Friday, December 5, 2008

To Bail or Not to Bail: Financing the American Auto Industry

The American auto industry's big 3 arrived in Washington yesterday with cup in hand asking for 34 billion in loans. Their late inning theatrics may not be enough, it may take more than a few hybrids and CEO salary reductions to convince Washington that the American auto industry deserves the bailout they are requesting. As I write this, Chrysler Chairman-CEO Robert Nardelli, Ford President-CEO Alan Mulally and GM's Mr. Wagoner are scheduled to testify before two congressional committees.

Accusing them of being slow learners is amongst the kindest things that can be said about these 3. Even if big auto's CEO's abandon their corporate jets, drive hybrids and work for free, that does not cover the exorbitant cost of decades of errant strategy, woeful mismanagement and blatant disregard for the environment. For some, the only act of contrition adequate to the circumstances would be letters of resignation confessing their incompetence.

Across the board, the auto industry is experiencing declining sales in the US. The American auto industry has experienced declines of between 31% and 47%. Even successful auto firms like Toyota are experiencing declining sales. As reported in AdAge, "this was the worst November in 50 years for the auto industry, with virtually every automaker -- not just Ford, GM and Chrysler but also Toyota, Honda and Hyundai -- dinged by a unit-sales slide exceeding 30%.

American auto makers are quick to blame the congressional hearings for the declining American sales. "[T]he specter of bankruptcy is spooking consumers already rattled by the housing crisis and credit crunch. November started out strong, but by mid-month there was a 'noticeable slowdown' in sales that coincided with Detroit's first unsuccessful round of congressional hearings, said Ford's Jim Farley, group VP-marketing and communications. GM's Mark LaNeve, VP-vehicle sales, service and marketing in North America, cited findings by consultant CNW Market Research that 25% to 30% of Americans avoided Detroit showrooms last month because of all the media reports speculating about bankruptcy for one or all of them." But these explanations ignore the fact that problems in the American automotive sector have been a fixture for many years before these Congressional hearings.

A recent Wall Street Journal article (Oct 25) explains "How Detroit drove into a ditch". According to the author of the article, a former Detroit bureau chief who is writing a book about America's car culture, the blame is placed largely on problems in the factories. "Detroit failed to grasp -- or at least to address -- the fundamental nature of its Japanese competition. Japan's car companies, and more recently the Germans and Koreans, gained a competitive advantage largely by forging an alliance with American workers."

The author of a recent adage article suggests that American automakers are "lacking personality." She explains "It seems to me that the fundamental nature of Japanese competition is their ability to build brands." Her contention is that despite spending $4.6 billion on advertising in 2007, (3.3% of total U.S advertising spending and 5.9% of total U.S. network TV spending), Detroit has failed to build powerful brands. Of the 100 most valuable brands in the world, according to Interbrand, 52 are owned by U.S. companies. Ford is the only automobile brand represented and it should be no coincidence that this is the US auto maker that is in the best shape. "Expensive Saturns and cheap Cadillacs [and] dozens of other branding mistakes," are to blame for GM's poor performance. By way of explaining the lack of effective American automotive branding, the author of the same article says, "There's a growing disconnect between U.S. management and U.S. marketing. Management wants to build a business. Marketing wants to build a brand. The two are often diametrically opposed. To build a business, you tend to 'expand' the brand. To build a brand, you generally need to 'contract' the brand.

To combat the apparent unpopularlity of an auto bailout, efforts are being made to get the public aboard. Chrysler has published a website entitled, grabdemocracybythehorns.com. General Motors is using a form letter and a website that sends a missive to congressional representatives. Ford activated a new website, thefordstory.com. And as explained in AdAge, "Chrysler is working with a number of organizations, including its own dealers to use public relations and events to take its case to the streets. Mr. Nardelli, Vice Chairman Jim Press and other Chrysler officials are spending the first part of this week in a grassroots effort it calls a 'Virtual Road Show' with initiatives spread across seven states."

However, branding and public relations are far from the only problems faced by the big 3 auto makers. US car makers have made strategic decisions that are at odds with consumer demand and insufficiently mindful of environmental concerns. Decades after the oil embargo of the 70's American car companies continued to build behemoths with big engines and their more efficient vehicles cannot compete with those of Asian automakers.

However as part of their efforts to secure financing, each of the major 3 US automakers are emphasizing Green in their business plans. As reported in AdAge, Ford's 'Business Plan includes "hybrid, plug in electric vehicles. The plan also calls for an investment of some $14 billion in the U.S. for advanced technologies and products to improve fuel efficiency over the next seven years on all its models. By 2010, Ford said half of all Ford, Lincoln and Mercury light-duty models will qualify as 'Advanced Technology Vehicles' under the U.S. Energy Independence and Security Act, increasing to 75% in 2011 and over 90% in 2014. Chrysler plans 24 major product launches through 2012 that include a "wide portfolio of hybrid electric vehicles ranging from neighborhood electric models (like golf carts) to battery-electric versions." Cadillac has decided to offer a four-cylinder sedan in 2010. GM's Red Tag year-end clearance sale will emphasize fuel economy. And a recent Saturn insert had the headline Saturn Aura: 'Rethink responsible.'

There is no shortage of reasons why Detroit is in trouble. Amongst these reasons many point to overzealous labor demands, recent historic highs at the pumps, the credit and financial crises, the ongoing implosion of the housing market and global recession. But all of these reasons fail to acknowledge that for over 30 years, American automakers have lost their competitive advantage and failed to provide consumers with the best cars at the best price.

American automakers are big and that may be part of the problem. In 2007 GM recorded $181.1 billion in sales, which made it the fourth-largest company in America. However despite its impressive sales numbers, GM also holds the distinction of being amongst the most troubled companies in the US. Perhaps the American car giants are too large and too deeply entrenched in an outmoded strategy to make the kind of adaptations required.

Letting the big 3 flounder would have significant consequences for an American economy already in recession. But pouring money into firms with a proven track record of strategic myopia does not make sense either. Saving jobs is entirely desirable, but money must come with strings and Congress should entrust technocrats to determine how this money should be spent.

Under current treasory secretary Paulson, the financial bailouts are as free of obgligations as the unregulated markets they are trying to cover. Thankfully, Congress appears appropriately committed to attaching strings to the automakers request. To ensure that it does more than prop up a dysfunctional business model, the auto industry bailout must be geared towards helping automakers design and build Greener cars that people will buy. They must also develop a more sustainable, long term plan that will make them more competitive going into the future.

Despite the importance of the big 3 to the US economy, Detroit should not see a dime of federal financing until there are safeguards that guarantee the money will be used to improve the competitive position of the American automotive industry. We would do well to remember the bailout of Chrysler almost 30 years ago and the energy crisis that preceeded it. Bridge loans are not necessarily a bad idea as long as the American taxpayer does not finance a bridge to nowhere.
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2 comments:

Martin Gaudette said...

It is not Board of Directories that will suffer if the Auto Companies close down. It will be the Workers, parts suppliers and their workers, Auto Finance Companies, many other businesses that depend on these Auto Companies. It will be catastrophic not only for the US but it will have a devastating effect on the World.

SBC said...

Although the bankruptcy of any of the big 3 automakers will have a ripple effect throughout the economy, if restructuring is possible and a more viable business model can be implemented I would support the bailout. My hope is that jobs can be created with a viable future. It makes no sense to pour money into an industry that will not (or cannot) alter their present trajectory.

Our free market system works because it rewards successes and punishes failures. Pure Socialism has failed, in large part because it protects industry from competition. I do not see the value of bailing out an industry that cannot compete in the open market. Billions in bailouts that merely postpone the inevitable are of little use to workers or the wider economy.

US automakers have been given a stay of execution. We can only hope that by March new strategic thinking will begin the process of transforming big auto into a more viable and sustainable industry.