Is Big Auto Really the Answer?
Even when cultural clashes or company rivalries are absent from the picture, robust size can cripple an automaker. Once you’ve achieved the economies of large-scale production and established a sprawling sales channel, it’s difficult to make quick moves to adapt to changing market forces. Auto executives quickly learn how difficult it is to shrink a business, even just a bit, as opposed to growing one.
General Motors is a class study in just how difficult that process is, spending the past decade trying to adjust to smaller volumes while maintaining high fixed costs. One of the dilemmas it has faced is trying to keep its stable of brands focused while keeping plants running, because shuttering plants had little impact on labor costs. So if you’re the person running Pontiac, you might be perfectly happy to offer specific sporty products like the G8, Solstice, and Vibe. But to keep GM plants running, you also have to offer G3, G5, G6, and Torrent models that are repackaged Chevys. Saturn has been similarly burdened with this concept.
Toyota is often cited as the sharpest blade in the automotive management drawer, and the venerable Japanese company has an enviable track record of success. In fact, it has become the world’s largest automaker. But Toyota has discovered that size doesn’t equal prosperity and is reeling under the sudden market downturn. And while there are always ups and downs, when you are a giant, the pain is more intense. Today, Toyota has to decide how to rationalize two huge new production facilities in North America; one that’s underutilized and another that hasn’t yet produced its first vehicle. Sound familiar?
Until it lost money for the first time this year, Toyota was recognized as the world’s most profitable automaker. But according to some reports, Porsche earned a profit of $28,000 per vehicle in 2007. Now that it has merged with Volkswagen, a company that has far higher volume but nets just $400 per car in profit, the dynamics will change. Will Porsche remain quick and flexible? Will the quality change? Time will tell.
“Will Porsche remain quick and flexible? Will the quality change?”
The historical evidence overwhelmingly suggests that any business directly under the thumb looses its quickness and flexibility. Such a company no longer worries primarily about pleasing customers—but members of the political class. This is a sure recipe for a steep decline in both quality and originality.
“…business directly under the thumb looses its quickness and flexibility.”
Sorry about that. Should be: …business directly under the thumb of the government looses its quickness and flexibility.
When Washington set Cafe Standards GM was
forced to stay big by building unprofitable
cars that evened the line out. The fallout
was that it had to employ high cost employees
who became high cost pensioned retired
employees replaced by more high cost employees.
This was supplemented by the almost total
control the UAW/CAW had over the domestic
industry. Why are particular unions allowed
to have a monopoly whereas a company can’t?
It follows that when you have higher costs
you have to cut back somewhere in order to
remain competitive, quality control for
example, price wise. This is something the
union totally refuses responsibility for.
They think you just hire a smarter guy who
just pulls a great reliable product out of
his brain.
As the rest of the world came up to speed
and Washington playing to their strengths
this was a train wreck waiting to happen.
When people come to a product it becomes
big not the other way around.
By the way how come UAW members way back
then bought Sony instead of domestic GE
guilt free but when it come to cars they
become religious.
Is consolidation the answer? Just look at the british car making industry.
What British car manufacturing industry? you ask.
QED
Once the pensions, healthcare, a complete severance pay forever are funded by the Feds, building the autos will no longer be required. Should take about 2 years to put this all together.
No, but there are going to be serious sorting out issues in the automobile menufacturing sector. Serious shakeouts are occurring and will continue to occur.
Of course “shake out” in Capitalism means failure. Sell off… job loss. And the Fascists in Washington (newly re-installed to power) and the Fascists in Europe, cannot tolerate “capitalism’s creaative destruction” happening here.
The problem is that there are too many companies, chasing a fundamentally stable market, with products the government doesn’t want, but the customer does… (and doesn’t)
The Government wants the sipping two passenger electric skate preferably owned by an urban couple of androgynous nature and no children… Grocery storage is easy because they eat only wild grasses locally grown and harvested by happy drones.
The Customer wants a huge comfortable, safe automobile that is cool in summer, warm in winter, can cruise at 70 mph, manuver like a go-cart, all this without having to put any gas in the thing, and have it cost a buck. The customer also faces the need to put a family member in a seat with a seat belt… must pay for safety features that will “total” the car in case of the most minor accidents.. and this all must be accomplished with enough reliablity that the car can be paid for within 5 years, and owned for at least 7 or 8. Because the Customer needs 2 of these to survive.
The automobile manufacturers want to make cars that people will buy, with enough profit margin to make it actually worth building the things in the first place, and be able to pay their share holders a dividend so that they, the car manufacturer, can continue to make cars. Of course they want to make the absolute cheapest car possible, for the least possible quality investiment, with the least possible cost, and sell it for absolutely the most that the market can possibly bear. The want to sell as many of them as they, the car company can sell ever year, and actually sell more every year, on an ever increasing number.
Mix these things together, and throw in the cost of a modern automobile manufacturing company is left with almost no way to build and sell automobiles at a profit.
Well people need cars, especially in the US where most people actually live away from their businesses, and more often than not have multiple job career tracks where 20 years, or 30 years of service to one company at one location is a fanatsy of the distant misty past.
The reality is that there are too many manufacturers chasing too few customers with too slow a turn over in old product, and with a product that costs too much, even at a basic level to produce a competative model.
This is 100% of the automobile manufacturers… As the author noted, has anyone seen the recent balance sheets for Environmentally correct Toyota? Or Nissan… or the annoying Honda? Toyota just lost a fortune last quarter, and it is in the best position to make the govvies happy with their beloved pregnant skates.
The Fiat (Alfa-Romeo/Ferrari), Opel, Chrysler) deal is probably a barely survivable aglomeration that will limp with government help, into the near future. GM will suffer the same fate. Toyota is on the same trajectory, and will land in very much the same place in the near future. So will Nissan…
The reality is that it isn’t the cost of labor (though that is an accelerant of powerful force) it is the fundamental economics of the entire broken market. Someone somewhere will have to figure it out. In the mean time, the government will attempt by subsidy and fiat (no groans on that odd pun, please) save its precious unions, and force manufacturers to stay limping into the future.
Capitalism is on a shaky unicycle wheel, and the clown riding it isn’t too experienced.
Sad, when great things devolve into tragic jokes.
r/John
(Porche is a low volume, high price sports car manufacturing niche company.) Volkswagen married to Porche will be a tad like the old Porche Engined Polizei Bugs on the Autobahn in the early 1960′s. Surprising, not too great looking, and really difficult to handle.
I cannot imagine a crappier combination. Fiat’s unreliable little cars nobody in the U.S. really wants, built by Chrysler’s new majority owners – disgruntled UAW workers, with government bureaucrats pitching in with helpful advice.
Federal Motors will go into full production of little green crapboxes, which will be handed out to the poor, making the three legs of the democrat party unbreakable, ie labor, environmentalists and the victim classes. It’s Obama’s perpetual motion machine and it is beautifully fraudulent.
Looks like the Trabant is making a comeback.
GM HAS ONE FOOT IN THE GRAVE: CHRYSLER IS DEAD
Putting unions in charge of automakers is putting the fox in charge of the hen house.
http://greensrealworld.blogspot.com/2009/05/proof-of-dumb-ideas-uaw-controls.html
Perhaps the best comparison is slightly older- fading American Motors’ ill-fated merger with Renault (another European maker of crappy little cars).
Except AMC had a salable asset in the Jeep division. Today? Jeep will be regulated out of existence, if the UAW/Fiatler doesn’t kill it on their own.