Auto Manifesto

December 10, 2008

What Happened to Detroit?

After decades of mismanagement and mediocrity, we’ve all seen many of the overarching issues laid-bare in the past several weeks. In a nutshell here are the Detroit 3's problems:

1. Poor Management, Perpetual Reorganization, No Solid Long-Term Strategy

Actually their long term strategy essentially amounted to lobbying to keep the status quo in terms of fuel economy and regulatory standards. Cheap gas spurred big profits in SUVs and other vehicles that were not necessary in the numbers in which they were produced, and also put the manufacturers at the mercy of fluctuations in fuel prices.

All the while they went from one failed plan to another with no consistency in long term outlook. Every couple of years each manufacturer would roll out a new initiative but the outcome was usually more of the same: Shrinking market share and decreasing profitability, while spreading their marketing too thin on far too many brands.

2. Producing Vehicles the Market Doesn't Want

The domestic manufacturers produce 8 of the 11 worst cars of 2008 according to Consumer Reports. That becomes even more of a problem when demand is constantly shifting and their plants are geared to only producing a few models, with little flexibility.

Because of continued production of less desirable vehicles they’ve hurt the value of their brands. Sure, by many objective measures the domestic manufacturers have made great strides in productivity, cost, and quality.

But they missed the boat on building exciting, interesting, and desirable vehicles. The reason for this simply is that the executives do not understand cars. They may understand some of the numbers, but until the cars are what people want to buy, they’ll never make the numbers.

3. Excessive overhead (labor cost, healthcare, etc)

Not much of the fault is with the labor unions. They negotiated what they could. Sure it was shortsighted and the results helped dull America’s competitive edge and drove jobs to Mexico and overseas. But the real fault lies with management that would be so inept as to ALLOW the unions to push them into the agreements that they did.

The reason they're in crisis now is because they have been losing so much money, and then the credit crunch sharply reduced sales (many buyer's can't qualify for loans) AND reduced the credit available to the companies, especially since their existing debts (bonds) have continued to be downgraded. It's a vicious cycle resulting from the 3 points above.

By the time they realized this it was all too late. We’re now at a stage where it looks unlikely that GM and Chrysler will be able to stave off bankruptcy without government support (and even then it’s not looking too bright). The reason is because their businesses are not strong enough to survive in good conditions, much less to weather the storm.

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