U.S. Carmakers: Heal Thyself

Rick Hamada
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Wednesday - November 26, 2008

The efforts to bail out the automobile industry should come to an immediate and abrupt stop. The car business does not need a shot of temporary cash. It needs a complete overhaul.

Those of us who opposed the bailout of the financial industries feared the floodgates to the treasury would open and everybody would feel justified to petition the feds to keep their respective businesses afloat. It did not come as a surprise that once $700 billion was effortlessly earmarked for Wall Street that other distressed companies would come hat in hand to Capitol Hill.

Let’s leave the financial markets out of this for now and focus on the Big Three car manufacturers, specifically General Motors.

GM was founded in 1908. By 2008 it employed more than 266,000 people. It emerged as the largest automobile manufacturer in the world with offices around the globe. Through effective marketing, names such as Chevrolet, Buick, Oldsmobile, Pontiac and Cadillac became synonymous with America itself. GM also had a stake in Hummer, Saturn, Saab, Fiat and other labels.


 

There were challenges in GM’s ascension to the top spot.

The 1960s saw the Chevy Corvair hit the streets. It was a domestic answer to the incredibly popular VW Beetle. However, a book by consumer activist and presidential candidate Ralph Nader killed the Corvair. His book Unsafe at Any Speed documented alleged safety issues with the car and sales evaporated. GM eventually disbanded the label.

The Chevy Vega debuted in 1971 and ushered GM’s foray into sub-compacts. However, the Vega - with its aluminum engine - was a terrible car. Its poor performance and overall quality damaged Chevy’s reputation and became a comedian’s punchline.

The 1980s saw GM downsize the number of platforms. It was common for several badges to share the same basic chassis, thereby rendering many brands indistinguishable. GM saw one label taking sales from another or it led to consumers shopping elsewhere. That milquetoast strategy is still employed today.

At the Los Angeles Auto Show in 1990, GM unveiled the first electric car, the EV1. With hindsight being 20/20, GM’s decision to discontinue the EV1 seems as big a blunder as New Coke. Conspiracy theorists have several explanations as to why the EV1 died, but despite strong demand, GM pulled the plug on the first electric car in more than 30 years. Who knows? The refinement of the electric vehicle could have changed the entire industry and ultimately prevented the situation we have today.

The financial challenges facing GM and the auto industry are found in recent history, too. The post-911 economy pummeled car sales. However, GM launched an aggressive price-based marketing campaign and other carmakers followed suit. GM also concentrated on diversified investments generating strong pension profits.

However, GM’s decision in 2004 to forgo sedans in favor of truck and SUV production could-n’t have come at a worse time. Escalating gas prices and the devaluation of larger trade-in vehicles threw GM’s competitive stance off balance. In 2008, GM saw a 30 percent drop of truck/SUV sales translating to approximately $10,000 to $15,000 profit per vehicle. No wonder GM has fallen faster than a high school boy for Cameron Diaz.

During the last 12 months, GM sales have dropped 45 percent. In the first six months of this year, GM has lost almost $19 billion. Couple dismal sales with an inordinately high overhead and you have a recipe for disaster. The average hourly salary and benefit rate for GM in 2006 was $81.18 going to $78.21 in 2008. Granted, new hires now receive a rate of about $27 per hour, but the personnel cost gap with the competition will take years to close.

It is clear the combination of poor strategic business decisions, bloated personnel cost, volatile energy prices and overall economic challenges were the primary contributions to the downfall of General Motors and, by extension, Ford and Chrysler.

However, every business in America is dealing with a similar economic environment. Granted, the scales differ, but the realties are the same.

So why should Americans bail out these companies and not every company in America? When doling out taxpayer money, should-n’t the justification be more than, “If you don’t, we’ll go out of business”?


Bankruptcy has a negative connotation. Yes, it can be an embarrassment and set your creditworthiness back. But it is an opportunity for individuals and companies to reorganize, restructure and reinvent. GM and its competitors should capitalize on what is legally afforded to them just as countless people and businesses do. This option is more appropriate than simply writing a $50 billion check with which the car companies can do as they please.

Will the process be painful? Yes. But GM, Ford and Chrysler can emerge as leaner, more efficient and, importantly, more competitive and relevant companies.

And even more importantly, this can be accomplished without taxpayer dollars thrown into a fiscal black hole.

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