Bail out Auto Industry?

I was inspired to write a commentary on the Auto Industry after reading this post by John Dvorak on Marketwatch.com. In his article he makes a couple arguements that are dead wrong and likely assumptions that will contribute to Congress bailing these worthless institutions out. Below is my letter to Mr. Dvorak. Please feel free to read his article first.

Dear Mr. Dvorak,

I read your article entitled “Could Steve Jobs Save GM?” and was struck by one of your arguments that Mr. Jobs comes from an industry accustomed to constantly declining prices. You state:

There is no such effect or urgency in the any other industry. The closest you come is with auto depreciation, whereby a new car, once driven off the lot, becomes used and worth significantly less.

You also imply the auto industry business model is not manageable the way the tech industry is. You say

And the irony is that I think it may have been possible in the past, before the companies were vertically integrated, but not in the present, where the manufacturing, inventory, subassemblies, delivery and other systems that are in place are too delicately balanced and complicated for a newbie to deal with.

I would like to argue both of your points are dead wrong. In fact I am absolutely sure the auto industry faced and still faces the same dynamics of the tech industry and has for a couple of decades now and this is in fact a key reason for Detroit’s demise. They never reconfigured their business model to this reality. Instead they looked for a way to sustain their worn out mid 20th century business model even after investing in the 1980’s to re-tool themselves to better compete with what then was a virtual onslaught of automobiles from Japan that Americans were confounded by. American consumers were astounded by the idea you could buy an automobile and own it for 5 years only needing to change tires, oil and gas. Detroit had never made such an automobile and had no intention of doing so until they had no choice.

Well part of the reality of a well-made automobile that was fuel efficient to boot, was the manufacturing process and technology used to make such a car a reality. Yes, Technology, robotics, automation, precision and ultimately declining prices of microprocessors to the extent where all things are controlled electronically from a central processor / circuit board is a reality now. All of these things became less and less expensive. Outside of the cost of raw aluminum, steal and plastics (which admittedly have risen in recent years to artificially high levels, although this is not sited as a primary reason for the collapse of the US auto makers), every factor of input used in manufacturing automobiles and every part of making the actual automobile got more technically advanced and cheaper to produce.

In addition to these realities, it became measurably easier to create a product to enter the market. Look at the Hyundai example. I was a consumer in college of a 1988 Hyundai automobile. I was amazed by the fact that the engine, transmission, parts; chassis were all a kind of stew of parts by different suppliers. I don’t have an exact breakdown but through my ownership experience I learned the engine was Japanese and when I had to replace engine parts (parts obviously originally outsourced to inferior Korean parts suppliers at the time) the new ones came also from Japan. Hyundai, a large industrial company at the time of its foray into automating initially went to Ford, UK to requisite technology for cars and light trucks. Later they moved from foreign licensing agreements to the development of their own passenger cars. They outsourced styling to Italy, manufacturing and know how from Japan and the UK and introduced their first car, the Pony with an eye on ultimately exporting automobiles. They did not have their own in house designed engine installed in an automobile until 1992. To this day, Hyundai continues to reinvent itself by partnering with makers of various technologies for fuel cell technology, hybrid technology, truck building and manufacturing.

What is the purpose of this expose on Hyundai? I would argue that any team of engineers could create an automobile right now, outsource the major components and assemble them somewhere in the US and be in business not unlike Microsoft entered the gaming business with it’s X-box a few years back.

What you were right about in your article was your suggestion that having a “big 3” industry has been a real detriment to innovation and a real hindrance to destroying the legacy infrastructure that has ensued. The “big 3” are like the “big Soviet 3” where not only are they bound to themselves and their ideology but they are programmed to dominate and destroy any dissention from within their boarders. They have obviously not been successful in this strategy globally (the US never has been) and foreign auto companies with healthy competition have been able to innovate and reinvent as you rightfully suggest.

So what did Detroit do in the 1990’s when confronted with the obvious reality that it was becoming cheaper and cheaper to build automobiles, international competition was eating their lunch and their industry was beginning to look like the PC industry? (Side note, I have been making this argument to friends and relatives for years as they glazed over in complete befuddlement about the state of the American Auto Industry) They went right back to the 1970’s with huge gas guzzling vehicles (trucks this time conveniently re-branded Sport Utility so the consumer could have a soft and fuzzy feeling about them) they could sell for 2-3 times the price of a “passenger vehicle” and make as much per vehicle in the process as they sold cars for. Now that is a Detroit CEO’s wet dream. Yes, no restructuring needed, no retooling for the future, no innovation, shelf the hybrid technology, the fuel cell technology the regenerative hydraulic technology (Ford) and just about everything else because the future was in TRUCKS.

(Interesting fact, GM with the EPA developed Hybrid technology then GM walked and EPA published the research some time around the mid 90’s and Toyota picked it up and announced a short time after that within 10 years they would have a fleet of hybrid vehicles on the road globally. Now they own so much of the technology you practically cannot go hybrid with out a licensing agreement from Toyota if not buying the technology outright and just installing it in your vehicle)

In fact the only innovation that came from this move to trucks as passenger vehicles came directly form the typical 19th century mindsets of the people who run Detroit’s big three, a creative way to skirt all of the regulations tied to passenger vehicles in the United States and Congress gave them the tacit approval to do just this. Trucks were not bound by fuel efficiency standards of cars, they did not have the stringent side impact rules, bumper safety rules, roll over rules, emissions rules, passenger safety rules, you name it. Detroit figured out how to completely spit in the face of all car regulations and at the same time did something that any skeptic of TV advertising would be loath to admit, convinced ½ the auto buying public that they needed a vehicle that got the fuel efficiency marks of a 1978 gas guzzler, would cause them to be out of pocket something on the order of $1,000 for a tire replacement and would have annual operating cost of over $9,000 (back when we had $1.50 gas mind you) including depreciation. In addition the mass use of trucks as personal use vehicles would cause measurably more destruction of the roads (impacting their tax dollar), the environment, on drastically increased emissions and for the first time since 1978 would be the single most direct cause of the renewed increase in per-capita energy consumption in the US. These realities do not touch on the ecological destruction caused by moving to Trucks as a primary means of transportation or the overall environmental damage, stress on the global supply chain for fossil fuels, damage to the economy of the United States when fuel prices spiked to $4.00 per gallon, and damage to the image of the United States as just one massive reckless consumption nation bent on war and debt to feed their un-stainable desire to consume.

Yes I am forever reminded when moving some things from a friends apartment in early 2007 of the unprecedented success of Detroit’s marketing efforts when after seeing one of these trucks “SUV’s” parked at the loading dock asking a young lady of about 22 if that was her “truck” parked outside. “No” she said. Then I rephrased my question, “Is that your SUV parked outside”. “Oh, yes that is mine.” She replied. My my, what a job Detroit did to convince Americans of their need for a truck as their primary means of transportation, sunset rides up mountains, adventurous rides through back roads somewhere, visions of mom’s with their children happily strapped in the spacious back seat, pictures of families arriving at the beach with pounds of Chinese made plastic garbage piled in the rear storage area. The images abound. The advertising companies did their job.

In a land of more paved roads per capita than most others in the world, where the “nuclear” family has shrunk to about 1.5 children per family, where commutes have grown to nearly an hour in most large urban areas, where household costs had begun to skyrocket with the second major reason American per-capita energy consumption resumed it’s rise, massive 3,500-5,000 square ft “homes” with huge annual maintenance and depreciation costs, Americans were solidly sold on buying trucks to get to and back from work each day. Sad story at best. Meanwhile during this very time the rest of the world, Europe, especially France, Japan, Korea, China, India, you name it, the fastest growing segment of the auto industry was in vehicles with UNDER 600 cc capacity engines.

Now Detroit is reeling. They bought themselves about 15 years of life with their reckless shortsighted policies and their flight from the obvious, automobiles are now being made and sold around the world at less than $3,500 a pop. They knew this was coming. It scared the hell out of them and they yielded to the rest of the world to meet the challenge. There is no turning back.

I say we let GM, Ford and Chrysler implode. When all these smart people are jobless, perhaps they will have enough money between them to go out and start new automobile companies, ones with smart design, energy efficiency, consumer friendly, programmable interfaces, customizable on order, door to door delivery, mail order catalog business models, prices manageable with a credit card, recyclable components, flexible manufacturing technologies, safety and efficiency built in. I mean when the Cold War “ended” and we had a president who’s first responsibility was NOT to go looking for another imaginary enemy to build up the Defense Department Corporate Welfare machine, the defense industry actually shrank. Suddenly America had a bunch of smart people without a job and the next thing you know another completely new industry popped up surrounding technology these unemployed people could apply their talents to and exploit. I am writing you using that technology today and your owe your current job to it. The economy is already in the pits, what is there to loose.

Perhaps Steve Jobs and a few other smart technology people who have had to operate in an industry of advancing technology and declining prices could actually create a new automobile industry based on a set of assumptions known and operated under by the global auto industry for years. Innovate, outsource, produce, sell, repeat.