like the old saying:
“A satisfied customer tells 2 of their friends. An angry customer tells 10 of their friends.”
I don’t have an answer one way or another. I feel strongly though that soon to be sold electric cars will spell the death of most auto companies as we know them. As most of their profits are from the parts market, and electrics needing little if any maintenance during their lifetime, the profit on such sales will be low. Leasing will be the only viable alternative for car manufacturers. Sooner or later, the car companies will become much smaller and come in and out like other electronics manufacturers, or become subsets of firms like Proctor and Gamble, Exxon or Sony.
That’s why the EV! was destroyed. If you work for an auto company…think about cross training. Heavey haul vehicles have a much greater shelf life.
We’re a long way from mass marketed pure electric vehicles. The battery technology is at least 2 generations away; count on 15 to 20 years until battery electrics are everywhere. And they will still have transmissions, air conditioning, and many other things that break, along with the electrical power system.
Obviously I am passionate about this subject, but I am very curious about your comments on my thoughts. Here they are:
I can’t claim I am an expert, but I was part of Corporate Research for Montgomery Ward during its attempted turnaround until 1984. My father was the superintendent of the machine shop for GATX Plant 1 in East Chicago up until it was closed in the mid 70s. I have been privy to the internal arguments about what was needed to successfully turn around large American businesses and manufacturers.
I don’t think that American labor is any worse than anywhere else in the world. In fact we have historically benefited from the most talented labor emigrating from oppressive administrations to the US. The people who make decisions and set policy, however, is another story. They tend to be selected for the ability to seek out the most powerful leaders and agree with anything they propose no matter how nonsensical.
As a corollary of this, the US auto industry has become a legal monopoly. Any significant competition has been weeded out long ago. It is not so obvious now, but for many years the only way to tell the difference between GM cars was by the hood ornament; a Pontiac had an Indian and an Olds had a rocket.
What seems to make the auto industry even more of a problem is that it is vertically integrated. Manufacturing, distribution and financing are all under the control of the same entity. GM has GM financing, GM dealers, GM parts suppliers, even GM insurance. In some respects this allows benefits to the customer, but at the same time it makes it easier to hide inefficiencies and abuse of power. There is essentially no leverage in the hands of the customer to say, can I just have the sandwich?
In 1976, when I briefly worked for the GM leasing operation, the average price for a car was $5,000. That translates to about $20,000 today. Considering that those were not particularly small, safe or fuel efficient vehicles, it seems that the target for the current average vehicle should be somewhere between $15.000 and $20,000. This is because in 30 years we should be much more efficient in producing a product whose basic function has not materially changed. I intentionally make this bold statement, because I think many might want to argue about it, but that is a discussion I welcome.
As for whether bankruptcy hurts or is beneficial, from my experience is that it has its advantages. From personal experience, immediately upon my father being forcibly retired, a large facility was available and much equipment was available for the cost of transporting it. Almost immediately he formed a partnership and set up business in the same facility rebuilding high speed centrifuges. This business still exists today and is working out of the same location.
One of the most important lessons learned is that you really need to know what you are doing. One thing my father knew about was machining and hardening metal equipment. Not just because he was my father, but because he seemed to succeed where others failed. He certainly was not someone who would just suck up to someone else. He was also able to rebuild equipment far more cheaply than the manufacturer could produce it. I remember him saying that he knew which equipment was designed to be rebuilt and which wasn’t. He never had any problem telling a customer that his equipment was a piece of junk or whether it would basically last indefinitely. The only other consideration was whether the equipment contained components whose availability was under the control of a monopoly. They were to be avoided at all cost. The reason was because the monopoly could steal all your profit.
So what do I think should be done with the American auto industry? I think it should be broken up like the old AT&T was broken up. The present facilities should be divided up and given to a number of competing organizations. Currently, I see no reason to reduce or modify the existing labor agreements. One thing which should be retained is the health benefits.
One thing I do not understand is why dealerships should be captive. The major downside is that this perpetuates a de facto monopoly on parts. This is an abuse which should be addressed as I stated earlier. The government and manufacturers should remain responsible for tracking and controlling safety issues. I think there is substantial evidence that there is an adequate repair and maintenance infrastructure without dealers. I think this is a bad habit foreign manufacturers acquired form Americans.
As for captive financing, I think it is an abuse which should be prohibited. It is a crutch used to support slipshod manufacturing. One of the worst scandals involving American automobiles is that they lose so much value when driven off the showroom floor and in three years have so low resale value. It seems to me that, at a minimum, we should not reward sloppy manufacturing by letting them at least make a profit on financing a bad deal. In other words, if you are making nothing on manufacturing something, but people financing it are making a comfortable living financing it, you are still making half a comfortable living if you are allowed to finance an enterprise which should be put out of business.
Bill in HI
You provided a thoughtful reply. But when was the last time you saw a captive dealer? Almost all the dealers around here sell several brands. The smallest one nearby sells Ford, Chevy and Cadillac. Another sells Toyota, Scion, Chevy, VW, Hyundai, Nissan, Kia, and all the Chrysler products. It’s not under one roof, but they can sell whatever brand they can get the franchise for. Is it different in Hawaii?
Very good thread! I also cannot fault the actual labor in US plants; it’s what they are paid and the less efficient and inflexible manufacturing processes that make the labor component non-competitive with Asian-owned plants. That also applies to European manufacturers, expecially Volkswagen, which could no compete with its plant in Westmoreland, Pennsylvania. VWs built in Mexico with cheap labor are barely competitive in the US.
I would not worry too much about the monopolistic pats situation. Dealers do sell parts to independent garages, and the US has the world’s best developed after-market parts industry. This may not be true in Hawaii, but in the Lower 48 and Canada, almost any US car can be fixed with aftermaket parts.
It would do no good to try to bail out Detroit because they are a sinking ship and can go through 25 billion dollars in no time. Chapter 11 Bankruptcy is their best hope.
Some of the 700 billion dollar bail out money could be used by the banks for auto loans, but that is as far as we should go.
thanks,
aa
Absolutely no bailout. But loans? Yes, if they’re economically sound. But that assumes we have the money to lend (or bail out). Has no one noticed we have a ten trillion dollar national debt? And budget deficits out of control? And unfunded social security, medicare and medicaid obligations? The only reason the United States of America is not bankrupt is that the present crisis has made US Treasuries the only “safe” investment in the world, so that all the countries that have made money off our backs have to buy our debt. Ending the credit crisis would sink the US Treasury market. Then interest rates would go to 50%, and we’d have the great-grandmother of all Depressions. So let’s lend Ford and GM a few billion, fire all their management, bring the generals back from Iraq and Afghanistan and let them run the auto companies. Meanwhile we do a modified Chapter 11, blow off the union contracts, and get the new technologies on stream.
I agree that the unions need to go. Unions were good about 90 years ago, but I believe they’ve outlived their usefulness. Honda and Toyota are non-union and I know Honda treats their employees fairly well.
Honda has an unwritten rule in hiring plant workers; they don’t hire anyone who has ever been a member of a union nor anyone who has ever worked on an American car company’s assembly line. The reasons are obvious; they don’t want to hire anyone with the wrong work skills and habits.
Instead they hire young peole with the right ATTITUDE and APTITUDE, and train them in Honda’s way of working. Toyota has a similar preference.
If you ask anyone at Honda they will of course vehemently deny this, since it smacks of “discrimination”.
If you’ve ever wondered why Asian car companies like to build in small towns away from the big auto centers, this is one of them.
Best argument for NO yet from Jim Manzi:
"As of the close of business on Friday the market cap for General Motors was about $1.9 billion, Ford about 4.3 billion…Chrysler is privately held but it’s a safe bet that their FMV is less than $2 billion…probably a LOT less…so for approximately a lousy $7 billion…a rounding error for the federal budget…the government could simply BUY the entire U.S. auto “industry” — actually, of course, it’s just the U.S. nameplate manufacturers, but that’s another story — for what amounts to a pittance.
So if these geniuses in the government, especially the best and the brightest coming in with The One, think they know better what to do…that they can defy the market’s judgment…why don’t they just cut to the chase and buy the companies, replace their boards and management and run the companies…can you imagine how disastrous that would be?..but that’s in effect what they’ll be doing…almost as much fun as Fannie and Freddie!
The numbers are literally absurd…Ford has $160 billion in debt!..with NEGATIVE book value of equity…GM has about $60 billion in debt…and a HUGE negative net worth on a book basis of $56 billion!..Essentially, the market is valuing the companies — well above their (negative) book values — but at what amounts to scrap value!..so $50 billion more from forced tax exactions should be thrown at them?..and that’s NOT absurd?"
Well said…
I agree with Niel Young on this issue…We could help bail out major car companies contingent upon those companies manufacturing alternative fuel and much more fuel efficient vehicles. I’m sick of hearing that these types of vehicles won’t be available (for whatever reason) until 150 years in the future!..B.S. I contend that if you can make one, you can make a million. Tesla is a good example of actually PRODUCING their vehicles instead of pointing to new developments in AFV technology, and telling us it won’t be available for years come…
No
The big three have all share much of the same problems. They had problems independent of the rescission. A bailout will do nothing to fix those problems.
The two big problems are management and labor. Neither will be fixed with a bailout.
A bankruptcy will address one issue in part. The high cost of labor under the current labor contracts can be reduced. Hopefully the poor management they have had will be addressed as well. One would hope that a bankruptcy would be a hint that management needs to be changed. However I tend to doubt that will do it.
A bailout with the requirement for a change in the management and the way management is chosen and paid (no payoffs required to dump a poor manager) might be worth it.
Note: The US needs to look into making some serious changes in corporate law to address the way all US corporations hire and pay their management. Our system is far too expensive and it does not result in good management.The resident conservative columnist in The Star-Ledger, who is also a car enthusiast, had some insightful comments on this issue. Take a look at Paul Mulshine’s comments:
The gambling industry is suffering worse than the auto industry. If we bail out Detroit’s big three, we should bail out the casinos too!
I want to start a business and grow it to where it is large enough that the U.S. government will subsidize my losses. Of course I plan to personally squander the profits rather than retain them. If I retain my company’s earnings for a rainy day, I won’t be able to ask the government for a bailout!
I am a left-leaning moderate, but I am on board with the conservatives that it isn’t the U.S. government’s job to save these companies from their own inept management.
Here is someone making a pretty good case AGAINST a bailout and just letting the bankruptcy process run its course. That is bankruptcy in the sense of restructuring and not in the sense of just giving up. He makes a great deal of sense.
That is bankruptcy in the sense of restructuring and not in the sense of just giving up
EXACTLY! Those of us who have worked for companies that have filed chapter 11 bankruptcy can tell you that it isn’t the end of the world. Chapter 11 usually allows companies to dig themselves out of the financial hole that they put themselves in.
As a moderately right wing free enterprise advocate, I am against outright bailouts/nationalization, but in favoir of interim goverment loans to help a company RESTRUCTURE to where it can become competitive.
If the industry does not restucture itself and renegotiates all its labor contracts, it is doomed, like the British car industry a few years back. That industry, which originally had many brands (Austin, Morris, Hillman, Sunbeam, Singer, Lagonda, Bristol, Rover, etc.), is now totally foreign owned, except for a few niche players like Morgan. Even Lotus is now owned my Malaysia’s Proton car company.
The problems with the British car industry were unwieldy and inefficient labor contracts, too many strikes, lousy product quality, and incompetent management. Unlike Detroit, the products produced were actually suitable for the market, except for the quality.
However, car manufactiring in the UK is not dead. GM (Vauxhall) and Ford continue to build reasonably good cars based on their European design resources, and the new players, mostly Japanese, are building very good cars at competitive prices in non-union plants, and exporting these cars to the Continent.
Joseph; the third BIG problem is a product mix for the new realities of the market place. If this problem is not solved no amount of labor and management fixing will spell sucsess.
When Lee Iacocca took over to run Chrysler, it faced similar problems; he quickly introduced the K car and the small Omni and Horizon (with VW engines) to address market needs. It’s said that the K car saved Chrysler from extinction just as the 1949 Ford saved that company.