Hodgepodge

For the past several weeks we have been hearing about the specter of GM and possibly Daimler-Chrysler filing for bankruptcy protection. While this has certainly been precipitated by 40% drops in sales over the last few months, it started years ago.

Having once been in the retail side of the automotive business I follow it a bit and so I can say with confidence that this was inevitable even without the current deep recession.

For at least three years now, all three domestic automakers have been losing billions each quarter. Occasionally they would show a slight profit but for the most part they have all been bleeding cash for several years with no end in sight.

One has to only look at the structure of these behemoths and the products they turn out to see that. Add in the volatile price of fuel that threatens the one line of vehicles they were making money on (SUV’s and trucks) and you can see the cards are stacked against them.

High labor costs, high material costs, too many models that don’t sell, and probably the most foreign competition of any major product that is still manufactured here all spell doom for the auto industry as we know it.

The business model that made Detroit the power it once was worked for about 60 years. That model does not work today. Changing decades of habits like short term profitability and sloppy business practices is a difficult thing to do and happens slowly. In this case too slowly to survive.

Would the auto makers have been able to make changes and emerge as a leaner, more responsive industry had the current recession not decimated sales? Maybe, but I doubt it. I think what will happen is that like so many other industries, once the recession is over, we will buy most of our cars from overseas and a handful of smaller manufacturers making limited models will emerge. Unfortunately, the jobs that are lost will not.

For the first time in several years, jgaleckas; and I went to the auto show. We aren’t in the market for a new vehicle, although if the van dies we would need to replace it. We just wanted to see what was new.

To say we were disappointed would be an understatement. There was no “Oh Wow” at the show at all. The concepts cars were fewer than the past and even though they had some electric and fuel cell prototypes on display, they had those years ago when we went so they don’t impress me. What would have impressed me was a car that got 50MPG plus on the highway, or an actual electric car I could buy now or a fuel cell car I could buy now.

Even the third generation Prius is not expected to hit 50MPG on the EPA scale.

What I did see was a combination of over priced SUV’s (and all the offshoots thereof) and performance cars that while looked nice and probably can blast by my minivan like I am dragging the Queen Mary.What I did not see a lot of is what America needs right now – cars and trucks that get me from point A to point B efficiently and comfortably for a price well under $20K.

Don’t get me wrong, there are cars offered for well under that price and they looked like they would satisfy the A to B but the mileage on the small cars is typically 23city/30highway. Hell I was getting 31mpg on my Mitsubishi Lancer 7 years ago.

I would think the industry could do a lot better in that time. Yes the Prius and Civic get well into the 40’s mpg but they are also well above $20K.

The other thing that was clear is that Detroit, Japan and some European brands suffer from model bloat. Really now, do we need 2 sizes of SUV’s on top of 1 or 2 sizes of crossovers (a mini SUV) from all these car makers? Why do we need two economy models from each maker? In addition to confusing the consumer, it must be very expensive to design, build and support so many models. I certainly hope that one of the things the car makers are required to do in order to receive the bags of money they are asking for from the U.S. taxpayers is to cut the models down and streamline their operations. I refer back to my point A to point B logic.

My biggest disappointment was the new Volt from Chevrolet. It is the plug-in electric that we are hearing so much about. Guess what? It only gets 40 miles to a charge and uses a gas engine after that. While it is a step in the right direction, that range is barely enough for the many commuters who traverse across the urban sprawl of the larger cities. For most they have to hope there is a way to plug in at work or they will be sucking gas like everyone else. Of course if the car wasn’t designed to reach a top speed of 100mph maybe they could have improved the range.

I don’t think someone buying an electric car in order to stop using gas is going to be going anywhere near 100 mph with the car. One can only assume GM is lost in the 60’s when the 442 and GTO roamed the streets, peeling rubber and blowing the doors off the Falcon’s of the day. Yikes will they ever learn? I hope so or they are doomed to fail.

Like many of you I have been watching the scenario with the US automakers and their desire to get a piece of the $700 Billion boondoggle bailout. The fear factor as always is the major talking point, and I agree that if one of the big 3 in Detroit goes under it will be a major blow to the economy and the workforce. I think the impact won't be as bad as they say since X numbers of cars are sold by these three each year and if one goes under the other two will gain the majority of those sales and thus will need to increase labor and buy more OEM parts so a great deal of shifting will occur.

What I find most interesting though is how this is NOT a new phenomenon. For at least three years, the automakers have been losing billions every quarter, it's just that they are starting to run out of the pile of cash they accumulated when business was good for decades. What is unfortunate is that all the while they have been bleeding red ink they have done little to change. Oh sure, they have closed some plants, dropped some models (GM even dropped the Olds line completely) but they still have not learned to move quickly or compete with the Asian mfgs.

There are some factors would explain it; A very powerful union that makes it very difficult to automate or cut jobs or wages, Corporate leadership who cling to the old business models, and a lack of standardization in engineering that would cut costs - such as one component that is used across all models like power window motors, door lock assemblies and other items that are not visual.

These problems have existed for years in the US auto industry and the signs are that it won't change soon - unless one of the three topple, then maybe the other two and the UAW will see the light and start to figure out how to keep the other two going or soon the auto industry in America will go the way of electronics - when is the last time you bought a TV made in the US?

I read two interesting articles this morning:

GM to Close four plants, may unload Hummer
U.S. Auto sales plunge, drag market down in May

Both articles state some obvious facts and paint the U.S. automakers, especially GM, in a bad light and show their knee-jerk policies. And there is much truth in all that, but consider the fickle nature of the consumer.

Back in the 90's and even early this decade the demand for small, fuel efficient cars was weak. Gas was less than a dollar a gallon and people wanted power and size so the SUV was born and sold like hotcakes. Since it was a big vehicle and loaded with options and a new animal, the automakers could price them at a level that allowed huge profits. The small cars were so thinly priced that they actually lost money.

Now comes $4 dollar gas, and the consumer finally realizes that they don't want the gas guzzling SUV but that it's both vital and chic to own a small fuel efficient car, and voila - a 180 degree shift. It is hard to completely blame the automakers for being slow to respond. While consumers can change overnight, manufacturers cannot.

But before I sound like a shill for the automakers let me say this, they could have been better prepared. A crystal ball was not needed to know that gas prices were going to get to $4-5 a gallon in the next year or two. Oil prices started going up rapidly over a year ago, and a prudent course would have been to start designing and planning for how to quickly respond when the break point was hit. There has to be at least a few highly placed executives that remember the 70's oil embargo. I worked as a bookkeeper at a Toyota dealer then, and I can tell you that every Corolla that hit the showroom floor was whisked out by a customer the same day.

And with the success of the Prius, the hybrid movement should have been a no-brainer. Here again the U.S automakers turned to making hybrids out of small SUV's and other vehicles instead of coming out with a hybrid Aero or Focus. I will give GM high marks if the Volt becomes available in 2010, but had they got serious about it earlier it could be ready now, and they would sell everyone they built in my opinion.

GM has lost $51 Billion over the last three years, but still has $31 Billion in cash and undrawn credit - it seems to me that they could have prepared better and been ready to seize this current situation as an opportunity rather than have to try to survive it.