Thursday, April 21, 2005

Should We Recall the U.S. Auto Industry?

Knowledge@Wharton has an excellent article titled: Car Trouble: Should We Recall the U.S. Auto Industry?. I do not agree entirely with all the opinions in the article, but by and large this seems like a very good assessment of the state of Detroit today. Excerpts:
MacDuffie notes that Ford and GM each pursue a "near-term, profit-boosting strategy" that relies heavily on "hit cars" instead of a more fundamental, longer-term approach in which they work to have every part of the company function strongly. Detroit has been riding the minivan, sport-utility and pick-up truck crazes for so long that it has become overly dependent on these product lines for profitability and pays insufficient attention to other issues.

"Now there is all this talk in Detroit about the 'year of the car' [in an attempt to produce a sales revival]," according to MacDuffie, co-director of the International Motor Vehicle Program (IMVP), which is based at the Massachusetts Institute of Technology and has a network of researchers at universities worldwide. "Well, if you have spent the better part of a decade neglecting your car line in favor of your truck line, you are not going to bring out cars that compete well with the Toyota Camry, the Honda Accord and the Volkswagen Passat. Cars are the most complicated part of the marketplace and it's hard to just step back in."
I often say that Detroit has thrown in the towel when it comes to the Car market. The Big 3 are destined to loose further in that market segment, and there seems to be little they can do about it now.
Most car companies continue to hold the view that having factories running at 100% capacity is the most efficient way to produce vehicles because it allows the manufacturer to minimize the cost to produce each unit. Indeed, overcapacity has long been cited as a problem for automakers worldwide: According to The Economist magazine, factories are capable of producing 80 million cars and light trucks a year but actually churn out only 60 million. But, in the view of Pil and Holweg, the problem with this volume mentality is that it is not enough to generate sustainable competitive advantage. Each year far too many vehicles are left unsold. To clear out inventory, manufacturers are then compelled to offer millions of dollars in incentives in the hope that customers like the price enough to settle for a car that was not their first choice.
There is a term to describe this type of behavior: Reinforcing loop. You do not get out of this cycle by pushing hard on running at full capacity. Some day Detroit will learn this, may be when it is too late.
(J. D. Dave) Power says global competition is so fierce that Detroit may have to become accustomed to being a smaller player. "There is a structural situation that is going to make it very difficult for GM and Ford to keep from losing market share, and they have to be looking at trimming down their operations. They have got excess capacity and excess overhead, and some of it they can't get rid of overnight, like the pension liability and the health care costs. Those decisions were made 10, 20 years ago. Perhaps there's more opportunity for them overseas than their home market."
GM believes that their salvation lies in the Chinese market, but it is not clear that it will have the strength to be competitive there also. Excess capacity, mounting healthcare costs, and neglect of the car market. You can't get rid of them overnight, but remember that these did not become the critical problems overnight as well.


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