Not sure why, but I’m very intrigued by the auto bailout. Potentially the state of this industry could be seen as a forecast of what’s coming, more so than what we need to do specifically for Detroit. Pending systemic failure?
It clearly feels like nothing is immune from the current state of the economy and we may actually hit 10% unemployment before it is done. In that context, the auto bailout is just the next one, not the last one if we don’t do something. Every industry is contracting and the Auto bailout needs to happen to avoid a further melt down. This is where trickle down economics has easily visible/verifiable relationships – in a contraction. .
I’m not a give free money to everyone kinda person, especially large corporations that refuse to make tough decisions which will take them, the industry and the market forward, but sometimes ya gotta give a little to get a little. If the auto industry goes others are soon to follow, here’s some other industries which could trickled down….:
- Transportation – Parts movement and car delivery. The automotive just-in-time fulfillment model support probably 1000’s of small business owners.
- Electronics and High Tech – There are chips all over these fancy things and many high tech manufacturers don’t only do parts for consumer electronics, but also the auto industry. Don’t forget every car has a radio with speakers.
- Financial Services – No really, it can get worse….
- Local Economic Impact – no factory means no purchasing at the local diner or retailer, I know not an industry, but perhaps it could be considered “small business”
- Advertising (Print and TV) – I think like 20% of all ad spend is auto, not sure where I remember that from but it is significant whatever it is.
I’m sure there are lots of options – mergers and bankruptcy are definitely options, but there may be some other ones. So how could the big three get out of this relatively intact?
- Break up the Unions – there are plenty of successful automotive manufacturers in the US who don’t put their employees at risk, pay them well and in general are good corporate citizens without Unions.
- Incentives for the Consumer – If the car companies don’t get some cash they are in trouble and a market driven approach may be a good way to reduce inventory and generate cash.
- Logo reduction – There are just too many brands for these 3 companies to effectively manage profitably.
Break Up the Unions
I’m a Michigan native, so I love unions – sorta. I’ve seen how unions have delivered disproportional benefits for the labor/effort/value provided which in some circles is something to be loved. Union scale is good stuff if you can get it, as I have many a friend who went into a factory made gobs of cash since 18 and now have vacation homes, jet skis and generally a good life, possibly leverage life, but with no real skills or alternatives if things go wrong way. I see this as being mainly due to the unions. Good job team – an unskilled workforce and debt!
For the corporation the benefits are even more wonderful – bloated cost structures and throttled productivity. Unions fight for platinum coated health plans, retirement plans and more raises than most folks in the private sector get based on merit and corporate performance.
Simple Math: If the benefits weren’t so steep, they may actually be able to hire more people, rather than giving folks $30,000 a year in overtime. It’s cheaper to pay overtime than it is to support hiring a new person. Unions may have served their usefulness. Today’s transparency in the world today makes it a little had for corporations to put folks at risk and generally not do good.
I’m certainly not buying a new car right now, not because I don’t want to, I just don’t need to. I might however buy a car if the government gave me a tax credit equal to the profit the dealer and car maker would get. Give a 1 to 1 credit and generate some transaction in the market and improve cash flow.
So why is this any different than a full on bailout? Well it allows the consumer to invest where THEY want to. This incentive shouldn’t be limited to the big three, but should be constrained to cars manufactured in the US, so that means that potentially some Big Three vehicles wouldn’t make the list. After the dust settles there may only be 2 of the big three left, but it would be driven by market/consumer decisions and not due to a knee jerk crisis response. Folks would buy cars that met quality requirements and other decision criteria.
These car manufacturers like their logos and brands. GM has 12 different active brands, Ford has five brands on their website and Chrysler has three, so why so many? Does GM really need Buick still? Can’t HUMMER role into GMC or vice-versa? As for Ford, not sure you still need Lincoln, you keep the town car and roll it under Ford. Does Ford also need Mercury? Isn’t the Mercury model just the same as the ford with better trim and lower gas mileage? Chrysler is probably the best positioned with just three main brands, but I would think they still want to focus on reducing models, since the town and Country and the Caravan a like the same thing. Couldn’t Jeep become a brand extension of Dodge?
So what would logo reduction get the industry? Consumer incentives will help identify what logos to move out of the mix and help with a market driven SKU reduction. There are a bunch of SKU’s to choose from and most could easily be displaced by the other logo alternative. Less SKU’s means less complexity and the ability to scale production more efficiently/profitably and allow them focus thier innovation efforts. It would allow them to reduce their marketing costs from labor perspective and ultimately build STRONGER brands. If these companies could consolidate their design and centers for innovation that would have to have some positive bottom line impact.
Give Them the Money!
What is the danger in giving them the money? Not much, the downside is much bigger. The issue is cash and the ability to make it through the recession. These companies are doing them most they can and bankruptcy just would help. I would actually up the ante to $25B per car maker – that’s effectively what we gave the banks, but it should have some strings to ensure it stimulates other sectors:
- Production of cars of <20 miles per gallon needs to stop
- Overtime budgets need to be cut in half
- By 2012 all passenger cars manufactured needs to get >25 gallons
- Trucks and industrial vehicles need to improve gas conumption by 25% by 2012
- Plants with the lowest 3rd of efficiency need to be re-tooled
- The top 15 plants with the highest “pollution rating” need to be re-tooled
- Emissions for all vehicles need to be reduced by 15% by 2012.
This is Just a Cycle
I’m not an economist, but I do like me some history and this looks familiar. The economy is at a tipping point, not unlike the one that fostered the great depression. The distribution of skills, the demand for skill types and available capital make for a sustainability issue.
The great depression could be considered a function of the transition from a fully agrarian economy (majority of skills and spending habits) to an industrial economic model (the majority of demand). So just like the move from a primary sector to secondary, we are transitioning from a secondary economic system to a tertiary sector. Some might even argue Quaternary or Quinary, but these are more tertiary overlays which are “thought/theory” gap coverage to help understand different modes of market engagement which exists today.
There are all kinds of theory gaps which make for interesting dynamics which need coverage. The current economic norms for participation are changing – work from home, small business vs. large business, expertise over scale and information over goods are in growth mode. The challenge is we don’t have the necessary infrastructure, pervasive skills availability and incentives for business to move forward quickly. Government needs to invest in building mass transit, bandwidth and wireless upgrades and provide manufacturing/other industries incentives to modernize – buy more software, improve your plants, adopt alternative energy options and help the transitioning the population with educational subsidies.
I’m not sure we can buy our way out of this, but we just might want to give a big ole American try.
I got bored halfway through this post and started working on something else, but decided to push publish anyhow. The blogger equivelant of SKU proliferation.