How About Some Creative Destruction?

Why is such a tremendous portion of the economy dependent on so few decision makers? So many great ideas, huge sums of capital, and tremendous skill and talent are concentrated in the hands of 3 giant companies.

Here's the problem. Automobile manufacturers control the pace of innovation because other than regulatory issues and whether the market will buy their products, they have the final say on everything in between: Engineering, manufacturing, distribution - the whole ball of wax.

What's more, senior management makes the decisions. Everything is funneled through the auto companies, and all the major decisions are funneled through to top management. If the people at the top are not good managers, and history indicates they haven't fared very well, then it doesn't matter how good their suppliers, their partners, and their employees are. Stuff just isn't going to get done right. And everyone down the line is affected, not just in those companies but among a much larger ecosystem of employee families, suppliers, dealers, and communities across the country.

The best way forward is to break GM and Chrysler up or let them fail. Remove the gatekeepers. The sum of the parts is worth more than the whole. Invest in new technologies and processes being developed by new companies.

Let investment flow to a more granular level. Rather than spending tens of billions of dollars trying to prolong the inevitable collapse, it would be more productive to create a new marketplace or exchange that would enable investors to put money into emerging green and safety concepts and technologies, lower the barriers to entry, and bring in new blood to the industry.

If cars were developed from more common building blocks rather than blocks unique to one company, ultimately there would be more and better vehicles to choose from, produced by more competitive companies, and greatly reduce the likelihood of having to rescue another one that is too big to fail.

2008 Year In Review

It’s unlikely 2008 turned out like anyone expected. We had the skyrocketing fuel prices, followed by a devastating credit crunch and a string of high profile failures and bailouts. Top that off with the Madoff fraud, alleged to be around $50 billion dollars, and it was a year that shook everyone’s confidence from Wall Street to Main Street, and around the world.

The auto industry took a huge hit as people were unable to obtain financing as before, and $4 per gallon fuel curtailed driving and buying (of more than just cars). The auto market plummeted to around 13 million units from over 16 million in 2007. Just about every manufacturers was down, the Detroit 3 hit particularly hard.

GM and Chrysler are only still around because they were able to obtain loans from the Federal government. It was a bad scene all around.

The effects of 2008 will be felt for a long time.

This will likely be a rather large setback for the development and market penetration of hybrid and electric vehicles. It seems the influence behind such efforts will now shift from the market (fuel prices) to government regulation (environmental regulation, though these might also be delayed for economic reasons).

Toyota has put the kibosh on a plan to build the Prius in a U.S. plant. The Chevy Volt is looking less certain in light of GM’s financial problems, and who knows what will happen to all the upstarts such as Fisker.

Then there were more than twice as many dealerships closing in 2008 than the year before (about 900 versus 430), so communities across the nation are feeling the pinch – not just those in Michigan and the regions where assembly plants are located.

Any upside? It was safer to drive. Accident statistics seem to indicate 2008 will go down as one of the safest years on American roads thus far. A large part of this can probably be attributed to people driving fewer miles and, on average, at lower speeds to conserve fuel.

If nothing else we learned how much access to credit can affect the economy. Let’s all hope that 2009 is a bit better.

Sold It Yesterday?

With plummeting sales in cars this year it would seem that perhaps the excess capacity which caused some manufacturers to pile on the incentives in order to move the metal was hurting sales now because buyers who would’ve waited bought earlier due to the incentives.

But the R.L. Polk study mentioned in this article would seem to indicate otherwise. People are keeping their cars longer and not needing new ones as much as before.

That’s one more reason why the Detroit 3 and many other companies need to reduce capacity to get things back in line, balance supply and demand. Because as we’ve seen with the current situation it couldn’t last and now there’s going to be a lot of pain all around.

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.