a point in which it has failed so miserably over the last couple of decades. The business lessons that will come from this will be discussed for years to come in colleges and university across the globe.
So here are a few of my thought and opinions; the mess that this industry has found itself in is a business executives worse nightmare and could not totally be attributed to the decisions that executives at the top of these manufacturing concerns made. Although we can make a strong case that a host of decisions made by these executives have cost these industries dearly and I will outline those as I state my opinions. But the current crisis is a perfect storm of things which has created a tsunami that even the savviest of business executive could not navigate unless they had a pot load of cash. The intricate nature of all of the pieces necessary to make a vehicle, supply it with parts? transport it and retail it are interdependent and if one of these pieces doesn't work the whole system doesn't work, so even if the bailout happens for the manufacturer, what happens for the suppliers? What happens to the shipping industries? What happens next for the retail dealer body?
These issues must be addressed in a comprehensive manner otherwise the efforts to raise needed cash for the manufacturers is moot, if the suppliers can't supply and the dealerships are closed to retailing, the supply chain is seriously damaged and the image of this once prestigious industry will erode. With that, where there was once failure, a new model will emerge, the questions become how soon and who will it be?
As we examine the missteps of the Big 3 over the last couple of decades it is easy to see that misguided and uninformed executive management failed to provide a long term strategy to adjust to the ever changing retail climate. While the Big 3 were having a drunk fest on the profits that they were making off of trucks and SUV's they never addressed the changing taste of it's customer base for better styling and cost efficient vehicles in a timely manner. Not to mention the notion that in particular GM felt it was bullet proof, I asked a manufacturers representative about 10 years ago why doesn't General Motors consider the entry level buyer, the remark was along the lines of the company felt that they provided enough selection to meet there customers needs and that they could not be all things to everybody. Basically what the corporate line was they were conceding the entry level and car segment to the imports and that the segment that was in demand at the time was trucks, especially SUV's, my comments were, as a dealer we were losing sales to the imports and even more importantly we were losing a whole customer base, as anyone in retail knows that if you have an opportunity to gain there confidence when they enter the vehicle market, you share a greater chance in owning that customer for life. The bottom line, GM could not make money selling cars, they couldn't figure it out with there cost structure and probably felt that they would adapt as they went along.
I shared a similar conversation with my Lincoln Mercury representative regarding there Lincoln Town Car, my statements centered on the grounds that the Town Car customer was defecting to Lexus and BMW and the company line was similar to what my GM dealer rep stated. The point was they could have cared less that the product did not have any appeal to a large segment of the demographic they were trying to reach as there focus was elsewhere, there bottom line right now, not there bottom line in the future.
The Big 3 manufacturers failed to deliver for the future, the notion that management was not working hard and that they were mismanaged is arguable, because the demands to produce a bottom line took precedence over any long term strategy, we can argue that by this definition they were mismanaged, but in Wall Street shareholder terms they worked tirelessly to deliver profits, the pressures to satisfy Wall Street demands are staggering, this is precisely what Cerberus was trying to tackle when they purchased Chrysler, but the bottom fell out of the finance markets. Cerberus banked on it's ability to focus on a long term strategy to reinvigorate the brand and find success with innovation that imports would be hard pressed to match.
Beyond this, I find that for all of the brain trust that would be accessible to these manufacturers, no one seems to realize that a basic economic principle escaped them as they worked hard to downsize and produce profits for Wall Street. It is truly economics 101, supply and demand, a decision made by all three manufacturers to start manufacturing vehicles in Mexico and Canada has cost the manufacturers many more Billions than they realized by not renegotiating Union contracts and reducing other cost that were draining there cash at the time.
This is simple economics, just look at market share 30 years ago when these same manufacturers enjoyed a robust 75% market share and employed millions of people directly and indirectly. The cities and towns where there vehicles were made and the suppliers who supplied them were loyal customers who had a brand loyalty that was the envy of companies worldwide. I heard constant stories when I opened up a Ford dealership in a predominantly GM town and was told that I was going to have a hard time selling Fords in a GM town. The loyalty to GM was amazing, these folks knew that there bread was buttered by GM the whole town knew that there bread was buttered by GM, I am talking the bankers, the insurance agents. the real estate agents, the mom and pop shops, the friends, the families, just about everybody in the community was a loyal customer and in most of these cities and towns they enjoyed healthy 75 - 90% market share. This market penetration was not lost on the cities and towns that employed these auto workers and suppliers it extended to other cities and towns because of the extended nature of friends and families. The connection was far enough reaching that by the very nature of the benefactors who benefited from the manufacturer and supplier relationship, it influenced purchasing decisions beyond geographic borders of a particular community. The tentacles of this relationship was a tremendous business model that virtually guaranteed success, people were buying the product because they had a stake in it's success, the demand.
All of that was lost when manufacturing picked up and left these towns, it was lost on the suppliers and ancillary businesses who had a stake in the success of these manufacturers. Demand waned, not all at once, but over time as it took time to move these huge operations to other geographic areas beyond the borders of the United States.
I am confident that the accountants justified the decisions to move operations, but who provided the economic impact that these moves would have, not on the bottom line, that was an easy sell, but on the full economic impact that would be lost on all of the businesses, employees, families and friends had on the bottom line with the purchases that were made by these groups. The reasons why they were loyal were clearly related to the business model that was created inadvertently or not, it was there and strong. It was not dependent on a new model design or a freshened up product. It was dependent on the infrastructure that was created by an economic system that was rooted in economics 101. The manufacturer had a product and had loyal customers who wanted to purchase that product.
The failure of the manufacturer then failed to prop up their own economic infrastructure by adjusting to the new demands placed on it by a buying public who did not have the same loyalty that they had with the earlier business model. Instead they forgave market share as they concentrated on profits and as there grip on loyalty eroded, they justified there business case by there profit margins, these manufacturers enjoyed tremendous profit margins just a few years ago, mostly from there finance arms, but profit was profit.
Additionally the new business model was wound so tightly with what the manufacturer would have us to believe was wage disparity and although they found low wages in Mexico and Canada, particularly in Mexico, the wage scale that was paid did not allow those same workers to enjoy the fruit of there labor, namely a new car for them and one for there family, oh and one for the businessman in the community and so on.
Economics 101 people failed the Big 3 miserably and the future looks cloudy for it's survival in the near future, at least the bloated business model as we know it.
Should we bail them out? Not a blanket bailout like Chrysler had enjoyed, we must understand that there will be additional fall out even with a bailout, to think that there are some suppliers and a whole host of dealerships that will cease to exist in the coming months would be naive. But by and large the precedent was set when the financial institutions received a lifeline and they do not employ and create jobs at nearly the same rate as the auto industry, so yes they need a lifeline too. But a clear mandate on conditions and tight oversight to ensure that the bailout is going to sustain the industry now and into the future.
The bailout will work if a business model can be created that shows innovation, downsizing to meet market demands and addressing the legacy cost of the retirees, if those things are not addressed, the bailout of the Big 3 auto manufacturers will fail miserably and fast. The market demands in this environment will only deteriorate an already diminishing return. The only way outside of a bailout is a reorganization (Chapter 11) and start downsizing and starting over as we have no idea how long this downturn is going to last, GM ends up with Chevrolet and Cadillac or some model like that. If these things cannot be addressed, you might as well flush the money down the drain.
Enjoy Today!
That Car Guy
