Fixing the American Auto Industry

Introduction

I thank God nearly every day because I am blessed to be in the United States. I buy lots of foreign products—after all, international trade benefits all—but I take pride in buying from American businesses when I can, especially for larger purchases. Even if my Apple computer was built by a firm in Shanghai, it was designed and engineered by Americans and much of the software it runs was coded by American programmers. There’s something refreshing about finding a quality product invented, designed, and engineered by your own countrymen.

And yet, I drive a Honda. Sure, it has an American-built engine and final assembly was in Ohio, but it was designed and engineered by a Japanese company. You can debate whether or not it’s foreign when it was built here, especially when compared to—say—an American-designed Dodge being built in Mexico. Confusion of nationality is the price we pay for the benefits brought by globalization. But part of me really wanted to buy from an American car company. Since I got my license, I’ve driven a Jeep, two Mercurys, and a Chrysler before ‘defecting’ to a foreign automaker.

But I want to see Chrysler, Ford, and General Motors (GM) regain their former success (and earn my next purchase). I want our country to be the automotive leader it used to be.

Those ‘big three’ own almost all of the great names of the U.S. Auto industry. Chrysler, soon to reemerge from its failed buyout by Daimler Benz of Germany, has Dodge and Jeep (plus Eagle, Plymouth, and AMC—now unused). Ford has Lincoln and Mercury (not to mention the foreign marquees Jaguar, Volvo, Mazda, and Land Rover). GM has Chevrolet, Pontiac, Buick, GMC, Hummer, Saturn, and Cadillac (plus foreign marquee Saab, international brands Holden, Opel, and Vauxhall, and the unused Oldsmobile name). Few of these once-respectable brands mean much anymore, and their sales continue to dwindle while many brands of Asian origin—Toyota and Honda of Japan and Hyundai of Korea—grow by leaps and bounds.

What’s most incredible about the plight of the American auto industry is how simple it is to diagnose and how easy it would be to repair—that is, if the leadership of these companies (pardon my language) grew some balls. While Chrysler, Ford, and GM each hemorrhage money and customers quarter-after-quarter, they no longer have time to worry about placating the unions and the politicians. If they expect their companies to survive, they have to stop thinking like spineless appeasers and start thinking like competent businessmen.

Killing the Market

Four things effectively killed the consumer market for American automobiles over the last twenty years, and these led to dropping sales, which in turn led directly to the current crisis in the U.S. automobile industry.

1. Poor Reliability—The ‘big three’ (Chrysler, Ford, and GM) like to talk about how much their reliability has improved, but they still lag the Asian manufacturers by light-years. A quick look at Consumer Reports’ list of the most reliable cars for the 2007 model year reveals 33 Asian-branded cars and 6 American ones. Meanwhile, the Consumer Reports list of the least reliable cars includes only 6 Asian-branded cars and 20 American ones. Do the math. Many U.S. car buyers—like myself—want to buy American, but were burned in the past by bad reliability experiences with U.S.-car-ownership. My two Mercury Sables cost me many thousands of dollars in repairs and were in the shop almost bi-monthly for the four years I drove them. Needless to say, Ford Motor Company products didn’t make it to the top of my list when I started shopping for a new car. Anecdotes like this abound among the car-buying public, and it will take the ‘big three’ years of hard effort to rebuild consumer trust—even if they miraculously started dominating the reliability rankings tomorrow.
2. Non-competitive Pricing—I’m going to do a little exercise with compact sedans—not usually the smallest cars offered by most manufacturers, but the next one up in size.
   • Configure a Honda Civic to your liking and jot down the price. Then do a Hyundai Elantra, Nissan Sentra, and Toyota Corolla as closely as you can to the same specifications. When I did this little exercise, I came up with $19,510; $17,645; $17,975, and $18,300 respectively for an average price of $18,358.
   • Now configure the Dodge Avenger, Ford Fusion, Chevy Cobalt, and Saturn Ion compact sedans to the same specifications and see what you get. I came up with $20,355; $21,415; $18,290; and $17,735 for an average price of $19,449—over $1,000 higher than the Japanese manufacturers’ average for basically the same vehicles.
   • The American companies seem to be offering lower entry prices, but when you configure their cars to include the extras that come standard on the Hondas, Hyundais, Nissans, and Toyotas—side-curtain air bags, antilock brakes, and so on—they’re no bargain. This is especially true when you consider the lower reliability that comes with that higher price. Repeat the exercise with larger sedans, sport coupes, and minivans and you’ll get about the same results. The only place where the Americans still win on price is trucks and SUVs, but the gap there is narrowing quickly. Failing consumers’ cost/benefit analyses when they are researching a purchase is the best way to ensure they buy a competitor’s product, not yours.
3. Poor Styling—You wouldn’t know it by the recent resurgence of good-looking American cars, but a big part of what hurt the American auto industry during the 1990s and early-to-mid 2000s was bad styling. Just as the Asian manufacturers were graduating from compact and subcompact economy boxes into building full-fledged, decent-looking sedans, trucks, and minivans, the U.S. companies embarked on some of the most ill-advised vehicle designs in history. The amoeba-shaped Ford Taurus (1996-2005) is a prime example, but the bulbous Dodge Neon (1995-2005), misshapen Oldsmobile Aurora (1995-2003), Pontiac Aztec (2001-2005), Ford Thunderbird (2002-2005), and the downright insulting reintroduction of the Pontiac GTO nameplate on a small, bland coupe (2004-2006) all helped push the majority of tasteful consumers to European and Asian competitors. Even die-hard fans of American automobiles bought Hondas, Toyotas, and Volkswagens during this period because they wanted an attractive, normal-looking vehicle. The bad styling pushed those customers away, then the reliability and relatively low price of those competing vehicles kept them from coming back even when American cars started looking good again.
4. Not Adjusting to Market Conditions—For the 2007 model year, Chrysler introduced the Aspen. This full-size, semi-luxury SUV weighs 5,000 pounds, sports a V8 engine, and gets a whopping 19 miles-per-gallon highway and 14 mpg city. This brand new product comes during a time of record-high gas prices, and was introduced in the same model year that the Asian companies brought their foreign subcompacts (with stellar gas mileage) to the United States for the first time. These subcompacts—the Honda Fit, Nissan Versa, and Toyota Yaris—seem to be selling well. The Aspen is not. In any free market, the companies that are most nimble on their feet are the ones that survive. You don’t introduce giant gas-guzzling SUVs in a country clamoring for higher fuel efficiency. This is only one example, but it illustrates a long-term failure among the ‘big three’ to adjust when times change, and every time it happens the offerings of Chrysler, Ford, and GM get further and further away from the desires of the car-buying public. Furthermore, there’s simply not enough room in today’s market for the number of brands these three companies offer. If you want a GM-built SUV, do you buy a Chevy Trailblazer, GMC Yukon, or Hummer H2? How do you even decide which of those three dealerships to visit?

Root Causes

The four things I’ve identified—poor reliability, non-competitive pricing, poor styling, and not adjusting to market conditions—resulted in consumers switching to European and Asian automobile manufacturers, but to get to the bottom of what’s wrong with the American car companies we need to dig deeper. Why is their product reliability inferior? Why are their prices higher? Why don’t they adjust quickly to changing market conditions? How do these problems and their causes intertwine?

One of the four—poor styling—traces almost exclusively to bad decision making in the management ranks. The amoeba-styled Ford Taurus should have never been green-lighted by management. The same can be said for the embarrassing Pontiac GTO coupe (actually imported from GM’s Holden division and mis-named). There’s not much to be done about bad management except for the shareholders to demand new management, and they should do so when these situations arise.

The pundits and observers of the industry will point to many things and identify them as core- or contributing-ailments when it comes to the remaining pieces of the puzzle. High employee health care costs, poor factory efficiency, rigid multi-year product rollout plans, internal competition between overlapping brands, artificially high employee salaries, and more are all identified as parts of the problem. But each of those boil down to three root causes of the American auto industry’s disintegration.

1. The United Auto Workers (UAW)—It is not ‘politically correct’ to say so, but UAW is singlehandedly most responsible for the downfall of the American automotive industry.
   • By demanding excessive wages and benefits for what amounts to basic manufacturing work, the UAW has forced the American auto companies to raise prices higher than their Asian competitors and cut their profit margins until they are razor-thin simply to remain afloat. A recent study by Dr. Mark J. Perry, professor of economics and finance at the University of Michigan, pegs average worker wages and benefits at the ‘big three’ at $146,420/year. That’s 53 percent higher than the average wages and benefits at Honda, Toyota, and Nissan ($96,000), and—as Dr. Perry coyly points out—58 percent higher than the average college professor ($93,000) (Carpe Diem).
   • The harm done by the unions to American auto manufacturing goes far beyond this simple math. Contracts between the manufacturers and unions—contracts often obtained in questionable fashion through the threat of a strike (which forces the company to approve the contract under duress)—effectively prohibit pay or promotion based on merit. Thus, it is very difficult for the American auto manufacturers to punish or fire bad workers, or to reward the good ones with bonuses and promotion. Bad workers keep working on the assembly line (lowering build quality and vehicle reliability) while good ones don’t necessarily rise to the leadership positions where they could improve product quality.
   • Before the establishment of the minimum wage and workplace safety laws we have on our books today, unions were an important part of maintaining balance in the manufacturing industries. Today, they are the primary cause of imbalance.
2. Being Stuck in a Rut—Things change. The automobile market today is different than it was ten years ago. Ten years ago it was different than it was twenty years ago.
   • It may have once made sense to have multiple competing brands—there were enough consumers of U.S. automobiles to keep Chrysler, Dodge, Plymouth, Jeep, Eagle, Ford, Lincoln, Mercury, Chevrolet, Pontiac, Buick, Oldsmobile, Cadillac, GMC, Hummer, and Saturn each independently successful. But keeping all these brand names around simply for nostalgic purposes does nobody any good. The shuttering of Eagle, Plymouth, and Oldsmobile were each steps in the right direction, but they didn’t go nearly far enough. Can anybody point to a compelling need for Mercury, Pontiac, Buick, or Hummer when we already have Ford, Chevy, Cadillac, and GMC brands within the same ‘big three’ companies to sell to those markets?
   • Not only do the U.S. manufacturers have too many brands, they also have far too many licensed dealerships. There are over 15,000 domestic auto dealerships in the United States—more than our 13,000 McDonalds restaurants, and far more than our 6,000 Starbucks. Each Dodge dealer averages 375 sales per year, while each Toyota dealer averages 1,700 (AutoBlog).
   • The same attitude that keeps many of these unnecessary marquees and dealerships operational—a simple fear of change and the short-term problems change can present—also prevents industry leaders from taking necessary, drastic action to put the UAW in its place.
   • This fear of change keeps the U.S. auto manufacturers stuck to rigid five-year plans, even if the market changes in a new direction halfway through. This is likely why the Chrysler Aspen came to market—it was probably set in motion long before gas prices skyrocketed and could not be stopped.
   • This fear of change puts the American manufacturers on a reactive footing where they struggle to follow the market years after it shifts in a new direction. A perfect example: the scattered few American hybrid vehicles, which run mostly on equipment licensed from Asian companies, entered the market years after their Japanese brethren and the domestics are still playing catch-up.
   • This fear of change also has prevented any kind of widespread collaboration between the U.S.-based manufacturers and their duplicative overseas divisions. Ford has a European division and an Australian division, each of which have a unique fleet of vehicles unavailable in the United States. Likewise, few of our domestic Fords are available overseas. Instead of producing one car model in high volume for worldwide distribution, Ford chooses to produce three similar vehicles in much smaller volume—increasing per-vehicle production costs and the likelihood of production problems (low reliability, etc.). GM’s Saturn division is one of only a few examples of international platform sharing in the American automobile industry at the moment—most of the recently introduced Saturns, including the Sky and the Aura, are re-branded vehicles from GM’s European division, Opel. The other example is some collaboration between Ford’s U.S. operations and Mazda—the Mazda 6 and Ford Fusion share a platform, while the Ford Escape and Mazda Tribute SUVs were jointly engineered by the Mazda group.
3. Sheer Hubris—Finally, the U.S. auto industry collectively seems to think that it can do whatever it wants and, despite all evidence to the contrary, believe that people will buy whatever they build. This institutional attitude is a holdover from the days when it was true—before imports were the widely-available value-buy they are today. ‘Build it and they will come’ is not the right attitude to sell cars any more. The customers will choose the best car for them (based on price and quality), and the customers are always right. The Asian car makers get that, so they make the sales.

How to Turn Things Around

This is not intended to be a hit-piece on the American auto industry. As I mentioned at the beginning, I want to see Chrysler, Ford, and GM regain their former success. When I buy my next car (tentatively scheduled for 2011) I would love to buy from one of the ‘big three’ American companies, but I will only do so if it makes economic sense (value for the money as compared to the competition), if the car looks good (things are looking up on this front), and if the purchase doesn’t line me up for a five-year maintenance nightmare like those I’ve experienced before with American cars. So how can the U.S. manufacturers turn things around?

1. Break the UAW—Again, it is not ‘politically correct’ to say so, but the first and most-important step to fixing the American auto industry is to break the excessive power of the UAW union, which will go a long way toward reducing costs and improving product reliability. Many of the Asian manufacturers operate factories in the United States and have successfully rebuffed UAW efforts to unionize. As a result, we have successful case-studies for American auto factories with satisfied, fairly-paid workers that produce a quality product at a reasonable cost. Heck, I’m driving one of them. The domestic companies need to follow-suit.
   • In a perfect world, the UAW would realize this itself—after all, successful businesses with controlled costs are better able to pay their workers fair salaries than those in Chapter 11 bankruptcy, desperate cycles of down-sizing, or shut-down and liquidated. But, for reasons I do not understand, many labor unions have preferred to bankrupt American businesses with their irrational demands rather than conceding—even just a little—in a cooperative effort to save a company and its jobs. Apparently, the unions think an unemployed former employee of a liquidated business is better off than a worker getting paid less than they’d really like at a business that remains afloat. Regardless, the UAW should be given an opportunity to play ball even if they are unlikely to take the opportunity.
   • If the UAW is unwilling to cooperate, they must be quashed. Personally, I question the legality of many current collective bargaining contracts. Company representatives are often forced to sign the contracts under duress (the credible threat of a worker strike, which can lead to serious financial loss and an even quicker bankruptcy than the one signing the contract might lead to). A contract signed under duress is not legally binding, and this legal approach is one that the domestic automakers can use to try to castrate the unions in the courts.
   • Officers of the company have a formal obligation to the company shareholders, and the UAW—by forcing the company into collective bargaining contracts—interferes with this obligation and reduces the value of the company. Individual company officers, shareholders, and the businesses themselves should bring class-action lawsuits against the UAW on this basis.
   • The United States Congress should introduce legislation to limit the excessive power of collective bargaining in all our manufacturing/industrial fields. It is already illegal for businesses to collude with one another to unduly harm employees or consumers for their own benefit; it seems only fair that employees should likewise be prohibited from colluding with one another to unduly harm their employers. Instead of asking Congress for bailout money (as Chrysler did in the 1980s), they should ask for Congress to actually solve the problem—without spending a dime!
   • Ultimately, if the above measures fail, the American automakers must play hardball—let the current labor contracts expire and do not renew them. Do not even entertain discussions with UAW representatives. If the workers strike, fire them (the same way you’d fire a worker in any other industry that doesn’t show up for work). Hire new employees under individual contracts at appropriate wage and benefit levels for the work they are being hired to do. Promote them when they do good work, discipline or fire them when they don’t. If the UAW protests, ignore them. If the UAW resorts to illegally preventing access to or damaging the company’s property, or if they harm the company’s employees, have them arrested and charged for their crimes. Ultimately, each business has the right to enter into any employment contracts that it wishes to enter into, and if the UAW doesn’t like it . . . tough! And, if one (or even all three) manufacturers go under, at least they did so fighting tooth-and-nail for their own survival rather than by letting the UAW force them into a slow obsolescence.
2. Simplify Product Lines—Most Asian and European manufacturers have only one or two brand names under which they sell their cars—their ‘main’ brand (Honda, Toyota, Nissan, Volkswagen) and their luxury brand (Acura, Lexus, Infiniti, Audi respectively). Further, they generally sell the same basic spectrum of cars world-wide with adjustments in their offerings and specifications to fit each market (after all, Americans are uninterested in Japan’s tiny ‘kai’ cars, while European and Asian markets are generally uninterested in full-size cars and SUVs). The ‘big three’ need to implement this same simple arrangement for their product lines by reducing the sheer number of brands and eliminating unnecessary duplication among those brands and between international divisions. I envision each of the ‘big three’ operating under three brand names—a primary brand for cars, minivans, and crossovers; a brand for trucks and SUVs; and a luxury brand selling ‘upgraded’ versions of the other divisions’ vehicles. These three divisions would sell basically the same spectrum of vehicles in the United States and internationally (with tweaks for each individual market) with minimal internal competition. Yes, we will lose some venerable, historic automotive brand names . . . so what? In business, you cannot be afraid to slaughter sacred cows when necessary.
   • Chrysler would retain the same three brands it operates under today—Chrysler, Dodge, and Jeep. Dodge would focus on the general-purpose automobiles (cars, minivans, and crossovers) already in its lineup and turn all of their trucks and large SUVs over to the Jeep division. This would mean the end of the Dakota and Ram trucks, which would be re-styled into the new Jeep Commanche and Honcho. The Dodge Durango would become the new Jeep Wagoneer. The Jeep division would drop it’s low-end crossovers, the Compass and Patriot, leaving that end of the market to Dodge’s Caliber and Nitro. Meanwhile, the Chrysler brand would move up-market from it’s current ‘semi-luxury’ status (oddly competing with some of Dodge’s higher-end offerings) to compete instead with Lincoln, Cadillac, Acura, Lexus, and Infiniti with full-fledged luxury cars (upgraded/re-badged Dodge and Jeep products and some of its own creations).
   • The Ford Motor Company currently owns or holds a controlling interest in Ford, Lincoln, Mercury, Mazda, Volvo, Jaguar, and Land Rover. Additionally, Ford’s European and Australian divisions independently produce their own automobile product lines with Ford branding. Ford should review this confusing array of duplicative, self-competing vehicles and select the best in each market (compact, mid-size, crossover, wagon, etc.) to become its new core product line worldwide. It should discontinue all other vehicles and focus on selling each product in its lineup in much higher volume than it does today. Ford should eliminate Volvo, Jaguar, and Land Rover as independent brands. Some combination of Ford, Mercury, and Mazda (I would call it Mazda, since that name comes with less baggage among the U.S. car-buying public) should become the new general-purpose automobile company selling cars, minivans, and crossovers. The Ford brand should continue, but refocus on their truck and SUV product lines (or, if the general-purpose division will be named Ford, this truck/SUV division should be called something else). Lincoln would continue as Ford’s luxury brand, selling upgraded/re-badged products from the two other divisions and some of its own creations. Come on, Ford—let’s see some of those ‘Bold Moves’ you advertise about.
   • General Motors has the furthest to go among domestic automakers to simplify its product lines. GM sells cars under the following names in the United States: Chevrolet, Pontiac, Buick, Cadillac, GMC, Hummer, Saturn, and Saab. Additionally, GM sells cars under the Holden, Opel, and Vauxhall names in overseas markets. Like Ford, the first step for GM is to analyze its confusing array of automobile offerings and select the best vehicle in each market (compact, mid-size, crossover, wagon, etc.) to develop a simple, cohesive product line to sell worldwide with minor regional adjustments. Then, GM should purge its duplicative brands—Pontiac, Buick, Hummer, Saturn, and Saab should all be shut down, as should the Holden and Vauxhall brands used internationally. All GM general-purpose vehicles (compact, mid-size, crossover, wagon, etc.) should be sold under either the Chevrolet or Opel name worldwide (I would call it Opel, again because that name comes with less baggage among the U.S. car-buying public). All of GM’s trucks and SUVs—including Hummers—would be sold under the GMC brand, which already has versions of all the trucks/SUVs sold by Chevy. Hummers would simply become the GMC Hummer H2 and GMC Hummer H3. Cadillac would remain, selling upgraded/re-badged products from the two other divisions and some of its own creations.
3. Eliminate Underperforming Domestic Dealerships—Most domestic auto dealers know that there are too many dealers, but are understandably reluctant to close up shop themselves. Too bad. The auto manufacturers should demand the merger of their dealerships while they eliminate brands—i.e., GM should strongly encourage its Pontiac dealers to merge with nearby Chevrolet dealers when it pulls the plug on Pontiac, and generally demand that underperforming dealerships merge or shut down. Those that do not cooperate should have their franchises revoked as soon as their current agreements expire. If a particular dealership really doesn’t want to get shut down, then its managers and employees should make sure they’re making sales. This game of hard-ball simultaneously eliminates the glut of domestic dealers and guarantees that the remaining dealers will do everything they can to keep making sales (for fear of getting their own franchises revoked). This should increase car sales and decrease dealerships’ operations costs, which works out well both for the remaining dealerships and for the ‘big three’ automakers.
4. Top the Reliability Rankings—I don’t care what their excuse is or how much reliability has improved lately in a relative comparison to the ‘big three’s’ earlier products. The American automakers need to top the reliability ratings, and do so consistently, if they expect to regain the public trust and improve sales. This doesn’t mean ‘okay’ reliability or ‘decent’ reliability, Chrysler, Ford, and GM need to challenge Honda and Toyota—the reliability leaders—head-on for the number-one spot. When I see a list of the ten most reliable cars on the road, I want to see five (or more) American cars on it. Taking UAW’s self-defeating rules out of the equation will go a long way on its own, but the management teams at the ‘big three’ must create an atmosphere where build quality and reliability are the paramount concerns. Further, to regain public trust, the ‘big three’ should drastically increase their standard warranty. Hyundai offers a 5-year, 60,000-mile comprehensive warranty and 10-year, 100,000-mile powertrain warranty. Match that, or be really daring and offer a 10-year, 100,000-mile comprehensive warranty! If the American manufacturers start building their cars right, this won’t become an undue financial burden (and many consumers would be willing to pay a higher price [within reason] if they knew they were getting a much better warranty).
   

   (Note: Days after I published this piece, Chrysler began offering a lifetime powertrain warranty on almost all vehicles sold under the Chrysler, Dodge, and Jeep brands. Not long after, GM increased their standard powertrain warranty to five years or 100,000 miles. This is still not quite on-par with Hyundai, and the comprehensive warranty remains fixed too low, but it’s a step in the right direction for sure.)

5. Win Consumers’ Cost/Benefit Analyses—Most importantly, sales will not pick up until American cars start winning a basic cost/benefit analysis. When consumers buy a car, they look at what that car offers for the price. This isn’t as simple as figuring a dollar value—consumers will buy a more expensive car if they perceive it being a better value for the price as compared to competing products. The exercise earlier where I compared prices of nearly-identically spec’d vehicles is a perfect example; it doesn’t matter that the American cars had a lower starting price, because once I added the features I wanted I ended up having to pay more. For the American car companies to survive, they must either lower their prices to compete with the foreign automakers or increase the relative value of their cars by adding desired, innovative features that the competition doesn’t have (or that they make you pay extra for).

Conclusion

There is hope for the ‘big three’. Today’s Chryslers, Dodges, Fords, Chevys, and Saturns are looking better than they have in decades. American manufacturers have also made headway in reliability and fuel efficiency, though they still lag their Asian competitors. Chrysler, bought out by Germany’s Daimler Benz in 1998 as a supposed ‘merger of equals’, has been brought back to the United States by Cerberus Capital Management, an equity firm that is as well-suited as anybody to make drastic improvements in Chryslers operations. With imagination and guts, the leadership of these venerable corporations can ensure their survival and even regain a leadership position in the industry. If Apple Computer could come back from the brink of bankruptcy to become the computer, music, and electronics leader it is today, the ‘big three’ can orchestrate a similar turnaround.

But it will not be easy, and for that reason I am not convinced that each of the ‘big three’ will still exist in ten years’ time. If I were to hazard a guess, at least one of them will either slide into bankruptcy or be bought-out by a competitor (if they can find any value in it) within the next decade. But I am very optimistic that at least one of them will survive, and that they will do so by implementing some or all of the recommendations I have made in this document—cutting abusive UAW contracts out of their financial equations, improving product quality and value, and being innovative rather than reactive.

In 2011, when I am in the market for a new car, it is my hope that I will be able to go to a domestic dealership and purchase a reliable, feature-packed, innovative American automobile for an equal or lower price than that offered by the competition. If such an option exists, I can guarantee I won’t be the only one in line to buy it. Until then, I will stick with my Honda.