The Sorry State of the Car Industry

I’ve been mulling for a few days about writing a post about the current crappy state of the US car industry, thinking about the $25 Billion proposed “bail-out”, the crashing sales, and even the crazy proposed merger of GM and Chrysler. But Thomas Friedman has pretty much written it for me, so go ahead and read it.

How could these companies be so bad for so long? Clearly the combination of a very un-innovative business culture, visionless management and overly generous labor contracts explains a lot of it. It led to a situation whereby General Motors could make money only by selling big, gas-guzzling S.U.V.’s and trucks. Therefore, instead of focusing on making money by innovating around fuel efficiency, productivity and design, G.M. threw way too much energy into lobbying and maneuvering to protect its gas guzzlers.

I’ll just add a few things.

Toyota will become number one

My prediction is that Toyota will move up from it’s #2 slot to be the #1 manufacturer by the end of 2009. Their sales have been impacted by the current economic crisis, just like everyone else, but not nearly to the same degree as GM.

And Toyota’s product portfolio is much more diverse and better protected against parsimonious spending. GM’s is far too heavily skewed toward large, expensive gas guzzling trucks and SUVs, and its small and inexpensive cars are fewer in number and not as good as Toyota’s (with a couple of notable exceptions such as the well-received Chevy Malibu and Cobalt). That doesn’t bode well for riding out a combination of tight consumer spending and credit, and still relatively high gas prices.

GM and Chrysler merger: Huh?

In what universe does the merger of GM and Chrysler make sense? Both companies are in terrible financial shape with the same combination of huge cost structures and poor sales. In fact, Chrysler’s product portfolio is even worse than GM’s: even more skewed to SUVs and big trucks, and its lower end and smaller cars have received universally terrible reviews (Chrysler Sebring, Dodge Caliber).

All of Chrysler’s hot cars are largely irrelevant in a spending-constrained environment: Viper, Ram pick-up, 300, Challenger. Its bread-and-butter minivan has been eclipsed by offerings from Honda and Toyota.

And a merger would certainly result in large numbers of lay-offs as the companies have massive duplication of product lines, production capacity, vendors, and staff. Unless the unions force them to keep the manufacturing workforce, which would just compound the fixed costs problem. Speaking of which…

Plenty of blame to go around

The prospect of a bailout, whether it’s for banks or car companies, makes me queasy. I’m no laissez-fair free marketer, far from it. But the disparity between the logic of bailing out companies that are “too big to fail” and not helping people with comparatively tiny mortgages (or small businesses) who are “too small to care about” is just too disturbing in its hypocrisy. The management of car companies have squandered innovation for decades in favor of lobbying favors, as Friedman points out, putting them in their now perilous position.

But the unions have played their part too, providing a level of cushion for their workers that no other industries have, and in the process helping drive the hand the feeds them into the ground by forcing massive cost structures (health care, retirement benefits, endless unemployment support). A bailout would just encourage that co-dependency and let everyone off the hook rather than calling them to the carpet for it and forcing them to change. Undoubtedly a reset of the compact between automakers and unions would cause massive pain for the near term, but in the long run it would get the industry back on its feet. And without it, they’ll just be back in this same position in 5-10 years.

Gas Prices Catch up with Detroit

The always provocative Jamie Kitman, columnist for Automobile magazine amongst others, has a piece in the September issue calling out the Big Three automakers (or The Moderately Large Three, he demurs) for their decades long lack of responsiveness on the issue of fuel economy.

Game over. After almost half a century of fighting battles, America’s Big Three have at long last lost the war. Yes, it’s official. From this day forward, fuel economy matters… Too bad Detroit carmakers weren’t prepared. They only had fifty years to get ready.

Detroit didn’t have to encourage profligacy, it chose to. And some will argue that the power of advertising dollars could and should have been used to encourage efficiency. The American industry could have planned the same patriotic card it deployed following 9/11 to advocate fuel conservation instead of throwing around billions of dollars to make sure there were large SUVs in every garage. It didn’t have to spend some four decades fighting safety, emissions, and fuel-efficiency standards.

Clearly this is not just a down year, it’s a total paradigm shift… Cars that seemed like pretty good ideas suddenly seem less inspired. Cars that appeared bad ideas before now seem like the worst ideas ever. The Hummer brand, for instance, is on target to sell fewer than 35,000 units this year, or about twelve percent the number of Oldsmobiles GM was selling when it decided to shut that venerable brand to concentrate on…Hummer.

Strangely enough, while typing this up I’m listening to a Tivo’d recording of Charlie Rose’s interview with GM CEO Rick Wagoner. It’s a good interview, but obviously he gives quite a different perspective than Kitman (who points out that Wagoner got a 64% raise to $15.7M in 2007, despite GM’s heavy losses). And I can’t say that I can entirely blame the automakers for the large trucks. People bought them, and they didn’t buy small cars, for the most part, so the financial imperative in the near term was fairly clear.

But one thing Wagoner just said jumped out at me: he thinks the US government should get behind funding the startup costs for new energy sources, such as fuel cells and batteries, in order to kick-start the growth and innovation. But 15 minutes before he was bemoaning the role of governments outside the US supporting their domestic auto industries because it makes it unfair for competitors (i.e. GM) to compete. Seems to me that you can’t have it both ways though - either government intervention in helping domestic manufacturers get rolling in a new industry is OK, or it isn’t.

Related posts:

• The Hummer Calls it Quits
  
• Brains vs. Brawn: The Return of American Muscle
  
• Toyota: The Disruption is Complete
  

Designing the New BMW 7-Series

Sculpting clay on the 2009 BMW 7

Here’s an outstanding series of photos describing the design development for the new 2009 BMW 7-Series. It shows step by step from drawing to renderings and clay how the exterior and interior of the car have been refined. In particular there is a lot about the clay process, which is unique to automotive design. Even in this day and age of CAD and 3-D goggles, there’s nothing like seeing a car physically represented at full scale with masterfully crafted clay.

The BMW Group’s process of designing a new vehicle and finding the ideal shape is based on a concept of keen competition. In the development of each new model, several design teams compete with one another in their design of the exterior and interior in a truly creative contest. Made up of designers and modellers, the teams then, in the second phase of the design process, complete models in original, 1:1 size clearly showing the aesthetic harmony of the car’s proportions and surfaces. To do this they use a simple but very important material in the design process - clay.

I wasn’t a big fan of the last 7-Series (though the roof profile and side glass had great lines and proportion), but from the little you can see on this one it looks like the 2009 model could be very interesting and elegant.

Read more.