The Sorry State of the US Car Industry

I’ve been mulling for a few days about writing a post about the current sorry state of the US car industry, thinking about the $25 Billion proposed “bail-out”, the crashing sales, and even the crazy proposed merger of GM and Chrysler. But Thomas Friedman at the New York Times has pretty much written it for me, so go ahead and read it.

How could these companies be so bad for so long? Clearly the combination of a very un-innovative business culture, visionless management and overly generous labor contracts explains a lot of it. It led to a situation whereby General Motors could make money only by selling big, gas-guzzling S.U.V.’s and trucks. Therefore, instead of focusing on making money by innovating around fuel efficiency, productivity and design, G.M. threw way too much energy into lobbying and maneuvering to protect its gas guzzlers.

I’ll just add a few things.

Toyota will Become Number One

My prediction is that Toyota will move up from it’s #2 slot to be the #1 manufacturer by the end of 2009. Their sales have been impacted by the current economic crisis, just like everyone else, but not to the same degree as GM.

And Toyota’s product portfolio is much more diverse and better protected against parsimonious spending. GM’s is far too heavily skewed toward large, expensive gas guzzling trucks and SUVs, and its small and inexpensive cars are fewer in number and not as good as Toyota’s (with a couple of notable exceptions such as the well-received Chevy Malibu and Cobalt). That doesn’t bode well for riding out a combination of tight consumer spending and credit, and still relatively high gas prices.

GM and Chrysler Merger: Huh?

In what universe does the merger of GM and Chrysler make sense? Both companies are in terrible financial shape with the same combination of huge cost structures and poor sales. In fact, Chrysler’s product portfolio is even worse than GM’s: even more skewed to SUVs and big trucks, and its lower end and smaller cars have received universally terrible reviews. For example see Dan Niel's pummeling of the Chrysler Sebring, or this article about some recent flops from Chrysler.

All of Chrysler’s hot cars are largely irrelevant in a spending-constrained environment: Viper, Ram pick-up, 300, Challenger. Its bread-and-butter minivan has been eclipsed by offerings from Honda and Toyota.

And a merger would almost certainly result in large numbers of lay-offs as the companies have massive duplication of product lines, production capacity, vendors, and staff. Unless the unions force them to keep the manufacturing workforce, which would just compound the fixed costs problem. Speaking of which…

Plenty of Blame to Go Around

The prospect of a bailout, whether it’s for banks or car companies, makes me queasy. I’m no laissez-fair free marketer, far from it. But the disparity between the logic of bailing out companies that are “too big to fail” and not helping people with comparatively tiny mortgages (or small businesses) who are “too small to care about” is just too disturbing in its hypocrisy. The management of car companies have squandered innovation for decades in favor of lobbying favors, as Friedman points out, putting them in their now perilous position.

But the unions have played their part too, providing a level of cushion for their workers that no other industries have, and in the process helping drive the hand the feeds them into the ground by forcing unsustainable cost structures (health care, retirement benefits, endless unemployment support). A bailout would just encourage that co-dependency and let everyone off the hook rather than calling them to the carpet for it and forcing them to change. Undoubtedly a reset of the compact between automakers and unions would cause massive pain for the near term, but in the long run it would get the industry back on its feet. And without it, they’ll just be back in this same position in 5-10 years.