Detroit has done the best to convince us all over the past several months that they are the victims of third-party problems outside their control and influence. They have taken about as much responsibility as you’d expect 100 year old mega-corporations to take, and only admitted to some small failings while still pointing the fingers at others. They have gone to Congress to ask for some of the Bailout cash that has been assigned to investment banks against the will of most Americans, feeling that the funding would make all of their problems go away so that they can resume business as normal.
Some of their efforts have shifted to finally addressing Japannese auto-makers, namely Toyota and Honda (and at times Nissan). When these companies initially came on the scene the Big Three dismissed the cars as too small, poorly made, underpowered and made the gross assumption that we would all want to purchase “American Made” cars. The Big Three kept making the cars and trucks that they wanted to make, and until recently kept with this mentality, only occasionally making cars that appealed to the markets that Toyota and Honda were quickly overtaking.
The Asian auto-makers in fact ended up making excellent cars and trucks, and from several thousands of miles away from Detroit were able to shift with and define American tastes better than the Big Three were able to in their own back yard. The concept of “American Made” has shifted to “American Boardmembers” as the Big Three started making cars with parts from all over the world, and Japan and Europe started building cars here but without the stranglehold of the great instituation of the UAW.
In the late 90’s Detroit was firmly convinced that Americans wanted to ‘drive big’, and felt that in spite of turmoil in the Middle East which has existed for centuries that oil would always be a cheap, available and sustainable way of powering automobiles. Japan started however taking a different path and kicked in the R&D to produce alternative fuel vehicles. GM did this as well, developing, creating and piloting the GM EV, only to say that there was no demand for electric powered autos in the US and that Americans were unable to live with some of the limitations that an electric powered engine would have, ending in them scrapping the project and crushing all of the cars.
Sure enough during the last 8 years, the Middle East inevitably exploded in turmoil yet again. This coupled with natural disasters such as Katrina, which some environmentalists blame the strength of partially on our heavy burning of fossil fuels and CO2 release, created great shortages on the US oil supply- not to mention the oil cartel OPEC holding us in their grips to create massive profits for themselves at their own whim. We wouldn’t in theory allow OPEC to operate in the US, due to anti-competitive and price fixing practices, but we’re more than happy to deal with them internationally.
Other problems that Detroit ignored were easy to see. The population was aging and they were edging closer to retirement age. This was not a hidden statistical anomoly that was unknown to all save a few researchers in universities. We’ve all known it was coming since hospitals were overflowing with babies during the Baby Boom after WWII. Yet Detroit was unwilling to face the fact that the good times might not always occur and had no contingency plan. They played ball with the UAW and kept handing out huge pensions.
The UAW is a huge problem in the auto industry. When you’re in middle school and you read Upton Sinclair’s “The Jungle” the reasoning and need for unions is crystal clear, but fast forward to 2008 with a fully global economy and protections such as OSHA in place and all of a sudden it makes a little less sense. Unions go under the premise that no single worker is valuable enough to be able to negotiate favorable working arrangements and conditions on their own, and that for everyone to succeed the only way is to work together as one larger group and push for the most benefits and compensation possible across the board, while also lessening accountability and managerial ability to fire by demanding union-approved working practices regarding employee retention. I personally hope to always be valuable and unique enough in skillset on my own to my employeers that I can negotiate my own salary, benefits and work conditions but apparently that isn’t for everyone. Combined with their massive demands for pensions and high salaries this has spelled opportunity for great peril to the auto companies.
The average total compensation to auto-workers is $73/hour, working out to around $150K/year in total compensation on average. This of course includes salary, vacation, medical benefits, taxes and retirement- all in areas with relatively cheap costs of living. You won’t find auto plants in the middle of Manhattan, Boston, LA, Tokyo, Paris or London. It’s been split apart as “not that high” since it includes a slew of benefits. Yet, consider the skill and education profile of many of these auto workers. These aren’t engineers from MIT, but many people with High School educations only that have gone to work at Ford or GM because they viewed it as a ’safe’ job.
Surely, they work hard, but I know a lot of people in Boston and Cambridge that are working hard too and few to none of them have that type of compensation. I’d say the average total compensation of people working at startups is closer to $35/hour, but that’s just a rough guess. And these aren’t ’safe’ jobs, as 9/10th of them will never go public or have a positive exit. Additionally the costs of living in Boston are easily 2-3x that of Detroit. We aren’t union, we all negotiate on our own work, experience, drive and abilities. We don’t work 40 hour weeks either. We don’t have pensions.
In short, it seems that they are massively overpaid, and over compensated with all things considered, much to the deteriment of their companies that are failing. Additionally, it’s a fallacy to think that any job is “safe” and to not have a backup plan in case something happens to your company. Yet the members of the UAW all kept acting with a hive mind mentality of continued threat of strikes to keep pushing the numbers higher, while sales were relatively flat and competition was looming. The Big Three played ball and let them get away with it.
Swinging around to 2008 the auto-makers have a new scapegoat for their poor performance; the economy. After totally buying into the John McCain line (and most of his party in fact) that the “fundamentals are strong” and failing to consider the potential of economic instability and continuing business as normal, they have gotten bit in the ass. Sure, everyone is hurting whether they saw it coming or not, but the Big Three really just ignored reality, and continued focusing on a credit-based business model and failed to recognize the potential need for downshift. I’ve been wondering to myself for years the question, “Do we really need new cars this year?” as there are already so many capable cars on the road. During an economic downturn, even if you find yourself in the position that you must purchase a car, you’d certainly consider purchase of something used. I’ve had three cars and a motorcycle and never bought one new. My average purchase price was $1,400. The cars had few problems, and at most cost me a few hundred each to repair. They are all still on the road, working well, and two of them are 20 years old now.
However, Detroit is unable to scale down with the market without causing massive havock in the economy. Scaling isn’t just a problem with Ruby on Rails not going big enough, but also a problem of if you can gracefully shift downward and still have a sustainable business strategy in case the worse scenarios occur.
Looking forward to the future there are more problems on the horizon that I feel that even after the Big Three have some bailout resolution, that Congress will surely deliver to them, they will continue to ignore and they will get bitten with again. Detroit is currently competing against Japan’s auto industry. Somehow Europe is ignored in all of this, but even worse is China and India and farther on the horizon Africa.
China and India are ramping up their auto industries. I am almost certain that Detroit will say the same thing that they told themselves in the 70’s and 80’s. “Americans want to buy American. China can’t know what American consumers want. The cars will be of low quality and not meet American standards.” They’ll probably tell this to themselves while their employees are driving to WalMart to buy stuff made 90% in China. They have us outnumbered for people, they have huge amounts of real estate, low wages, no unions, plenty of government assistance/drive, and the ability to do anything we can do- cheaper and likely faster. India is ramping up similar. And there’s absolutely no reason that they couldn’t do the same in up and coming countries in Africa, South America or any other poorer area of the world.
It’s expensive to make anything in Europe, the US or Japan. Failure in other countries is cheaper. Fail fast and fail cheaply, and you stand the opportunity of being able to iterate enough times that you hit gold.
Detroit is working on it, and has hired some good people like Scott Monty (@scottmonty) to help them out. Yet they need a Steve Jobs to turn those companies around and frankly they don’t have the leadership needed to do it.
What they need to do:
- Get great leaders
- Declare Bankruptcy to break union obligations and re-organize themselves
- Stop working on a huge credit-line. Taking loans doesn’t fix problems, it causes more. Ask anyone who is in credit card debit.
- Cut un-profitable lines, no matter how much you like them.
- Develop new standards and accountability for all employees.
- Diversify business. Honda’s done a great job of this.
- Listen more to consumers.
- Move faster. Hard to do with a big company, but make it happen. The US Government is pretty big too, but watch Obama in his first 100 days and watch how change can happen.
- Empower employees to make change
- Hire better, hire smarter
- Automate, organize workflow better.
- Think differently. Stop copying the same 10 cars over and over again.
- Go Green. 100% Green. As much as possible. Shift the view of cars from being things that hurt the environment to the entire process being as self sustaining as possible with nearly zero carbon impact. This might be something that other nations can’t do as well or as fast. Can you make entire auto plants run from wind, solar and tidal power only?
- Pay attention worldwide. Don’t be afraid to be international companies yourselves. Pay fair wages in other countries to have things done where needed.
- Overall, actually compete. Stop resting on the idea the American is great, and make American great.
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Gm Bailout