Many years ago the large German company for which I worked calculated that, for each of a particular product it sold, it lost a certain, additional amount of money. The product had a negative margin.
Why the company continued to make and sell the product is complex and beyond the scope of this post, but it highlights a point I’d like you to keep in mind: selling more of what you sell is not always the key to profitability.
This morning there was a post at TCS bemoaning the last Ford Taurus off the line. The valedictory message of the post was that if Ford had been more interested in a serviceable, reasonably-priced car, the Taurus might have succeeded. I’ve read any number of comments to posts on the mammoth, hemorrhaging losses that Ford is incurring to the effect that what Ford needs to do is produce a high-quality, inexpensive car.
I sincerely doubt that any U. S. automobile company can prosper by manufacturing low-cost cars. There are a whole host of reasons why this isn’t so.
For one thing, inexpensive and economical means small and light and the domestic market doesn’t favor small and light. It’s no accident that the best sellers recently have been SUV’s and light trucks. These, along with minivans, are mostly being used as family cars—the contemporary version of the station wagon. They won’t easily be replaced by small sedans.
As housing prices have risen, people have moved farther and farther from their work and commutes are longer. Does anyone really relish the idea of a two hour commute in a motorized shopping cart?
U. S. manufacturers have high “legacy†costs i.e. pension and health care benefits for retirees. That means there’s a built-in overhead.
There’s a built-in overhead, too, in the cultures of these companies. They continue to operate as though they were the cartel they were in the 1950’s.
Previous employee buy-out plans have resulted in the most capable, portable, and hireable employees having left these companies already.
U. S. auto makers make more than $30 per hour (although they make less than their German counterparts). Add benefits and it comes to over $70 per hour. High wages and arcane work rules results in a high cost per automobile produced.
You’re not the automobile companies’ customers: their dealers are. Vehicles produced may have more to do with what their dealers can sell than with what the end-users want.
The CAFE standards, aimed at reducing vehicle emissions and oil consumption, apply to fleets sold rather than individual vehicles. I suspect that’s resulted in small sedans being used as lost leaders—sold at or even below cost—to result in compliance for the whole fleet. Without the CAFE standards would small, light vehicles be produced here at all?
And then there’s the future disaster looming on the horizon: Chinese automobile workers receive a wage of $1 an hour, not much in the way of benefits, and there’s no state-supplied health care or social insurance, either. There’s no way that U. S. companies can compete with that on price alone even with the greater productivity of U. S. workers other than manufacturing cars without workers altogether. The Japanese tried that and their experiment with robotics wasn’t completely successful.
The Chinese cars are coming.
I have no idea if, how, or whether the U. S. automobile industry should be saved. I strongly suspect that they’ll be going to Washington with their hands out looking for a bail-out. We’ll increasingly see taxpayers without pension plans or health care benefits paying for the pension plans and health care benefits of former employees of companies who’ve defaulted.
I’m not one of those who blames unions for the fix that U. S. auto companies find themselves in. I think that the unions have done what anyone would: they’ve tried to get the best deal for their services that they could. It’s not their fault that management has lacked the courage or ingenuity to say “Noâ€.
As we’re seeing in Washington these days a lack of courage and ingenuity on the part of leaders is not unique to the automobile industry.
I think that, in part, you have to view the car market as an ecosystem. In an ecosystem, diversity is good. While light trucks, SUVs and minivans have been a cash cow for the last decade or so, that only staves off the inevitable, and worse, makes the companies dependant on a smaller “genetic” (design) pool: fewer types of vehicles available. When evolutionary pressure (market shift) occurs, how well a car company can adapt to that is dependent on its diversity of vehicles. Ford has done less well than GM in part because Ford was far more dependant on its high-end SUVs and pickups. GM, with a large number of small, fuel-efficient types in production, was able to weather the high gas prices far better.
But of course, the entry of Chinese-made cars will also provide a far-different evolutionary pressure, and it’s that which I referred to as “the inevitable.” It is only a matter of time before major car companies begin to default on their pensions and health benefits to retirees. The alternative is bankruptcy. They may delay long enough to have both defaults and bankruptcy. But unless and until the union benefit cycle is broken and auto company management becomes far more interested in cutting costs due to mismanagement, the car companies will become progressively less able to compete.
And by the way, it’s not just management not being able to say “no” to unions. For a long time, the laws made it impossible for unionized businesses to say “no” and stay in business. The inability to fire striking workers and other “worker protections” was a key part of the fordist economy, and management was limited to doing the least it could short of having the unions walk out. With all the power in the hands of the unions, management was hogtied. Of course, this was largely a backlash to all the power previously being in the hands of the employers, so it’s a wash over the very long term. Hopefully, the next implosion (probably, as you note, the coming of Chinese cars) will result in a more balanced and market-oriented foundation for heavy manufacturing.
The pressure to show increasing sales every quarter (forcefully noted to me by a boss long, long ago) tends to preclude a long-run, “ecosystem†approach for American companies. Chinese managers (for example) have other pressures but not those particular ones.
I continue to believe that the internal contradictions of Chinese society will preclude this from being “the Chinese century†and I wish that U. S. managers and workers would stick to their knitting rather than worrying about competition from China or for the Chinese market for that matter.
And, of course, your point about the Fordist economy is singing my song. 😉
I’m not too sanguine about the likelihood of reform on the part of American industry. It would take a complicated battery of government, social, and business reforms and, frankly, I think the internal and external pressures are in the other direction.  If the Democratic Party stands for anything it’s Fordism and it’s a Fordist world. We’re the outlier.
You are correct that CAFE relegated small cars to loss-leader status. It also resulted in some “creative” interpretations of the law: the Chrysler PT Cruiser, for instance, is considered a truck for some reason. (The ragtop version isn’t; the difference between the two, other than the top, is that the convertible’s seats won’t unbolt easily, which suggests that DCX intended for the regular PT to pass as a cargo van.) And a couple of PTs will nicely offset a brace of Dodge Ram bruisers.
GM sussed this out pretty well: they bought the failed Daewoo Automotive and turned it into a source for bottom-feeders (Chevy Aveo), making it possible to move their domestic small car (Chevy Cobalt) slightly upmarket, increasing the chances of making it profitable. Meanwhile, Ford soldiers on with the same old Focus.
What the Big 2.5 need more than anything else, though, is a lot more vehicles that will sell without incentives. Chevy’s new Impala is doing decent business, as is Ford’s Fusion, but neither of them have people beating down the doors to offer full sticker for them.