Looking to the Future of the Big Three
November 18th, 2008
There has been much discussion in Washington and in the media about what to do with the Big Three. One school of thought is that the country cannot afford for GM, Ford and Chrysler to fail and fall into bankruptcy so they must be bailed out The other line of thinking is to let them fail as they have run the companies into the ground with an ostrich-like approach to strategic planning.
I have written a few columns about the Big Three, GM and the Chevrolet Volt. I have written about how Ford has created a car manufacturing plant in Brazil that points the way to effective and profitable car production. I have been a strong supporter of the limited efforts of the Big Three to move to a new paradigm that is required to become a future, most clearly represented by Larry Burns. In spite of all that there is much to be angry about.
If, in 2006 I could see that oil would reach $125 a barrel in 2008, why couldn’t Detroit? If Toyota can prove that selling a hybrid that gets up to 50 miles per gallon is a popular and profitable idea, why can’t Detroit produce such cars? Well those are very valid questions. The only answer is that the eye on the profits generated by gas guzzling trucks and SUVs was such that the Big Three had a myopic strategic view on the vehicle marketplace. That is why I have been predicting for the last 6 months that the Big Three would become the Big Two, at best.
There are only three options to consider.
1. We let the companies fall into bankruptcy so they can be reorganized. This is what troubled companies do when continuing to operate as they have no longer seems valid. The airlines are a recent example of this. I would normally support this option in stronger economic times. Tough love for companies to come back as stronger entities has a history of success. However the current financial and economic disaster that America is now in would be greatly amplified by this process. There might be 5-7 states where unemployment would immediately shoot beyond 10%. Without a plan to retrain employees and retool manufacturing, bankruptcy will just cause greater economic damage to the country and would significantly prolong the economic downturn.
2. We nationalize or semi-nationalize the Big Three. Fire all the board members and top management that have “led” the companies to this point. We bail out the industry by essentially financing it and dictating management. The key here is to find the right management. As Tom Friedman suggested, bring in Steve Jobs to lead innovation and R&D. As my wife suggested, bring in Warren Buffett as Chairman of the Board. In other words, bring in leaders who do not come from the insular world of Detroit. Make the American Taxpayer the largest owner in the companies with a risk reward scenario that provides an upside. This option will still result is an increase in unemployment and lost benefits, but at least new leadership might improve the chances for success and will also create the opportunity for government funds (read taxpayer funds) to be repaid.
3. Embrace competition and set metrics. This option I have yet to see anywhere, so I offer it up for consideration. Tell each of the Big Three that the goal is to have dramatic increase in average fleet MPG and the entire product line be either hybrid, plug-in hybrid or pure plug-in. In simple terms it could work in the following manner. Give each company the money they are requesting but set performance standards. The first company that gets to a fleet average of 45 mpg based upon building cars for the future, cars that are not totally reliant on the internal combustion engine, will have the federal investment forgiven. The second company that reaches the goal gets to repay the loan at a low 2-3% interest rate. The company that comes in third will have to repay the loan at 5-6% interest rates. If any of the companies fall, the federal government is in first place to recoup funds in the liquidation of assets.
There are several things I like about this option. It will smoke out current management as to their intentions and capabilities. If they resist it, it will show that they are not sincere or confident in their capabilities to completely reinvent their industry. It will set the Big Three goals in perfect alignment with the needs of the country to move away from the gasoline internal combustion engine as quickly as possible. President Elect Obama has correctly stated this as an essential goal for this country. Align the financial bail out of the Big Three with this goal directly. Businesses all over the country are lent money based upon performance metrics. It is the performance that counts, not the perpetuation of failed business models or management teams.
Finally, this option promotes the American values of competition, of rewarding superior performance, of avoiding nationalization that many call socialism and also provides a better probability the taxpayers will get repaid.
We stand at the beginning of the Shift Age. We must face it with forward looking intelligence rather than “solutions” that honor the past with strategies that will no longer work.
November 18th, 2008 at 8:17 pm
Hmm, I was just saying to my husband on Sunday, “why not make the bailout contingent upon each of the auto makers coming up with a competitive hybrid or electric car?” Force them to do the right thing. US carmakers have no excuse for not jumping on the bandwagon. The technology is there, it’s just the foreign automakers who are cashing in on it. Seems obvious to me, and it suits the Obama mandate for less reliance on foreign oil. Two birds with one stone.
November 18th, 2008 at 9:35 pm
Brilliant! I suggest a comprehensive training program for the entire staff of the big 3. Not only people who are currently employed but also those who have been laid off. Bring them all, under a future technology program…. give them free food and let them learn the new ways. President Elect can really make this happen as this is the road he just needs to revisit.
November 19th, 2008 at 1:43 pm
As an old Econ major, I concur with your proposal #3. It sets benchmarks with the old carrot and stick…with pain associated for failure. In addition to hybrids or electrics, why not jump to the future and go with hydrogen fuel cell technology? If the space program has perfected it, why not the car industry. One aside – I’m not sure I’d go with non-car types running the car industry. Sorry to say, one cannot import the success from financial or computer sectors and magically trasform and mechanical industry.
November 19th, 2008 at 3:01 pm
I see the merits of all of these approaches, and it would be great to see a hybrid (no pun intended) resolution come out of this, where the companies fail, the government manages their crucial infrastructure components (MOPAR etc) for consumer insurance, and a new generation of managers, technologists, and manufacturers steps in to fill the void with a mountain of innovation. As you’ve written many times, the US’ most profitable resource in a telecommunicating world is its IP, and it would be wonderful to see our designers, chemists, engineers and computer scientists flocking to the automotive industry.
I have to ask though, assuming one of these three choices were inacted straight down the line, which would be best for the automotive maker’s pensioners? As you know there are probably millions of retirees or long-time workers that would be effected in a big three meltdown. This factor has been a major weight on all of the companies in recent years, and has had to factor into all of their strategic planning. Going into chapter 11 would allow any of the companies to sever or transfer those relationships, and the regulated relationships they have with dealers nationwide, but that would obviously have a serious effect on the economy and the future of our citizens. What’s your take on this David? Is the impact being blown out of proportion, should any government aide go directly to these employees, or do we look at it from a statistical standpoint as a ‘marketplace correction’?
I guess when it comes right down to it, the perceived human impact to people’s lives is the only thing that would tie me to the Big Three. If the major European manufacturers can manufacture and ship an entire product line to the US, losing money on the Dollar/Euro conversion and logistical costs, and still turn a profit, my sympathy for the American corporate bulwark becomes extremely limited. Add to that truly innovative American companies like Aptera and Tesla, who’ve been able to begin the manufacturing cycle entirely on their own, and the reality of a major shake-up goes from desire to necessity.
November 19th, 2008 at 4:14 pm
David:
From what I heard the other day, Toyota Prius is under very limited availability. There may even be a 9 month backlog on Toyota Prius currently.
From what I know from other sources, the availability of other brands of hybrids and new generation clean turbodiesels is similar.
The most common explanation for lack of availability of hybrids is lack of availability of battery supplies. This applies to both current generation NiMH battery technology and future plug-in hybrid Li ion battery technology.
Also, as noted elsewhere, the only big 3 CEO who is a lifer in the business is Rick Wagoner of GM. Narducci at Chrysler came from GE and Mulally of Ford came from Boeing. It seems to me that both of those companies have done more already to transition to next generation management than GM.
Sincerely,
Jonathan
November 19th, 2008 at 10:15 pm
Caleb-
Yes the human toll on the retirees will be bad not matter what route is taken. They will feel the same thing tens of millions of people have felt over the past 45 days as they watch the evisceration of their 401ks and IRAs.
In the long run, the compassionate, human thing to do is to retrain workers for a new green energy economy and also to put as many people as possible to work on rebuilding America’s infrastructure for the 21st century. Massive work projects focused on the future of America.
David
November 20th, 2008 at 12:48 pm
Some of your thinking is overly simplistic. Steven Jobs and Warren Buffett have had success in their own fields, will that translate to the auto industry? I can’t see why.
The goal of the big 3 (and every other company ever created) is to make profits, not save the planet. What if they put all their efforts into making hybrid cars, and gas drops to $1 a gallon, or hydrogen powered cars are the new rage, or any number of other things happen to make hybrid cars not the place to be. Even though they’re in tough times, I imagine they know the auto industry better than we do.
There are lots of problems with the big 3, many of them related to sweetheart deals when they were making big bucks (union deals, subcontractors, regulatory, …) that are killing them and making it difficult to complete with foreign cars.
I agree that any financial bailout needs to include changes to the way they do business.
November 20th, 2008 at 6:13 pm
The problem is that the winner of the incentive option (3) would still be lagging foreign manufacturers in the US who do not have the burden of Big 3 union contracts and pension obligations. Only bankruptcy can be expected to substantially relieve those burdens.
The economic impact of Chapter 11 bankruptcy may be overstated. Demand from reorganized GM etc might well increase. And, a reduction in price for the present
line up of cars (now that gas prices are lower and the
price of hybrids is higher) might well slow or reverse plant closings. Sustained production with pay comparable to foreign competition in the US and readjustment of pension obligations, automotive workers
and workers in supplier companies would be able to hold on to their jobs, albeit at lower earnings. With a return to profitability once the Big 3 build the cars that Americans want, workers could be the first to share in the prosperity.
Big 3 has not collapsed because of a lag in technical, design or engineering know how..and not even because of
inferior management. It collapsed because it hinged itself to the shortlived star of gas guzzlers..that delivered the big margins needed to satisfy stockholders,the union, and pension obligations. With
bankruptcy each of these becomes moot and Big 3 can
return to profitability by building fuel efficient cars with or without internal combusion engine.
January 18th, 2009 at 9:51 pm
It’s been interesting to see this story evolve over the past few months. Asia seems a clear front runner around energy storage systems. I think the real story is changing the business model of the auto industry from selling new cars to selling vehicle services.
Success will be based on our ability to navigate the transition from combustion engines and modular electric motors powered by one integrated system batteries, fuel cells and capacitors.
I’m looking forward to seeing how this story unfolds!
Garry Golden
Editor
The Energy Roadmap.com