"An era can be said to end when its basic illusions are exhausted." - Arthur Miller

Wednesday, December 03, 2008

Car Industry Bailout

The car industry is still pushing for its now $34 billion bailout plan, up from $25 billion (which likely will grow over time) and as part of that released some early plans to try and turn their companies around.

The plans include selling their private jets, cutting executive pay to $1 (but no mention of bonuses or other creative payouts), selling off divisions, plant closings and cutting car lines. United Auto Workers has also joined in, making concessions on the billions of dollars the auto industry owes the unions for its "jobs bank" which pays workers 95% of their salaries when not working (about 3500 of them so far), medical and pensions among other things. The overall goal is to save the industry and all the plans seem to fall short.

It’s a start but not enough. The mess is a top down problem. The leadership of the "big 3" and UAW dug this hole. Greed on both sides took things too far. For the CEOs, they chose to go with big vehicles and ignore the change to green. They flat out stopped trying to innovate, leaving that the Japanese automakers. They took an approach at short term gain, gladly sacrificing their decades old reputation of quality in the effort to make sure they get their bonuses with spreadsheets that look nice but did not to help the companies grow and innovate. In all areas, from construction, to quality, to innovation, and employee management, they have allowed other car companies to take the lead and they only follow years after it’s too late.

On the UAW side, they constantly demanded more and more, whether earned or not and now for the car companies the costs have become greater then the reward. The goal stopped being about protecting the workers and more about making the UAW leadership richer and gaining more power to the point now where the UAW gets to sign off on decisions that use to be made by the company. It essence the management of the auto industry has become a collaboration between the big 3 and the UAW resulting in too many chefs in the kitchen and inability to make the decisions that should have been made a long time ago.

So what can the "Big Three" do to save themselves from themselves?

1) Fire the CEOs and their lieutenants.
Part of the problem with all these bailout plans is the lack of punishment. They executives that run the companies made the series of decisions that are nearly destroying them and their reward is good pay, great bonuses and a "crap happens" pat on the back. Employees get fired for small infractions of the rules that don't even cost the company money yet these guys stay on the payroll? They created a mess that someone else needs to clean up. Ban the golden parachutes and treat them like they would any other employee that screws up on a huge scale.

2) Jettison the UAW and their contracts.
The UAW use to have a purpose and an important one but that was decades ago. Now all they are doing is dragging down an important segment of the economy and taking the rest of us with them. People hear "unions" and they confuse their history of good with their present where they mostly bog down companies and prevent growth that is necessary for job security and stability. Honda, Toyota and other car companies have proven that an automobile company can thrive in America, with happy loyal workers without a union managing the relationship. It can and does work across the country for hundreds of millions of workers who do not have unions so this belief that the America auto industry can't function without the UAW is incorrect and unproven. If they do it right and don't let greed interfere (which is the hard part) they companies could save billions and have many happy workers helping them thrive and grow.

3) Make fewer cars.
The car companies simply make to many types of cars. There isn't one type of SUV there are dozens. And within those dozens are even more once you add in the various configurations (V6, sunroof, etc). The lines need to shrink and shrink fast. A car company often isn't just competing with its rivals, its competing with it itself. Does every division they own have to make an SUV, a hybrid, small cars and so forth? Have the divisions specialize. Pontiac for sports, Cadillac for luxury, GMC for trucks, and so on. The companies save money in the long run in design costs, constructions costs, repair costs, and so forth.

4) Provide the customer with less options and choices
Choices on paper sound good. The car companies can charge more (or less), the customer has a say on what their car has or doesn't have and everyone is happy. The problem is in reality you just have a lot of confusion and opportunity for dealers to rip off customers creating an unhappy experience for all. You also have the greater costs that come with many options and configurations. Instead use the Honda model of a limited number of colors with a limited number of configurations (usually 3). Sure they may not have the "perfect" configuration but they usually don't anyway by the time the dealer nickel and dime them to death with all the confusion options that exist now. At least this way the customer knows exactly what they are aiming for and will get ahead of time. And before you say it will not work, again that is exactly how Honda does it and it seems to work more then fine for them.

5) Make it dead simple stupid to buy a car.
Quit the commission games, the add-on, and all the crap that is done to squeeze more money out of the customer. Make the buying experience as simple and stupid as possible where the customer could almost answer 5 questions and be presented with the car they want. The only "haggling" should be the price and interest rate, not all the options, extras, and other crap that currently gets tagged on that usually results in buyers remorse. You want the customer to drive their car, be happy and continue to be happy years after the purchase.

6) Make them better.
The car companies simple failed to be the leaders they use to be. They seemed to be focused on bigger without paying a whole lot of attention to better. Better in quality, better in technology, better gas mileage, better in whatever way you want to measure. The goal should also have been to improve in all areas possible. Instead the goal seemed to be "close enough." Toyota shouldn't be leading in the "green" car market. GM should have been. Hybrid shouldn't be the end game, a gas free car should be. If any new improved technology regarding cars comes out, it should come from an American car company. Quality construction should be paramount. Less repairs the better should be the goal, not more. It should be a good thing when a car lasts 20 years, not mourned for the lost sales. The cars should be moving advertisements on why customers should be driving them if they are not already. Make it so the customers are companies’ biggest fans, not the advertisers.

7) Keep it in America
For the industry to survive, it’s going to have to shrink. It is better to not have enough cars then too many cars. Its better to shrink now and hire them back later then it is to have to get rid of everyone. Sadly a hit is going to have to be made for long term survival but that doesn't mean abandoning America. If the choice is a plant in Detroit or a plant in Mexico, Mexico closes first. Your money, your survival is from American taxpayers and you should pay them back by keeping as many jobs here as possible. Any growth post recovery should stay in America.

Right now, the country pretty much thinks the Big Three should fail. They earned that by piss poor management, piss poor vehicles, failure to adapt and innovate and essentially purposely choosing short term gain at the sacrifice of the long term view. I believe if the car companies do any or all of the above it can go a long way towards restoring their reputations and their stability. The goal is real simple - make quality product. The profits will come from there.

1 comment:

  1. That's right it will have to shrink. There is no reason to pay janitors at GM $30.00 USD per hour and with overtime over $100,000 USD per year. He's cleaning toilets and making as much as the guy building dies... Doh!

    But the bailout situation is also positive, if you know where to look. Previous bailouts of wall st and citigroup have already made things easier on most americans. I've been doing some research, and there's more grants and lower APR's out there now than before. Bailout is for you too!