america and her car companies.

This was a sloppy, not-as-coherent-as-should-be post, and so I’ve rewritten it.

We have a lot to be pissed off about. Literally trillions of dollars of (in theory) taxpayer money are being given to corporations to “bail them out.” This after years of lush profits, exorbitant bonuses, and executives living like it was the gilded age. I’ve been really pissed off. But about two different things:

1) What the hell is going on with our financial services companies? We have had to give them hundreds of billions of dollars to keep them solvent, their reckless risk-taking has endangered economies and financial markets around the world (do you know of any unharmed?). But what pisses me off even more is that these companies are still paying out dividends and giving out ridiculously large bonuses. This is absolutely ridiculous and one of the most shameful giveaways I’ve ever seen. We’re OK with families losing their homes AND with Bankers still pulling in $500K bonuses for starting this train wreck? Are you kidding? While it might have seemed justified for people to be getting paid millions of dollars for moving around money when it seemed like they were actually creating value–what’s the excuse now? This is shameful.

2) The auto companies are getting eaten alive by the public and showered with scorn. Some of it deserved. But, especially when compared with what they financials have done to us, I’m shocked at how deep this feeling goes. The recent cover story in Time magazine nails it.Here’s the first paragraph.

“This is the thanks you get for creating the middle class, Henry (Ford). In the throes of the biggest auto swoon since 1931, the headmen of Detroit go hat in hand to Washington to try to keep their once might industry upright for a couple of months and are treated as if they had invented the four-wheel-drive subprime mortgage. AIG torpedoes the entire economy and gets a $150 billion handout; Citgroup takes risks no sane manufacturing company would even contemplate and is rewarded with a $20 billion federal bailout. And the car guys?”

So I’ll posit that a lot of this has to do with the fact that while how the financial companies wrecked our economy is kind of hard to understand (something about mortgages and credit cards), it’s pretty damned easy to understand why Detroit needs help. It’s because they’ve made poor quality cars, that looked bad, with workers who they’ve paid too much money. These guys deserve to die. Let ’em. So I guess I can see how the haterade storm on Detroit came about. I just think it’s gone way overboard. Here’s why:

A) Fundamentally, I think most Americans have never forgiven GM, Ford, or Chrysler.

Almost everyone I know in their 20’s and 30’s has an aversion to American cars. You say Chevrolet and they’ll say “crap.” GM (I’m going to use GM as a proxy)made really, really bad cars in the 70’s and 80’s. In fact, I can remember some of those cars growing up. They required constant repairs. Entire generations moved over to imports with their superior quality and damned the Big 3 to the trash heap out of their consideration set. And today, when those companies fail, many Americans see this as evidence of why they were right to abandon American cars. They’ve never been forgiven.

The truth is that the quality gap has closed. As Time points out, or any number of publications, over the past decade quality is no longer a differentiating factor. But as any marketer knows, perception is reality, and its sure hard to change. The marketing wisdom is that if the success of your product is dependent on changing a consumer’s opinion, you’re probably going to lose. And so this has been the predominant problem for GM, et al– the perception gap. And GM’s marketers have failed miserably. This isn’t new. I’ve called these guys idiots for years now– here’s a blog post from ~2 years ago, where I beg them to apologize for making crappy cars and move on. A drastic reevaluation of your brand by a consumer requires drastic messaging.

B) GM’s cost structure reflects stubbornness, a lack of cooperation, and an era long passed. The cost structure of a living wage, health care, and a pension is reflective of the era of very profitable American manufacturing base and a corporate parent willing (or forced?) to share in the profits with its labor. The social compact to share in the success with the workers dates back to Henry Ford nearly doubling the wages of his workers so they, too, could afford a Model T. Yet, as their industry spiraled into decay thanks to poor quality, globalization, and leaner competition, these contracts and labor arrangement barely budged. Also worth mentioning are the other problems — pensions and health care costs reflect a time when an employee would retire at 65 and be dead by 67. 15 years of these costs vs 2 is a big difference. These are legacy costs. Bob Lutz summed it up well in the NYT yesterday:

“You get these people who say, ‘I know what I’d do if I were C.E.O. of G.M., like close up all the union plants and set up plants down South with non-union labor,’ ” he said. “Well, any idiot can figure that one out. But how conceivably can you get that done?”

C) If GM was such a crappy company that deserves to die, how can you explain it being the #1 car manufacturer in China and having much success everywhere else in the world?

D) It does matter where a company is headquartered– GM has the majority of their engineering and design staff here in the states. It’s not just manufacturing jobs we’re talking about. These are high value jobs that will disappear. America already doesn’t design or make TV’s, DVD players, cameras, or hundreds of other technically advanced things. We shouldn’t add cars to the list.

E) I forgot where i read this, but someone made the point that one of the primary drivers of the Japanese and Koreans basing their US auto production in the US vs Mexico was they were already foreign. They (rightly) concluded that American’s would consider them the same as GM, Ford, Chrysler if some of the cars were put together here. Without a true American manufacturer, why should they maintain more expensive labor? Let’s not even talk about expensive engineers and designers– these jobs will be based in their home office (Japan, Korea, Germany, etc) or China, India, etc.

F) This *current* crisis for the Big 3 *WAS* caused by the financial crisis. Yes. GM (which I’ve been using as a proxy) has had problems and made a number of mistakes. But they’ve known about this and have been working on fixing them. In fact, they had enough liquidity to take them through all of ’09. But then auto sales fell off a cliff almost dropping in half. This isn’t limited just GM, Ford or Chrysler. Honda, Toyota, etc is seeing this as well. They, however, aren’t burdened by the weight of history. Legacy costs threaten to kill the American 3. You could be stubborn on either side of this: If GM had made good cars, they wouldn’t be in this position. Or, if not for the financial crisis, GM would have survived because they were on their way to righting the ship. The truth is it’s both of these, right?

G) This is an opportunity. GM has inched its way to this point over the past few decades. There have been a number of union renegotiations, new car designs, and inventive research and development (The Volt anyone?) The problem is they never went far enough, because GM was never close enough to the edge. Now they are. As long as legacy costs can be brought in line (with an incentive given to labor to benefit in the upside of a leaner, more profitable company in exchange for their guarantees), and the necessary trimming to an infrastructure in line with their viable market share (think selling brands, closing dealerships, some plants and making the rest very flexible) GM can be a profitable and prosperous american enterprise. And then, as I said in my previous post 2 years ago, GM should use this as an opportunity to fess up for past mistakes, explain what they’re doing, talk about their quality improvements (YELL ABOUT THEM!), and ask Americans to invest at home again. (Full disclosure: I’ve owned a Pontiac and 2 Saturns and love buying American). With really great cars like the Cadillac CTS, Chevy Malibu, etc, a great communications campaign, and a competitive cost structure, we can compete.

If anything is clear from the financial crisis, it’s that this idiotic idea that America can compete just on services and doesn’t have to make anything is a recipe for disaster. (All of the financial instruments of mass destruction which triggered this meltdown were a large chunk of those magical service revenue). As a country, we’ve already let the vast majority of our manufacturing base leave. This is one of the last vestiges of an industry that we need (think national security).

In summation, I’m not apologizing for (OK, maybe a little) GM & gang, I’m asking you to look at it with a bit more nuance.

2 thoughts on “america and her car companies.

  1. I agree that there is an unfair difference in the way it seems like the financial institutions are being treated vs the Auto industry. Personally I think they should both be treated the same way and not be given a penny unless they come up with solid plans for change.

    As for quality – it may have improved, but at least in GM's case – I have to disagree that their products are equivalent to Honda, Toyota or VW for instance. I bought a 2007 Chev Cobalt last October and the brake rotors on it are junk. My 1998 VW Beetle made in Mexico only needed 3 brake jobs in over 300,000 km. The Cobalt had warped rotors when I bought it – they have turned them twice and replaced them once and I only have 41,000km on the car. They cheap out on parts to pay labour and benefit costs. GM vehicles also can never seem to get their door seals quiet. They are loud on the highway. My Cobalt and a 2000 Silverado both had leaky seals. My VW Beetle was sealed perfectly and had no noise, as did a Honda Civic.

    Lastly, the underlying issue with the Big 3 is not really the financial crisis. It is that they have been living high on high wages and benefits that in good times worked but now don't. They cannot possibly compete with car companies that produce either a superior product or a product at a cheaper price. Their costs do not allow it.

    I want the American car industry to survive, but there needs to be some serious restructuring BEFORE I would give them billions of dollars.

    Personally I would not have bailed out the financial organizations either.

    BTW – Being #1 in China sure does not equate to a quality product in my eyes. Just being able to turn out volume at a cheap enough price. Can you say lead in toys or melamine in milk?

  2. Financial companies have a bigger clout with the US government than manufacturing companies. That is the reason why they were given a trillion dollar bail out package without even the restructuring details having worked out. It is no wonder that the auto industry was so confident that they too would be given a similar package that the big 3 went to Washington in 3 separate private jets without even a basic plan. The auto makers have hinted enough that if they fail it will have a larger impact on the economy with all the ancilliary units shutting down. If it was for me, I would not have bailed out the banks and will not bail out the autos. I am sure without the bail out packages, the econmu would not be worse than what it is now.

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