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« Reason

Whither Detroit?

By Tyler S. Clark (Contact)


Published November 18, 2008

As the federal government injects billions into financial institutions and indicates its intent to continue down this path, the focus now shifts to the health of the domestic automobile industry. Many are asking whether we should step in and keep them from failing, much as was done for the airline industry after 9/11.

But the question about helping the Big Three is not 'if' but 'how'. The Center for Automotive Research conducted a study on "The Impact on the U.S. Economy of a Major Contraction of the Detroit Three Automakers" (pdf) and determined that--though not the oft-cited statistic by supporters of 1-in-10 jobs--the impact of a contraction in Detroit could result in the loss of up to 3 million jobs in 2009. Furthermore, no more than half of those projected losses would be recoverable through the arrival and expansion of manufacturing by foreign automakers in the U.S.

There is justifiable, wide-spread disillusionment with the unimaginative management of GM and others: they have continued to produce gas guzzlers and resist increases in fuel efficiency while Honda and Toyota have been churning out highly desirable hybrid vehicles for years. Any federal support extended to automakers will and should include stipulations for bringing their production strategies in line with future trends: dictating expansion of hybrid technology implementation and stipulating increases in fuel efficiency.

We cannot afford to let the automakers collapse any more than the financial sector. After all, as has been pointed out, the biggest threat to our economy is consumer confidence. If help for automakers is not issued at all or is issued in a way that lacks accountability for future performance, the crisis of confidence will only deepen.

Some argue that these kinds of rescues merely create a rainbow signal in the sky for other industries to follow to its pot of gold. Fine. Let them come and prove their need in terms of impact to the economy. As for domestic automobile manufacturing, the defense can rest.


Comments

1Erplane(475 comments)posted 5 years, 8 months ago

Hey Tyler - good comments indeed. Though your comment about GM producing 'gas guzzlers' is not entirely accurate. If you made that comment 5 years ago, you would be more right. But GM and Ford have made significant progress in making more fuel efficient vehicles. Actually if you go freep.com, they have a good segment - 6 myths about the Big 3. The whole "Epsilon" platform, which is the G6, Saturn Aura, and Chevy Malibu, have 4-cyl engines that get 33 highway. Thats better than Accord and Camry.

The govt should step in. GM and Ford have been restructuring and it was going okay, until the world fell out from them. Should they have gone down this road YEARS prior - yes. In Japan, the govt taxes a car further as it gets older (essentially). Its called a Shaken tax. As a result, cars depreciate to 0 value in less than 5 years. That forces consumers to buy a new car every 3-5 years, way more often than in America. That is an indirect govt subsidy - it keeps the Japan auto companies churning out more cars than the market would normally dictate. And dont forget the Japan OEMs dont have to pay for healthcare.

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2tylersclark(182 comments)posted 5 years, 8 months ago

Thanks for the comments, Eric. Your educated and thoughtful insights are always appreciated!

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3commoncents(53 comments)posted 5 years, 8 months ago

Tyler,

I almost agree with your position. If the big three can be re-engineered into more productive, meaningful, and relevant businesses, I would say "yes with stringent conditions." If not (and that is a possibility), I say let that industry go where people can manufacture decent vehicles at a profit.

I think everyone should question the cries of warning about how many jobs would be affected. Auto industry studies are hardly an independent source! More important is the cost, productivity, and quality of labor. When the big three have to pay nearly double the labor costs of other competitors, someone needs to ask why and what are they getting for their money. Here in the Valley, we need only look back at the steel industry and local hospitals to see what we have lost for the same reasons. Not far away in Akron, look at how this issue cost our region the tire industry jobs.

A meaningful solution involves an entirely new business model - not just labor reform. They need to completely restructure their entire distribution system, which is one of the oldest, most inefficient still around. What value does the current dealer network really add? Other than a sales process that most people distrust and dislike, a service role that is overpriced and horrible quality/reliability, I can't think of anything. Has anyone considered direct sales and/or service?

What about limiting the product offerings? Do we really need the array of brands and models... especially when most of us know that many are the same?
I, like you hope we can not save, but rebuild, a quality auto industry... one with completely new management, new products, new realistic (not entitlement) labor costs and attitudes. We have too many people who want to work! Saving the old, failed industry does nothing but waste money. Forgetting the mistakes of the past and building something new would be worth the investment.

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4tylersclark(182 comments)posted 5 years, 8 months ago

commoncents, Innovative rethinking like you're laying out will undoubtedly be essential to finding a new way forward for the industry.

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5projectgeniene(87 comments)posted 5 years, 8 months ago

Commonscents you are so right. I'm torn on this whole issue. As a marketer who has been a brand manager, I do not feel sorry that the U.S. car industry hasn't done the proper brand management or reduction of brands based on consumer or sales trends. It isn't new that consumers want fuel efficient, smaller cars/SUV/CRV. I feel like I'm watching the decline of the U.S. steel industry all over again (the worker being punished for bad management). Also, why is top management paid so well for poor performance? There definitely needs to be stringent oversight for this industry (as well as banking now) since they cannot police themselves. I have never worked in a company or for a brand where I receive a bonus if my company or category doesn't perform well. You don't need an MBA to understand that a CEO or CFO or board of directors should not be rewarded if the company is not performing up to expectations. Why do they keep producing trucks or large gas guzzling autos that the consumer is not requesting (this is not new but a good 20 year old trend)? When I moved back to Ohio, I asked around to friends and family about what type of new car to purchase. I hadn't ever purchased one before having lived in NYC and not needing a car. No one said to buy American. All I heard was to buy a Toyota or Honda because, as a woman who can't fix her own car and a mother who needs something safe and reliable, I couldn't go wrong with those dependable brands. This from people that live in Youngstown (GM country). It doesn't take a genius to see that there are core problems to the product produced by Detroit as well as image problems regarding their quality. On the other hand, I don't want to see the entire industry wiped out and people lose their jobs which can result in a plethora of problems. I remember too well the strains (emotional and financial) on my friends' families in the 70's when fathers lost jobs or had to go south to look for a new job. I also have to say that I see a definite need for an ethics class in undergraduate and graduate business programs. Hmm, maybe all upper management should be required to have a class on ethics like the Harvard business training classes that are always offered to executives.

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6apollo(1227 comments)posted 5 years, 8 months ago

They need to have less dealerships, less factories, less wages and benefits for the unions and executives, less models, and more oversight in order to get taxpayer money.

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7tylersclark(182 comments)posted 5 years, 8 months ago

It sounds like we're finding a consensus on how to move this forward. Let's hope Washington can do the same.

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8projectgeniene(87 comments)posted 5 years, 8 months ago

Actually, part of the consensus is that Detroit needs to analyze their brands and reduce the amount of brands, overhead and overhaul their objectives & strategies for the next 5 years.

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9Erplane(475 comments)posted 5 years, 8 months ago

Well, sad to say, but GM does have too many brands, that is for sure. As a Pontiac guy, I cant understand the difference b/t they and Saturn. As a result, each brand has rebagded product that doesnt appeal to any one focused class. They need to downsize in that regard. What I am torn by is whether it is time to blow up the labor contracts and start over. I am not saying this is all labors fault, but the current wage structure makes it uncompetitive as it stands (its also hurting Ohio's economy - as foreign makers think the 'old union' midwest is toxic to build a new plant). Its funny, Congress wants to have a list of requirements from the Big 3. I wish one of the execs would have taken Congress to task on having no political courage in the last 15 years to have comprehensive healthcare reform. I am not talking socialized medicine, but they did nothing while healthcare costs skyrocketed, and small business to companies like GM haved to endure the brunt of it.

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10Erplane(475 comments)posted 5 years, 8 months ago

Commencents - Good points you raised. Interesting on your take on distribution systems. Many people thought that the internet would revolutionize buying cars. But it didnt happen - more an evolution. Most consumers use it as a source of information to be more informed. That helps from getting pushed around by dealers. But the need for consumers to be more tactile in their purchase will always have a dealer network, or something thereabouts. I hate when I go into a dealer and they know less than me about a car. Thats their job!

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11valleyred(1094 comments)posted 5 years, 8 months ago

We cannot continue to bailout these terribly mismanaged companies! I am 100% against a bailout. I'd much rather support them going into bankruptcy so they can change their vision and rewrite their future.

The labor costs totaling $73 per hour for UAW Employees is ridiculous as well. The cost is $47 for Toyota employees, which is where it should be. Cut wages to $50-55 per hour and these problems will not happen.

Them flying in their private jets to DC is even more ridiculous.

Does giving these mismanaged more money to drain everyday really fix the problem? The only thing that will fix it is them going into bankruptcy so we can tell the bums at the top, no more private jets and no more overpaid workers!

I'm worried without a doubt and I am torn on this issue as well. B

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12Erplane(475 comments)posted 5 years, 8 months ago

I read this morning that Obama has contacted from very good bankruptcy lawyers to talk about a 'prepackaged' bankruptcy for the Big 3. I am starting to think that the govt money will be in the form of guarantees for DIP financing. This may mean that that $73/hr will go away - net net a very good thing for GM, and the others.

Hope I am not over-posting. I am way passionate about the U.S. auto industry. Read this posting by Jalopnik.com about the new Pontiac G8 GXP

http://jalopnik.com/5094964/2009-pont...

It shows American makers are making world class cars. For the writer to say GM has replaced BMW is amazing!

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