In July 2007, I wrote an epic piece titled Fixing the American Auto Industry. In it, I reviewed the state of affairs at Chrysler, Ford, and General Motors (GM) at the time, how they got where they were, and what I felt they needed to do to get back on track. Reading it today, I stand by the vast majority of what I said. I am also sad to say that my dire predictions have essentially come true:
. . . 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.
All-in-all, I wasn’t all that surprised when two-thirds of the ‘big three’ went bankrupt (Chrysler and GM). Nor was I surprised that one of the ‘big three’ is still surviving and doing pretty well in the market (Ford). That’s basically what I said would happen; though I was a bit surprised at how quickly things fell apart for Chrysler and GM.
I certainly didn’t predict everything though. Fresh off of ‘going private’ under the leadership of Cerberus Capital Management, I would have expected in 2007 that Chrysler would be in the best position to turn itself around. Less than two years later, Chrysler was a bankrupt shell of a company jointly owned by the United States government and Italian automaker Fiat. I am thoroughly disappointed in Cerberus; they had a great opportunity and missed it. I’m also surprised that Ford was able to survive and, indeed, do very well for itself without breaking the UAW union or eliminating a large portion of their dealerships.
Of course, most surprising of all is the billions upon billions of dollars that you and I have unwittingly ‘invested’ into Chrysler and GM. This was an illicit misappropriation of our tax dollars and is absolutely unacceptable. If any company deserved our support, it was the one that was actually doing what it needed to do to return to solvency.
Regardless, I pointed to five things the American auto industry needed to do to turn itself around in 2007:
- Break the UAW.
- Simplify product lines.
- Eliminate under-performing dealerships.
- Top the reliability rankings.
- Win consumers’ cost/benefit analyses.
While no company has done all of these things, Ford has taken a serious crack at it and is continually improving itself (to the point that I’m [very preliminarily] considering a Ford for my next car). Beginning immediately before its bankruptcy, GM has also begun to implement many of these changes. Chrysler seems to have missed the memo, but it is essentially gone as an American automotive manufacturer already and I hold out no real hope for them anymore.
Break the UAW
Sadly, none of the ‘big three’ have managed to accomplish this most central task. As I discussed in my 2007 analysis, the United Auto Workers union shares much of the blame for the state of the U.S. auto industry. They have artificially inflated wages and benefits far above what is properly competitive and established an entitlement atmosphere where bad employees keep their positions indefinitely and good ones are not well rewarded for their efforts.
While Ford has managed to deal with this monkey on its back, I am still somewhat concerned about their long-term viability as long as the UAW has a stranglehold on their factory labor. Honda, Toyota, Nissan, Subaru, and other foreign manufacturers operate car factories in the United States without union labor; they pay fair wages, but have necessary flexibility in hiring and firing based on performance. As such, foreign-branded cars made in the U.S. by American workers are built cheaper and better than their American-branded counterparts.
Ford has made great strides in their build quality, which I will discuss later, despite the UAW’s interference, but a car made at a UAW Ford factory will always have a higher cost of production than a comparable car at a Honda factory even if they’re both here in the U.S. This means that, as long as the UAW has a labor cartel at Ford’s factories, the company has two choices: charge more for its cars than the competition, or make less profit on each car than the competition. Neither of these is a winning strategy in the long term.
I applaud Ford for keeping the UAW under control, as much as they can, but the reality is that the UAW is a cartel which obtains its labor agreements through extortion (the threat of a strike). If the UAW won’t become an ally and partner with Ford (and Chrysler and GM), they must be broken. Detroit has one of the highest unemployment rates in the U.S.; there is no shortage of people willing to work in a car factory without a union contract.
Simplify Product Lines
The unnecessary duplication and overlap between the various marquees of the American car companies has long been more a hindrance than a help. I made a series of recommendations to each of the ‘big three’ in my 2007 piece and, while things didn’t go exactly as I recommended, I am pleased to report that the basic end goal—an easy, straightforward array of products—is slowly becoming a reality.
Ford has been quietly divesting itself of its duplicative and low-volume brands. They have sold (or are in the process of selling) their stakes in Mazda, Volvo, Jaguar, and Land Rover. They have also announced their intent to shut down the unnecessary Mercury brand, which has no unique products of its own. Ford Motor Company will, essentially, be Ford and Lincoln. Additionally, Ford has begun to more actively share their products around the world. A new commercial van, the Transit Connect, has gone on sale in the U.S. and originates from Ford’s European division. The upcoming Ford Focus redesign will be a world-wide product, replacing the unrelated European and American versions of the Focus. The European Fiesta is also coming to the United States soon. The more Ford does this, the better. There is no need to produce three completely different mid-size sedans (for example) in moderate volume when you can produce one in massive, world-wide volume.
GM has also embarked on a reactive, post-bankruptcy effort to cull its unnecessary brands. It is working to divest itself of Saab and Opel, and is planning to shut down its Pontiac, Hummer, and Saturn groups. However, even post-bankruptcy, GM seems afraid of going all the way. Chevy and GMC still compete with one another selling the same trucks; Buick and Cadillac still compete among themselves in the American luxury market. Buick has no reason to exist except as a foreign brand (they are quite successful in China). GMC only has reason to exist if Chevy stops selling trucks. GM has also done a poor job of utilizing its foreign divisions except for Daewoo, the one division it should stop utilizing. Get some Holden’s over here from the Australian group. Share some technology! You’re the biggest car company in the world, and most of your best cars aren’t even sold in your home country!
Chrysler, meanwhile, was in a pretty good position at the start. It only had three brands—Chrysler, Dodge, and Jeep. All they had to do to simplify their product lines was get rid of the Jeep Compass and move Chrysler a bit more upmarket. As far as I can tell, they haven’t bothered to do either.
Eliminate Underperforming Domestic Dealerships
There were way too many dealerships for each of the ‘big three.’ Seriously. I can’t find the actual statistics as I write this, but I seem to recall that Toyota dealerships averaged over 1,000 sales per month, while ‘big three’ dealerships averaged more like 100 or 200. What this meant was that the quality of each dealership was less than it should have been, and many dealerships were constantly teetering on bankruptcy themselves.
Ford seems to have avoided a major cull of its dealerships, but this should still be on the table. It’s better to have an awesome dealer 20 minutes away than to have three crappy ones in a 5-20 minute range. Personally, if I were running Ford, I would strive to have nothing but the most excellent dealers, and I would expect that each dealer sell the full Ford/Lincoln product line. It sounds heartless, I know, but dealers are the public face of the brand. Every bad dealership experience sours a customer not only on the dealership, but on the brand. Ford (and the others) can’t afford to have any bad or even mediocre dealers in the network.
Chrysler and GM both embarked on a huge cull of their dealerships when they were teetering on the brink, and received hearty public criticism for it. I don’t know what the methodology was, but I have heard many anecdotes about great dealerships being closed while poor ones stayed open. Personally, what I recommended in 2007, was that these companies make it known in advance that they will be shutting down underperforming dealers, and let them fight for the right to stay in business. This competition would drive all the dealerships that survive to be better and stronger. This would have been a better approach, but it would have required time . . . a luxury that Chrysler and GM had run out of.
Top the Reliability Ratings
While the UAW was the single biggest cause of the implosion of the U.S. auto industry, many pundits and consumers would cite reliability. Ask any Honda, Toyota, Nissan, or Subaru driver why they didn’t buy a Ford, Chevy, or Dodge. Most of them will cite a poor reliability experience with a ‘big three’ car from some time in the last twenty years or, if they are younger, a generic ‘I wanted something reliable,’ kind of statement. After all, most younger drivers have never owned a ‘big three’ car because their poor reputation preceded them.
I blamed the UAW and their culture of poor performance for much of the reliability problem in my 2007 piece, but I’ve tempered this view in the time since. Ford, without breaking the UAW, has managed to challenge the Japanese manufacturers in reliability and build quality in recent years. This proves that a poor management culture at the ‘big three’ was as responsible as the UAW for the quality mess they found themselves in, and that strong management can counteract and even overcome the poisonous influence of the union.
I would not have predicted in 2007 that Ford’s reliability would have come so far. While the Fusion was already available at the time, and often received high quality scores, I counted it as a fluke rather than the beginning of a new trend. Ford has proved, however, that the Fusion was the beginning of a new focus on quality and reliability. Many of their other new models rate high as well, and Ford now finds itself in the top-five of many brand reliability rankings. I can’t praise Ford enough for this. Product quality, more than anything else, is what saved Ford from the fate of Chrysler and GM. That’s exactly how it should be.
However, sadly, Chrysler and GM both seem to have missed the memo on this one. Even in their post-bankruptcy desperate reorganization, I’ve seen no indication that their quality will be improving any time soon. Maybe I’m wrong. Mark my words: without reliable products, Chrysler and GM will never be solvent companies again for any period of time.
Win Consumers’ Cost/Benefit Analyses
In the end, people will buy a car if it is a good value for their money. When U.S.-branded cars cost more and perform worse than their foreign-branded competition, people will buy from the foreign-branded competition. It’s really that simple.
What’s complicated, however, is exactly how to go about winning a cost/benefit analysis. There are a lot of ways of doing it. You can be successful selling half-way decent cars for a very low price (e.g., Kia). You can be successful selling technologically-advanced luxury cars at a very high price (e.g., BMW). You can be successful almost anywhere in-between, as long as you’re ahead in something. For too long, the American companies were behind in everything.
Again, Ford leads the way in this area. The Fusion is competitive with its foreign competitors on price, features, styling, and reliability. That’s why it sells so well. The Escape also does very well in the small-SUV market. The company, however, needs to repeat this success in other areas. The groundwork is laid for a Ford resurgence, but we’re not quite there yet. The new Focus and Fiesta models will hopefully repeat the Fusion’s mid-size success in the compact and sub-compact markets, but there’s more to do. It can still go very badly for Ford if they let-up now.
GM is faced with much stronger difficulty in this area. Ford has been working for years to restore its reputation while GM continued producing, primarily, unreliable lemons. Even if Chevy came out with the world’s greatest car tomorrow, and sold it for $1,000 less than its competitive vehicles, most people would ignore it because they will assume an astronomical ongoing maintenance cost. GM needed to fix this five years ago so it could begin reaping the benefits now. As it is now, most people wouldn’t take a Cobalt or Malibu if somebody gave it to them for free (which should happen, since we own the company now . . . right?).
Chrysler, meanwhile, made strides in reliability (rising from ‘bad’ to ‘mediocre’) during the early 2000’s but failed to keep its products up to date. The PT Cruiser and 300 have both been on the market, basically un-changed, for about a decade. This in inexcusable. Once again, even if they were cost and quality competitive, they just can’t be feature competitive with newer, fresher vehicles from its competitors. It appears that Chrysler spent no money whatsoever on research and development over the last ten years, and it shows. Ten-year-old designs don’t win a cost/benefit analysis against a new, cutting-edge competitive vehicle.
All-in-all, the developments since my 2007 piece have been 1/3 promising and 2/3 disappointing.
GM shows some half-hearted progress but doesn’t seem willing to go all the way. Chrysler, as I mentioned earlier, can probably be written off at this point . . . I will remember my ’78 Jeep ‘Honcho’ pickup (from the AMC era) and ’98 Chrysler Cirrus fondly, and wonder what might have been if Cerberus had the guts to take some risks and turn the company around when they had the chance.
But, to my pleasant surprise, Ford is doing fairly well. With continued quality leadership, I think the company can completely right itself and show the world that American cars really can still be great. It might not be too long before I can proudly go to a dealership and buy an American-branded, American-made car without having to sacrifice my money and patience in the name of patriotism. Won’t that be nice? Keep it up, Ford. There’s still more work to do, but you are on the right track.