Posted by
OB Busch on Monday, December 08, 2008 4:22:21 PM
Alfred P. Sloan became the head of General Motors in the early 1920’s and
formed a corporate structure that would become the model of most corporations
well into the 70’s. The Sloan structure served the business well in the 30’s and
with the switch to wartime production in the early 40’s. During wartime production
the factories were updated and modernized on the government’s dime. The
groundwork was laid for the post war boom.
What a boom it was. Millions of returning war veterans took advantage of the GI
bill and with new diplomas and new jobs they entered the market demanding housing,
cars, and appliances.
The demand for cars exceeded the supply. Detroit couldn’t pound out the cars fast
enough. For 25 years the Auto industry manufactured a product that was both high
volume and high profit. In the ‘real’ world of business you usually have one or
the other, seldom both. By the late 60’s the industry had become a bloated
beaurocratic version of Sloan’s corporate structure. There was a certain
arrogance that permeated all the way down to the salesman on the car lot.
The emphasis was on style over substance.
The planned obsolescence concept of the 50’s led to yearly redesign of cars.
Introduction of the new model year was an annual social event. Even with the flashy
new sheet metal, cars were built with engineering concepts from World War 2.
Fit and finish had wide tolerances and plenty of adjustment room. Suspension
technology was ‘bigger tires and longer wheelbase’ equaled a better ride.
The emphasis of the 50’s and 60’s was to design and build bigger and more
powerful engines. The competition between companies made the American
Auto Industry experts at giving the people what they wanted. They knew the market;
they knew what would sell and what wouldn’t. For a long time the demand was for
more power and the Corvette, Thunderbird, and the more affordable ‘pony cars’ and
‘muscle cars’ of the 60’s was the culmination of the powerful car.
Lot’s of money and lots of customers, created optimism in the American Automobile
Industry. This optimism allowed the unions to demand more wages, more benefits,
and more workers. The union strategy of targeting one of the big 3 automakers for a
strike caused the targeted auto maker to capitulate to union demands. The other 2
fell in line. This would last forever, they surmised, and the new demands by the union
could be paid for with increased prices and sustainable demand.
In the mid 60’s Japanese car makers Toyota and Datsun introduced their cars to the
United States. They were small, underpowered, and ‘Japanese’. (At that time
Japanese was equated with junk products). The US auto makers had introduced
their version of small cars to compete with the popular Volkswagen Beetle. Chevy 2,
Ford Falcon, and Plymouth Valiant were built with the same technology as the
big cars, just on a smaller scale, much like the Volkswagen.
As the demand continued for the powerful big cars that made the Big 3 famous, a
market for small cars was developing. People started looking for small new car
instead of a big used car as their ‘second car’. A sizeable chunk of the
‘baby boomer’ generation favored a smaller car. The Big 3 did not respond to
this market and had no inclination towards building small profit cars.
They already realized that their union contracts and legacy* costs would
make lower priced cars unprofitable. By 1973 Toyota, Datsun (which became Nissan),
Honda, and Mazda all had dealerships in the US. They first covered a supply gap
for smaller cars then began to take market share from the Big 3.
The bureaucratic structure in place made bringing new products to market a
long and arduous process for the US Automakers.
In 1976 models were introduced to compete with the Japanese
imports. You might remember some of these technological disasters.
Ford Pinto and Mustang 2, Chevrolet Vega and Monza, AMC Gremlin and
Pacer, Pontiac LeCar, Plymouth Horizon, and the Dodge Omni.
They became known as ‘sh!t boxes’.
The writing was on the wall but the insular world of the US Auto Industry focused
on the profitable vehicles over the increasing demand for smaller cars.
The few insiders with a view toward market realities were pushed to the side.
Overall demand was leveling off because everyone already had a car or two and
was keeping them longer.
That dwindling demand would now be shared with imports.
The gas shortage of the late 70’s further increased demand for smaller fuel
efficient cars. Front wheel drive technology was introduced by the Japanese.
The big 3 were now faced with marketing fuel efficient, front wheel drive cars.
They were also faced with the fact that agreements with the unions demanded
a high profit.
The government came to the rescue through the law of unintended consequences.
The crippling CAFÉ standards set by the Carter administration led to
underpowered cars. There was still a sizable segment of car buyers that preferred
big powerful American cars. They shunned the cars that complied with the fuel
mileage standards. They shunned the mid size cars with 2.5 liter, block 4 engines.
What did grab their attention were trucks. Exempted from the CAFÉ standards
they were big and powerful if a little cramped for passenger space.
The US Automakers saw a reprieve in making ‘passenger trucks’. They would
become known as SUV’s. They were roomy, powerful, high profit and in demand.
Happy days were here again! Capitulation to the unions followed the old familiar pattern.
Small cars were improved and could hold their own against the Japanese (and Korean)
imports but they were still low profit.
This is the time the US Automakers should have realized that the fuel price crisis
of the late 70’s would reappear at some point. The work should have begun toward
creating a business plan that would make small cars profitable. This may have led
to some playing hardball with the unions, perhaps some strikes and animosity,
but in the end the automakers would be prepared for the next round of small car
mania. It was also all too apparent that environmentalism was gaining political
power. More government regulation was sure to come. It would have been in
the automakers best interest to invest some of those SUV profits in the next
generation of technology, such as hybrids and alternate fuel technology.
(Beyond the token amount they did spend).
Having blown those opportunities, we are where we are today. The US Auto
industry once the pinnacle of corporate structure is now hat in hand sitting before
the US Congress. Their demise seems inevitable not because of corporate
greed, as many would say, but because of a lack of vision, and a lack of
contingency planning.
Even as they appeal to Congress for a rescue loan, the auto industry has a
demand for their product. In 2007, General Motors, Ford, and Chrysler sold
8.5 million cars in the United States.
Worldwide, GM alone sold 9.3 million cars. Ford outsold both Honda and
Nissan in the US.
US Automakers sell 57% of all cars sold in the US. Even in this down year
of 2008 that will amount to 8.1 million cars.
So where is the future of the American Automobile? Where there is a
vacuum there are investors to fill that vacuum. While their may still be a
scaled back Ford, or GM, or Chrysler, there may also be the modern
day equivalents to the DeSotos, Packard’s, Studebakers, and Maxwell’s
of yesteryear.
*Legacy costs are pensions and benefits due to non productive employees agreed upon in former and present union contracts.
Supply and Demand
Combined U.S. market share for Big 3 estimated to be 57.3%
Number of cars sold in US, 2006 16.38M units
9.3 million By US Automakers
Number of cars sold in US 2008 (projected) 14.1 million
8.1 million By US Automakers
2008 World Wide Auto sales through August 2008 55 million)
Not factored in are other brands made in the United States and US
made cars that are exported.
Can imports make up the pending supply gap?
There is not enough manufacturing capacity available elsewhere (see
World Wide demand above) nor enough shipping available to move the goods.
If the Big 3 fails to meet market demand, the cars to meet this demand
would logistically have to be built in the United States.
Sources for sales figures: Detroit Free Press & Autodigest.com