Saturday, October 25, 2008

Detroit's self-inflicted wounds

Since arriving at SJSU, I’ve loved using the auto industry to teach strategy to my undergraduates. It’s much more accessible than airlines for most of them, since they all own or use a car and they understand the attributes that car buyers consider. It also demonstrates issues of entry (and exit) barriers, foreign competition and operational efficiency.

But this year, talking about cars has gotten downright depressing. Slowdowns in consumer spending will crush new auto sales for several years — sales that were already reeling from (now moderated) high oil prices and years of incentives to keep up demand after 9/11. Thousands of US dealerships will fail this year, and indications are that the consumer confidence (and thus auto industry) problems are going to be worldwide.

It’s even worse for the American auto industry. GM’s moronic attempt to buy Chrysler seems to be dying because no one is foolish enough to finance the venture. The decision by Cerebrus to unload the weakest of the weak Detroit Three makes sense, but only the proposed Nissan-Renault alliance (or perhaps another foreign buyer) has any prospect of improving Chrysler’s performance.

My dad started with a Model A back in the 1930s, and like my dad I’ve tried to remain loyal to Ford Motor Company, through good times and bad. Like my dad, my first car was a Ford, in this case a Pinto Runabout (aka the 4-wheel Motolov cocktail). Other than two MGBs, every car I’ve owned over the past 30+ years has been a Ford. When I go shopping for a new car in a few years (<$20k >30mpg), right now it doesn’t look like a Ford will be in the consideration set.

The American car companies have been badly run for decades, emphasizing marketing over products. Yes, it’s difficult for anyone to compete with Toyota, but the relative success of three Japanese companies, two Korean companies, three German companies and even Renault demonstrates that Detroit’s problems are entirely self-inflicted.

Paul Ingrassia, former Detroit bureau chief of the Wall Street Journal, has an authoritative discussion of these self-inflicted problems this morning, entitled “How Detroit Drove Into a Ditch.” (For some reason the article is not locked behind the WSJ paywall). This article should be mandatory reading for every manager of a rustbelt company. One excerpt:

In all this lies a tale of hubris, missed opportunities, disastrous decisions and flawed leadership of almost biblical proportions. In fact, for the last 30 years Detroit has gone astray, repented, gone astray and repented again in a cycle not unlike the Israelites in the Book of Exodus.
Since he no longer has to get cooperation from Big Three news sources, unlike current auto reporters he has no pressure to sugar coat it. He likens them to Enron before the fall, and his forecast is stark:
The Detroit Three (no longer the Big Three) are adamantly denying bankruptcy rumors, but there's no denying that their very survival hangs in the balance. … It's highly unlikely that all three companies will survive.
Not surprisingly, Ingrassia links the problems to the poisonous labor-management relations that have assured inefficiency and inflexibility for decades, ones not faced by the transplant auto makers:
Japan's car companies, and more recently the Germans and Koreans, gained a competitive advantage largely by forging an alliance with American workers. Detroit, meanwhile, has remained mired in mutual mistrust with the United Auto Workers union. While the suspicion has abated somewhat in recent years, it never has disappeared -- which is why Detroit's factories remain vastly more cumbersome to manage than the factories of foreign car companies in the U.S.
Ingrassia notes that in the 1980s (when GM CEO Roger Smith was inadvertently helping a polemicist writer break into “documentaries”) both Ford and Chrysler found a way to improve their performance, at least temporarily. Ford created the best-selling Taurus while Chrysler invented the minivan.

Today, GM may be too big to save and Chrysler was sick before Daimler swallowed it and then spit it out. However, I want to believe that Ford can be saved. Fortune says this week that Ford’s balance sheet puts it in the strongest position of the three. (Of course, this is the same Fortune that ran an optimistic feature story in January about GM’s incipient “turnaround.”) But the story makes it sound like Ford is hoping to ride out the current storm rather than fix the systemic problems that it (and its competitors) face. It also has the problem of short-term focused family heirs.

For all three, the core problem is the union and labor relations. (Yes, they have to design cars that people want to buy, but that’s an inherently more tractable problem.) There are two alternatives for fixing labor relations: break the union — become a nonunionized shop like the transplants — or win them over. I don’t see how either is going to happen. Ingrassia notes that 70 years ago the UAW pushed GM and Ford to the brink and the car companies blinked. After that, the Big Three assumed they could pass on ever higher labor costs indefinitely, and accepted a lack of labor flexibility that would prove crippling.

Cooperation also appears to be a discredited strategy. Saturn (and to a lesser degree NUMMI) was supposed to be an experiment showing that an American firm could work cooperatively with the UAW to make a “new kind of car” (and car company), but that experiment fizzled out after less than a decade. In the end — as with most Detroit fixes for the past 20 years — it was more marketing hype than substance.

To solve both the labor and broader operational problems, I might have suggested bringing labor onto the board — the classic German approach. But that was tried at United and labor quickly grew disillusioned. With high labor costs, senior wage system and few career alternatives, the airline industry is the only other US industry as messed up as autos — as with Detroit, the airlines (except for nonunion carriers like Southwest) keep kicking the can down the road rather than solving core problems.

In short, it’s hard to see how Ford (or any of the others) can get from here to there. A Lee Iacocoa might be able to do it, but the next most capable car guy of his generation — Bob Lutz — has been ineffective at GM (while Jerry York gave up). While it’s clearly possible to run an efficient automaker that creates cars people want and has workers who want to work there, none of those companies are American.

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