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The Bigger They Come, the Harder They Fall
For the first time since December 1992, the Ford F-150 pick-up truck has lost its crown as the best selling vehicle in the United States. After seeing its sales implode by 33% in one short month, the F-150 dropped four full places on the best-seller list, behind Honda’s Civic and Accord, and Toyota’s Camry and Corolla. These aren’t the best of times to be a US automaker. Back in 1992, the vehicle that beat the F-150 out for the top spot on the sales list was the Ford Taurus. But since then, the US automakers have more or less abandoned the family car market to Japanese, Korean and European marques. Now that gasoline prices have risen past the $4 per gallon level and consumers want fuel efficient vehicles, US carmakers have been left without competitive products in their showrooms, and are paying the price.
As bad as April was, May has proved the cruelest month so far for American automakers, as their market share evaporated as consumers fled pick-ups and SUVs for more fuel efficient cars. The Big 2.8 (does Chrysler even count as a major automaker anymore?) were actually outsold by their Asian rivals for the first time ever. The Asians took 48.1% of the market, leaving US brands with just 44.4%. All in all, GM sales plummeted by 30% in May, while Ford and Chrysler suffered falls of 19% and 28% respectively.
The predicament the Big 2.8 find themselves in would be less galling if it wasn’t the second time they have made the same mistake. In the 1950’s, Detroit demonstrably made the best cars in the world. But then they got fat and lazy, failed to invest in new technology, and by the time the first oil crisis rolled around in 1973, American cars were outclassed by nimble foreign rivals that sold smaller cars that actually drove and handled well and didn’t break down all the time. Chrysler was only saved by dint of a government bail out. But Detroit adapted, and by the late 1980’s was beginning to build competitive cars again. Chrysler invented a whole new market segment with its introduction of the minivan, and the venerable Ford Taurus became the best selling car in America for several years running, proving that Americans could in fact build quality cars.
But as oil prices declined and stayed low throughout the 1990’s, Detroit regressed. The SUV craze proved to be very profitable in the short term, but it masked the fact that SUV’s were built on old fashioned body-on-frame truck platforms. This was in fact the secret of the SUV’s success. Since they were based on old technologies, they were cheap to make, and carmakers could reap huge profit margins as the SUV fad took off. But instead of reinvesting these profits wisely, Detroit abandoned the less profitable car segments of the market, and failed to invest in new technologies like fuel cells or hybrid vehicles that would prove so popular when gas prices finally went up again. This is an example of bad management, pure and simple.
A further irony is that both Ford and GM sell very competitive small cars in Europe and Asia, where high gas prices have kept the market for fuel efficient cars strong. So it wasn’t as if these companies would have had to spend billions developing new small car platforms for the US market – they already had them. Only now are the Americans scrambling to bring these models to the US. GM seems to have decided that Saturn will now serve as the American arm of Opel, its German subsidiary, selling rebadged European models.
The worry is that this is too little too late. GM announced that it was shuttering four more assembly plants yesterday, and all 2.8 firms continue to hemorrhage red ink. Neither American car buyers nor financial investors are likely to give Detroit a vote of confidence in the short term. Trust needs to be earned, and none of the Big 2.8 has shown that they know how to run their businesses profitably. Getting caught out by high oil prices twice is just embarrassing.
The good news is that consumers are adapting relatively well to $4 per gallon gasoline. People are driving less and exploring new options like hybrids. The Mini brand racked up the largest sales increases in May, shooting up 47.2%. And high gas prices aren’t just good news for makers of small cars, public transit use is shooting up in every metropolitan area around the country.
Perhaps the larger point to make here is that low gas prices have been a fundamental cause of America’s faltering economic competitiveness. Not only were low oil prices the proximate cause of the US auto industry’s failings, but America’s huge trade deficits were also helped along by the relative affordability of shipping goods across the Pacific. Now that oil prices have risen, so too are shipping rates. And given that roughly one-third of the US trade deficit is accounted for by oil imports, getting Americans to reduce their demand for oil is becoming a strategic imperative.
In the bigger picture, if the US is to rebalance its economy and regain its competitiveness, it needs high oil prices. The shame is that the gains from high oil prices are mostly flowing to oil exporting nations abroad. If US politicians had shown the political will to raise energy taxes, many of these revenues could have gone to fixing our failing bridges and building new subways and rail systems instead. Live and learn.
It is About Energy Policy
But poor management has clearly played an important role in the current problems US automakers are facing. It wasn't just that they focused on trucks and SUVs to the exclusion of cars, they spent much of their time engineering their financial statements and are now trying to figure out how to fire as many American workers as they can and shift production overseas. And where has management been on these policy issues? Have they come to DC to lobby for universal health care or higher gas taxes? No. They come to DC to support self-serving agendas like blocking the CAFE standards or weakening environmental regulations.
And as for labor, as much as I think the unions are being self-destructive, I see no reason to attack workers, who are suffering more than anyone. And excepting health care, the Europeans and Japanese pay just as much for labor, if not more, that US firms do.
But ultimately, my target here is energy policy - maybe I should have been more clear. Unrealistically cheap gas in the US allowed US automakers to become fat and lazy. So I'm also blaming politicians for not confronting the energy policy issue, as it allowed the corporate execs to make misguided, if in the short term profitable, decisions. In the long run, it hurt their competitive position. I just thought the dethroning of the F150 made a good anecdote for the role of fuel efficiency as a source of competitive advantage.
and Labor Policy Too
I don’t want to hold a candle for the quality of Detroit management, but I know many of the key players personally and I also know many key players in more successful industries like the semiconductor and aircraft industries. I can’t say that in my personal experience the chip and aircraft guys are demonstrably higher quality managers than the car guys. Their circumstances are vastly different and more favorable.
Yes, the car guys were dressing up their balance sheets instead of making small cars. But they were losing money on every small car they made, and had to pay a lot more attention to their balance sheets because unlike the Asians and the Europeans they didn’t and don’t have patient capital.
It is not true that they opposed universal health care. Actually, the auto industry supported Hillary back in the early and mid ’90s when she was pushing it. The industry has opposed CAFÉ, but has also called for higher gas prices as the proper solution. I do believe, however, that the industry leaders failed to make getting higher gas prices the top priority issue it should have been. I think they misunderstood their own interest here.
The labor situation is more complex and costly than you understand. Not only does Detroit have health care and pension costs that the foreign producers don’t have. It also has much more restrictive work rules and difficult wage bargaining situations. In Japanese plants both in Japan and in the U.S.(where they are non-union) workers do a multitude of tasks, making the manufacturing process quick and flexible. In European plants in the U.S. the same is true because they also are non-union. In Europe where the unions are strong in the auto industry, the work rules are more restrictive than in Japan and Korea, but less so than in the U.S. In the big 2.8 plants where the UAW reigns, workers are restricted by the rules to a narrow range of tasks that hinder efficiency and flexibility. Beyond that, the Asian companies all have company unions rather than industry wide unions as in the case of the big 2.8. The bargaining power of the company is obviously much greater when dealing with an in house union than with an industry wide union. Finally, the Japanese and Korean companies in their plants in Korea and Japan use a lot of part time workers. When you compare wages of the big 2.8 with those of Japan or Korea, you are comparing to the Japanese and Korean company’s full time workers who are indeed well paid. But that is only a piece of the labor cost. The average labor cost is much lower. Moreover, the Japanese farm out a lot of work to their parts makers and a lot of these are real old fashioned sweat shops.
So, it’s important to walk in the other guy’s moccasins a bit before coming to conclusions.
Focus on the Policy
The story would have been a lot stronger if instead of being just another slap at Detroit, it had delved into some of the policy elements and industry structure factors that have conditioned competitiveness and influenced the strategic decisions of the various players. You note that in Europe the Detroit guys make perfectly sensible cars competitively. You suggest that it is pure stupidity and greed that led them not to do so in the U.S. Well, I don’t ever want to discount stupidity and greed as powerful factors, but it is also the case that the policy requirements and fuel taxes are quite different in Europe. If the U.S. government adopted the same measures, I’m willing to bet that Detroit would also build sensible cars here. On the flip side, the European producers and Asian producers don’t make many SUVs in Europe or Asia, but they do make a lot here. Suggesting that they respond in the same way to the same stimuli as Detroit. That would have been a really strong point to make because then there is a real policy point to the piece, namely that along with Detroit management the U.S. government. is a villain too and that it ought to get some guts and impose a real energy and transportation policy to make the U.S. more competitive and more efficient.
You also skip over the labor component of the situation which is also quite a different situation for the Europeans and the Asians than for Detroit. Again, this is also largely a matter of government labor policy and labor law. These things too could be changed by policy.