American Car Makers and Bad Management

In the news, and in a few publications, the Detroit (US) car makers have been blamed for "bad management." I would like to clarify that definition and ask your opinion. But first, my thoughts…

An obligation of a business is to respond to customer demands. American customers demanded large SUVs, and gadgets for it that made the SUV a home away from home. What drove SUV sales is the North American safety requirements that require car seats for children under 60 pounds (about 25 kilos). SUVs tend to have individual seats per passenger and thus, each car seat takes up a dedicated spot in a SUV. A family of three children with groceries loaded in the trunk and with both parents cannot fit into the normally sized car. But the gasoline crunch that occurred last year, and that will re-occur, is giving the consumer second thoughts about SUV ownership and is forcing adoption of changing lifestyles.

Then there is the difference in lifestyles between America and Europe. In Europe, people live nearer to their work. The majority of family wage earners travel less than 50 miles (80km) each way. Also, as the cost of fuel is very much higher then that in the US, for the European, Asian, and African contents, a small car for travel to/from work and for the family is the more affordable option. Unlike the SUV with groceries locked in the rear, a roof rack is used to hold the groceries.

With the current worldwide credit crunch, American consumers are changing tactics. They want to live within their means. They want bank savings for their shaky economic futures. That translates into cutting expenses to the bone, purchasing and keeping the vehicle for 10 years, and no longer using the vehicle as a status symbol. That also means that the vehicle has to be reliable enough to last 10 years.

If foreign vehicles last more then 10 years, as they do, the message is clear to manufacturers – produce lower cost vehicles, much reduced fuel consumption vehicles, and more reliable vehicles. As this objective appears to be met in Europe, the same should be true for North America.

Is "bad management" the act of responding to consumer demands? Is "bad management" not realizing that with a financial crunch, sales cannot be sustained? Is "bad management" not anticipating this crunch, then according to my beliefs, we do not have to right to say that this current automobile manufacturing problem is due to bad management?

One the one hand, management knows that it can take three or more years to retool a plant. On the other, did they have the foresight to begin planning or integrating changes for the new paradigm? Is not recognizing the rapid change in energy costs, and the uncertainty of the economy "bad management"? Could they have predicted this situation? I believe not.

I do have one idea that can be applied to bad management decisions and that idea is the introduction of "value engineering" in the late 1950s. Value engineering is a methodology whereby the design of components is downgraded so as to function without breakdown throughout the warrantee period. Value engineering for the manufacturer is the application of the saying "a penny saved is a penny earned." Where American manufacturers were skilled in this area, foreign manufacturers felt that component reliability builds a brand’s reputation, and their idea of "value engineering" was based on providing a 10-year lifespan for a part. The result was that for trivial increases in cost, foreign manufacturers share of the American car market was gained.

Remedies for American Car Makers

The car industry is divided into after-market and before-market selling. The after-market will be most affected favorably sometime in the future, when the repairs begin to increase and it is more advantageous to repair a car then to trade it in for a newer model.

Remedies have to improve the following areas:

  • American car manufacturers have to tailor car manufacturing to match the quality of foreign products.

  • Move away from the business model geared to building large, high-margin vehicles like trucks and SUVs rather than smaller, fuel-efficient cars.

  • In the before market, we have the dealers, insurance companies, governments (sales taxes), and mechanics that are impacted badly. Here we need to realize that profit margins must be pruned to reduce vehicle costs. Some of the cost pruning must come from the manufacturer, some from distributors, and some from costs of ownership and the cost of use.

  • GM and Chrysler claim the core problem is so-called "legacy costs" -- meaning the pension and health-care obligations they owe current and retired United Auto Workers (UAW) workers. The new compensations have to be reined in and more realistic.

  • Allow a line employee the right to do a reasonable number of multiple jobs. Union rules have to allow for more flexibility in deploying employees. In a union shop, an employee’s compensation is tied to his job description. He cannot switch jobs without bidding on it. Some rules for absenteeism replacement exist, but on the other hand, an employee who is lightly loaded is not allowed to concurrently do two jobs with two different pay rates. He cannot be given a small salary premium if he does them.

  • Then we have the distribution system involved with vehicle shipments from factory to dealer. Dealer preparation costs are a tax on the consumer. A car from the factory should only require a gas fill-up and license registration. Computer systems today have done away with the manual paperwork that used to be required for each car sale.

  • The car assembly line that integrates components made by hundreds of feeder businesses from the latter’s factories needs to be rethought. While just in time (JIT) and lean manufacturing is the norm, perhaps assembly lines are too much geared to mass production of a single vehicle model—a model that quickly fell out of popularity.

  • Undo the virtual lockdown on credit. Loosen up the ability to purchase a vehicle, as opposed to leasing one. The tight credit squeeze by banks is hurting the domestic car industry.

Giving cash to the American Big three is not going to increase car sales. Consumers are not going to lose their uncertainties. What is required is to give incentives to consumers to purchase or lease a new car. Car manufacturers need customers, not handouts.


Your Opinion Please

comments powered by Disqus