In the wake of their worst financial crisis to date, the automotive industries of Detroit’s Big Three are up to their necks in debt with creditors nipping at their toes. Facing imminent bankruptcy, their destiny rests in the hands of Washington to decide whether or not they are worthy of being rescued and should be thrown another lifeline yet again. This is not a little handout either. What these companies are proposing will cost the government billions of dollars at the expense of the taxpayer. In case one is not up to date with these current affairs and was wondering what these numbers look like; US News and World Report affirms that General Motors has already accepted $17.4 billion in federal aid and has requested another $16.6 billion more in new loans. Meanwhile, Chrysler LLC requested an additional $5 billion on top of their previous $4 billion dollar advance. The last of the three, Ford Motor Co. has not asked for aid yet. However, it is likely that they could require assistance if the other two go under.
In an urgent attempt to manage these considerable requests President Obama assembled the Auto Task Force headed by the new Treasury Secretary Timothy Geithner and the National Economic Council Director Lawrence Summers. As of last Friday this 10 member committee began reviewing the restructuring proposals by the two American auto giants. Their duty is to decide whether the plans which General Motors and Chrysler submitted to Washington are viable for another bailout of the Troubled Asset Relief Program. That being said, one has to wonder what exactly qualifies a plan as viable or not? The current plans mainly consist of job cutting, brand discontinuation, the liquidation of assets, and the negotiation of concessions with the United Auto Workers labor union (UAW). All the same, these measures alone do not seem to be justified for these auto manufactures to receive billions in taxpayer bailout money. Though some of these actions are necessary, the restructuring plans fail to address the fundamental flaws of automotive industry as well as hold those accountable responsible for their errors in judgment. Instead it only appears to be a temporary fix that will inevitably result in another fatal crash down the road.
Determining the proper course of action is both necessary and vital for the survival of these automakers and the millions American jobs that depend on this industry. That being said, shouldn’t we be ensured that our money will be well invested? After researching public opinion and studying the innovative ideas from many intellectuals within the automotive fields and beyond I’ve synthesized their visions and molded them into a plan that will be best solution for this crisis. Thus, the automakers will become viable by facing the accountability of their problems through a mandate of new management and by the dissolution of its current structure directed by a stringent government intervention. The manufacturers will become competitive again by reducing its size, eliminating their rebadged duplicates, and through the production of primarily core brands and fuel efficient technology. This will give them the necessary adjustment they need to bring them into perspective with the real market capacity. Addressing the declining enthusiasm for new car buying, the auto industry will become redefined by using open source forums to design its models giving the people truly what they want. This will generate excitement and a new found loyalty between the consumer and their car brands. The unused remainder of plants will go towards new manufacturing endeavors such as building new energy efficient technologies and public works projects to stimulate economic expansion. Unlike the current restructuring plan, this plan allows the American automotive industry to become a consumer driven beast that will innovate efficiency in both how cars are developed and are powered. It will create a growing job market which will not only sustain the economy but will contribute to the greater good of the American people for future generations to come.
One of the biggest problems today with the automotive industry is that no one is taking responsibility for the current state that it is in. There is a persistent circle of blame ranging [in no particular direction] from the management to the UAW to the economy to even public disloyalty as to why they’ve gone broke. The fact of the matter is blaming does not get one anywhere. In order to solve this problem everyone has to take some responsibility aside from the public. They have to freedom to purchase whatever they choose. If American brands aren’t cutting it for them then it’s their right to find something that is. However, this problem is one of the many oversights which fall under what the leadership should be held accountable for.
When controlling an industry this massive, leaders must do many things in order to direct it successfully. Their job is not only to accrue profit but to ensure their industry is heading in the right direction. This means they must plan for future accordingly with good and bad times in mind. “Critics say leaders over the years at Ford Motor Co., General Motors Corp. and what is now Chrysler LLC were slow to take on unions, failed to invest enough in new products, ceded the car market to the Japanese and were ill-prepared for the inevitable rise in gas prices that would make their trucks and SUVs obsolete (The Associated Press, 2008).” Though a majority of this holds truth, there are a few things which need more clarification. For instance, it wasn’t that the automakers didn’t invest enough in new products; it was that they invested in the wrong products, discontinued good products, and created many disappointments. Eric Peters the automotive columnist for the American Spectator describes these mistakes throughout a number of his works:
GM actually expanded its roster of brands (Hummer) and pumped money into perpetually money-losing Saturn.
It poured R&D money into a retro muscle car -- the pending Chevy Camaro -- when it should have been pouring the coals to a Chevy competitor for the Camry and Corolla. Then there's the Aztek fiasco; the GTO, the SSR, Hummer, and Six full line divisions divvying up a 22 percent market share (Note: General Motors has 8 lines if you count Saab, and Hummer)
Want another? How about Chrysler sitting on its hands, allowing its once dominant position as seller of minivans to fade away into near-nothingness. Or its failure to build a successor for the Dodge Neon -- in the 1990s, one of the best-selling economy compacts on the road. Instead, Chrysler threw development money at the pretty but pretty useless Challenger muscle car -- a 12 mpg gas guzzler… Ditto the crop of Commanders and Calibers, Aspens and Patriots -- models that Chrysler can't get rid of even with "two for one" desperation tactics deployed.
Toyota has been selling its Prius hybrid for a full ten years now -- anticipating the gas crunch by, oh, eight years. Not one of the domestics had a hybrid in production until after the gas crisis hit -- and even then, their versions were (and still are) primitive in comparison. GM's Volt hybrid electric car won't get here for another year, at least
Honda Civic and Toyota Corolla are perennial big-sellers and have been for years, in good gas times and bad. They gave Toyota and Honda not just a fallback if and when the big trucks and SUVs went sour. They also created an enduring buyer base -- composed almost entirely of former GM (and Ford/Chrysler) customers
How the heads of the industry directed their resources is one the most fundamental mistakes they made. When the companies should have been downsizing and simplifying themselves, they instead were expanding, trying to develop niches that wouldn’t account for nearly as many sales as their base brands. Specifically, these bases are passenger cars and trucks. As Eric Peters pointed out; what the Big Three had covered in trucks and SUVs they lacked in passenger vehicles that were high in quality and practicality. Consequently, none of what they produced was substantial enough to depend on when truck sales slumped and gas prices rose. An excerpt from Time Magazine in 2006 describes this process as it unfolded:
“The problem was a long time coming, as Japanese and later Korean automakers scored annual gains in quality, profitability and market share. But U.S. automakers were lulled into complacency in the 1990s by the SUV (light trucks, technically), which decades ago earned profit margins as high as 25%...Meanwhile, the Japanese started making good SUVs too, and the competition made the profit margins shrink. When the prices of gas soared, SUVs sales tanked, and the U.S. companies were caught without money spinners.”
The fact the management didn’t have the foresight to plan for the challenges ahead does not say much for them being the ones responsible for billions of tax more dollars and whether they should be trusted to make the industry’s next life or death decisions. Likewise, is it fair that these CEOs behind the industry’s fatal mistakes are still getting paid millions while their employees are losing their jobs at their expense? It is apparent that it is not just the industry that needs restructuring but the removal of the management is just as necessary.
If the government really wants to help the American auto industry they need to do more than hand Detroit a check. All the same, there is much debate whether bankruptcy should be considered as better option than the current bailout proposition that’s on the table. Former Massachusetts’s governor and Republican presidential nominee candidate Mitt Romney advocates that a “managed bankruptcy may be the only path to the fundamental restructuring the industry needs. It would permit the companies to shed excess labor, pension and real estate costs.” The New York Time’s chief mergers and acquisitions reporter and columnist Andrew Ross Sorkin explains a similar scenario which he refers to as a Government Sponsored Bankruptcy or G.S.B. and makes his case for it; “
Bankruptcy would give G.M. enormous leverage with its debt holders — and, perhaps more important, with the U.A.W., whose gold-plated benefits are one reason G.M. is no longer competitive. A bankruptcy filing would also give G.M. the cover to close plants, rid itself of unprofitable brands and shed dealerships. In fact, unless G.M. files for bankruptcy, state laws would make it prohibitively expensive to shut dealerships… The goal should not be to keep these companies from filing Chapter 11, but from filing for Chapter 7 — which would mean liquidation.”
Both Romney and Sorkin have good points but they are a little too rough on the U.A.W. Poor management has more responsibility for this mess than the worker who does only what he/she is asked to do. It is true that benefits such as healthcare are factored in the price of the car. However,if the government bared some of this, such as what they promised do with their universal healthcare plans than these costs would fall less on the employers and would help make them more competitive with foreign markets. Everyone has some accountability. Though bankruptcy could help automakers restructure and may allow them to keep their distance from creditors, it is not as simple as some make it out to be.
Bankruptcy is a tough call for many reasons. For one, it is long arduous process that has no guarantee of making the auto industry healthy again. Joe Nocera writer of the New York Time’s Talking Business Column weighs in with these difficulties;
“Under the current rules of the road, only bankruptcy will allow G.M. to cram down a new contract on the U.A.W., or get out from under its dealership agreements. But it can only do so after proving to the bankruptcy judge that it has tried to negotiate a new contract, which takes a very long time, and creates immense enmity. In addition, there would be so many moving parts in a General Motors bankruptcy, so many creditors who would have a seat at the table, so many stakeholders looking for every tiny advantage, that it would be impossibly complicated”
This is why there are so many who are trying to adapt or form their own types of bankruptcy-like simulations which parallel the extenuating circumstances of the automotive industry. Mitt Romney’s “Managed Bankruptcy” and Andrew Sorkin’s “Government Sponsored Bankruptcy” are just a few of these examples. One this is certain, there must be stringent government invention to manage such a substantially complex operation. This will be done judicially to ensure the best interest of the American people. The government must treat this as if it was a bankruptcy imposing its will to make parties cooperate and contribute aid only when it is necessary. Joe Nocera does the best at wrapping his fingers around a middle-ground alternative;
Someone in the Obama administration, with both business savvy and a suitably tough-minded approach, could bring together the parties, including the dealers, the union and the company. He (or she) could force the union and the company to renegotiate their contracts. With his input, Congress could perhaps pass a law that dealt with the state laws governing dealerships. (Or the government could pay off the dealers itself, instead of having G.M. do it.) He could sign off on plant closings. He could force the companies to come up with real plans that would return them to profitability. And in return, the government would make federal loans that would give them the breathing room they need.
In addition to this resolution, the government should add the clause which Romney suggested in his op-ed to guarantee warranty protection no matter if they are in bankruptcy or not. The newly appointed Auto Task Force will do more than approve or reject loans. They will take an active hand in remodeling this industry and will act as legal arbitrators to ensure that these tough changes are made and enforced.
This is where the real transformation will begin to take place. First, the fat will be trimmed. Many agree including Wall Street Journal’s Paul Ingrassia that the board and management have to go. There is no argument here that this must to be done in both Chrysler and GM cases. Ford should be safe for now. If any government aid is used then shareholders should lose their paltry equity. Union pay will have to be scaled down through a mediated negotiation to accommodate the industry through these difficult times. Their pay should be somewhat equivalent to the foreign owned plants here in the US till the automakers get back on their feet and can afford to renegotiate. The US Honda plant is a good example to how they handle wages and benefits. However, these are the choices which the government appointed task force will have to decide on though. Benefit contracts will have to be reasonably assessed and should be honored to the best of their ability to those which they were promised to. This must all be done in an ethical manner. The UAW shouldn’t have to suffer because of upper management’s mistakes but they also have to understand the reality of the times and that old practices which they were accustomed to were not always healthy to the industry. This is how accountability begins to take place. Everyone from upper management to the factory worker has to face their individual level of responsibility.
In continuing this transformation, fat must also be trimmed in production to suit the market’s capacity. This problem of over production has been an unacknowledged flaw that has plagued the automotive industry’s business model for quite some time now. It is only now, in this crisis, that automakers are beginning to realize the consequences of their actions. Eric Peters describes this toxic practice in his work, Too Many Cars, Not Enough Market;
What's "overcapacity"? Simply put, too many vehicles chasing not enough market. The industry (that's all the carmakers put together) tries to sell on the order of 11-12 million new cars every year because that's how many cars they build. The problem is it's hard to sell that many cars, even in the best of times -- and it's even harder to sell them at any kind of decent profit…Within each model segment -- mid-size family sedans, for example -- there were typically three or four major contenders circa 1970. Today, there are more than a dozen contenders in this same segment -- and it's similar in virtually every other segment… Meanwhile, the buyer pool has not increased in parallel with the increase in the number and types of vehicles being offered…Also, modern cars, once built, have an extremely long shelf life compared with the cars of the past. With decent care, they can last 15-plus years and more than 200,000 miles. But the auto industry continues to churn out new cars on the 1960s-era assumption that the entire fleet gets recycled every 5-7 years or so. Result? The inventory (new and used) stacks up.
How does one undo all this mess? As Eric Peters suggested and probably many of those who believe in the free market might agree, one should just the natural market forces act accordingly. This conservative approach is similar to the bankruptcy school of thought. However, our goal here is to keep as much the manufacturing sector as American as possible, thus, keep supporting the US economy instead of surrendering to foreign markets. Therefore, similar to customizing a bankruptcy plan that helps American automakers survive, a custom market transformation is necessary for them to regain a competitive edge. That way automakers work within market forces instead of against them as such a bailout would permit.
Eric Peters would refer to this next step as the thinning of the herd. For the Americans to stay in the game they must thin their herd or they will be completely thinned out of the equation themselves. For example, GM runs a total of 6 six full line divisions- Chevrolet, GMC, Pontiac, Buick, Cadillac, and Saturn—(8 if you include Saab and Hummer). This is way too costly for such a little market share (est. 22- 26%). Decades ago this worked because there was less competition, more market share (est. 50%) and less over capacity. Nowadays it is a waste of vital resources to have this much baggage. The reason why Ford is not nearly in a much trouble is because they are about a third less in size as General Motors. In order to begin fix to this GM must cut its divisions by at least half. That means the strong will survive and the rest will die off. This effect is already starting to take place in fact. Saturn will be phased out by 2010, Saab is looking at bankruptcy protection after being denied aid from the Swedes, and GM is searching for a buyer for Hummer. This is the just the beginning of natural selection for the auto industry and more must happen for it to survive. GM must stick to its core keeping about two to three of most successful divisions. In this case Chevrolet and Cadillac would definitely stay. This would be similar to the Asian business model such those of Honda-Acura, Toyota-Lexus, and Nissan-Infiniti. They mainly comprise of one standard division and one luxury division. Pontiac and Buick could possibly battle it out for the third spot. This could be like Toyota’s Scion division, a one-off place for bolder concepts. There are those who believe Pontiac should remain as GM’s specialty brand and there those that think Buick should stay because of their success in China -Sorkin. Nonetheless, one of them will have to go. Chrysler’s situation is a little more complicated. In midst of this crisis, their Industry is the worst shape of the three with all of their divisions struggling to say the least. These January 2009 sales numbers reflect this conundrum.
It is most important to note the far right column of volume percent change. This is how one judges the health/trend of the divisions and its models. For instance, Chrysler is failing miserably. What used to be their most popular models the PT Cruiser and the 300, have peaked and are now plummeting drastically in sales. Jeep, the smallest of the three are hanging in there the best with their star the Wrangler actually reporting gains. The largest, Dodge, is also hanging in there somewhat, only because the success of their trucks - the Ram pickup series and Dakota line. Dodge’s Viper is a surprise but sources say that because they have a solid resale value and have recently adopted as investment toy for wealthy consumers. So what should Chrysler LLC do? They will have to put most of their fleet to rest or as Andrew Ross Sorkin suggested, they could consolidate themselves under GM:As an inducement, the government would allow the merger with Chrysler to go forward… We need to look at the industry as a whole…The merger should reduce costs by as much as $7billion. But that’s not the tough stuff. The harder decisions are these: Both companies would have to jettison brands — lots of them… That means Saturn, Pontiac, GMC and Saab would all disappear. Deutsche Bank estimates that reducing G.M.’s brands from eight to three would bring down the company’s cost base by $5 billion annually. If you’re able to shut the dealerships too, lop off another $4 billion. Chrysler is an even sadder situation: the only brand with any value is Jeep. Its Dodge Ram truck lineup could be merged with Chevy, which would also pick up pieces of the GMC business. And Chrysler’s minivan business could be combined into the Chevy brand as well.
That is just one idea. Another may be to package Jeep along with Hummer for an independent buyer. It could keep these two alive by forming its own smaller niche for an off road/outdoor market. It is unnecessary to have the two running as full scale production lines especially because of where trends are heading with more practical vehicles. How Fiat fits into this picture, I’m not sure. Nonetheless, the only way Chrysler can get out of this is to downsize itself by 60% or more and take up arms with either a similarly downsized GM or continue forming their foreign alliance with Fiat. From the looks of thing it does not appear that they are capable of surviving on their own.
After the American automakers rid themselves of their weak links they will have to change their practices quite a bit to keep themselves from repeating their mistakes again. It is not just about changing the structure that is necessary. For the automotive industry to succeed for the betterment of itself and society its culture must change as well. As already mentioned, the management and board have to go. The culture cannot change with these people running the industry. I’ll add another thing too; new management’s pay will be based on their success. That way they can no longer get paid millions while their company is losing billions and their employees are out of jobs. That’s capitalism right? As for new practices, everything will be about innovation. This means no more producing the exact same vehicle under one to two other brand names or badges. Eric Peters points out how this practice runs rampant at General Motors.
The Aveo-G3 thing is by no means a unique or unusual practice for GM, either. GM re-sells the same basic minivan at least two different ways (Chevy Venture, Pontiac Montana), the same "crossover" wagon at least three ways (Saturn Outlook, GMC Acadia, Buick Enclave) and the same basic SUV three ways (Chevy Tahoe, GMC Yukon, Cadillac Escalade). These are just a few examples. Divide and conquer is a great idea in politics; in the auto business, it is a recipe for confusion, needless waste of resources -- and bankruptcy.
They’re not fooling anybody here. This neither excites anyone nor does it help sell cars any better. All this really does is flood the market with an abundance of look-a-likes reducing any demand which they may have once had. Stopping this practice is another way that automakers can start to thin their herds. Automakers must become more creative in satisfying their consumer’s wants and needs.
One of the biggest complaints today, which many have for the Detroit Three, is that they are out of touch with their consumers. Specifically, they are not producing the cars which people really desire nor are they producing anything that is superior in quality and in fuel efficiency. Again, this is where that culture disparity comes into play. This has to be fixed.
In order to make this change the automakers must take some radical steps in how they develop their cars. One of the best articles I’ve read lately is Jeff Jarvis’s:
How Google could save the Auto Industry. Here Jeff states what I just mentioned,
“The huge declines in sales reflect a fundamental disconnect between drivers and Detroit. It's time for a radical rethinking of the way U.S. automakers do business.”
Next Jeff tells how he was ignored when suggested that Detroit should open their doors to the public and make them a part of communicating their ideas in their vehicle’s development,
I sat in Detroit some time ago and suggested heresy: I urged the car people to open up their design process and make it both transparent and collaborative. Car companies have no good way to listen to customers' ideas. If they had opened up, years before, I would have been among the legions who'd have gladly told them to invest 39 cents for a plug-in car radio so we could connect our iPods”
Then Jarvis explains why the automakers were opposed to his ideas,
"My suggestion was sacrilegious because automakers have long been secretive about design. Design and surprise, they think, are their special sauce. That's why they cloak new models like classified weapons, setting off games of cat-and-car with photographers who try to scoop the secrets. Apart from the most fanatical car fan, do the rest of us still care? The excitement I remember about a new year's cars -- like a new season's TV shows -- is gone.This where Jarvis begins to argue his point,
How could a car company again win our affection for its products and brands? By opening up, by making the process of producing cars transparent so it could involve customers, by turning out cars customers want because they had a chance to say what they want."
He explains how this should be by using a collaborative business model similar to the likes of what Google uses,
"Google listens to us and trusts us when it releases unfinished products as "betas" so we can tell them what to do next. That's the approach behind Google News, Gmail, and the new Chrome browser."
Afterwards Jarvis links the two together to form what would be one of the greatest innovations in the automobile industry- “The Open Source Car”
"But shouldn't design at least be a conversation? Designers can put their ideas on the Web. Customers can make suggestions and discuss them. Designers can take the best ideas and adapt them, giving credit where it is due. I don't imagine customers would collaborate on transmission design -- though a few might have good suggestions if given a chance. But they would have a lot to contribute on the passenger compartment, the look of the car, the features, and the options. They could even get involved in economic decisions: Would you be willing to give up power windows if it got you a lower price or a nicer radio? This collaboration would invest customers in the product. It would build excitement. It would get the product talked about on the Web and linked to and boost its popularity in Google searches. The approach could change the relationship of customers to the brand and that would change the brand itself. Imagine that, the collaborative community car: our car…"
"What an opportunity the industry has to bring humanity and personality back to cars. If so many of us like to express ourselves in blogs, YouTube videos, Facebook, Bebo, MySpace, and Flickr -- if, as Google understands, many of us want to have a strong identity online through self-expression -- why wouldn't we want to express ourselves through our cars? Companies have turned their products into commodities by imposing such sameness on them. I know, it's about efficiency: four models built under four brands on the same body with the same parts, making them cheaper. But the joy of customizing our own cars was taken away by factory efficiencies and dealer economics: We buy off the lot, not out of the factory, and we buy cars that are often loaded, like cable subscriptions, with things we don't want…
Now take the next step and imagine I could take an unpainted car to any of those designers on Facebook or my student the graffiti artist and have my car painted so that it looks like no other. It'll cost me. But I'll bond with that car and love it because it's mine, an expression of me. That unpainted car would be the beginning of an auto company thinking open-source…"
Jeff Jarvis’s article is beautiful, articulate and innovative on many levels. Though I paraphrased much of its material, it is still a must read. He goes on to explain in greater detail how social networks are critical in collaborating automobile designs and how smaller companies are beginning the open source car process. Lastly, he discusses how the automotive industry could take a hand in all levels of transportation facilitating how people choose to get around. Though it might not be practical to have open source design for every car built, the automakers can begin to adapt this strategy to business model in ways that are both profitable for themselves and are constructive to the public. The point that Jarvis is trying to make is that Detroit has been missing the mark for quite some time now. If they can develop a way to connect to themselves with their consumers they can begin to turn their industry around. It is this type of innovative thinking that is imperative to change the failing culture within the automotive industry.
Innovation must take place in every facet. Bringing the public on board with the automaker is just the beginning. The next evolution in the industry’s culture will come from a push to evolve its technology. For too long now the American auto industry has been complacently behind the Japanese with energy efficient progress. Now is the time that they must become the leaders in this push towards the next generation of green technology. This is where the government must make a stand to form strict regulations to keep these automakers moving in the right direction toward specific goals. For example, laws need to be formed that mandate automakers to actively fuse green technology throughout their core brands. Makes and models must include technology that should incorporate the following alternatives; hybrid technology that uses both electricity and gas, flex-fuel powering such those cars that can run on ethanol, gasoline, or liquefied petroleum, compressed gas converters which use natural gasses such as methane, diesel engines and systems which run on Ultra-Low Sulfur Diesel (ULSD) or biodiesel, full scale electric propulsion that uses advanced lithium ion batteries or hydrogen fuel cells, or any other alternative energy sources.
