Have we have seen the end of the U.S. auto industry as we know it? Even with the Federal bailout (which is a meager $15 billion or about a sixth of the bailout of AIG), U.S. automakers face a tumultuous future. The fall of G.M. and other U.S. automakers has been slow, steady and predictable. The root cause has not been the recession, but a fundamental lack of vision and innovation.  As evidenced by the well scrutinized boondoggle of car executives on their private jets to Washington, the leadership at the Big 3 seem to be lost in a cloud of complacency and collective myopia (shortsightedness).

GM and Ford were slow to move away from fuel guzzling SUV’s, and are supporting extraordinary legacy health care costs (in GM’s case, more than $1,500 per vehicle in costs is paid to employees who are retired). The model by which automobiles are designed, built and distributed in the U.S. is inefficient and outdated. Consider the plight of U.S. auto dealers. As part of the Federal bailout, the Big 3 have agreed to shutter thousands of dealerships.  In the last 6 years, U.S auto dealers have closed 925 stores, replaced by 1,192 new Japanese dealerships that sell triple the number of cars per store.

Toyota, which has grown to 85% of GM’s U.S. volume, offers a striking contrast. Toyota’s competitive advantage is rooted in “Kaizen” which is often confused with lean manufacturing but actually translates as “continuous improvement”; the system by which every action, expense, investment and process is questioned.  Toyota has leveraged Kaizen to create competency in Operational Excellence, which it has used as a weapon to annihilate American competition.  In the case of automobile manufacturing, continuous improvement as a mantra has proven to be a superior management system*. Toyota:

·         Has a market valuation of $105 Billion or 13 times the combined value of GM and Ford.  A share of GM stock will cost you less than a Big Mac and fries.

·         Expanded its luxury brand (Lexus) in 13 short years to pull ahead of BMW, Mercedes and Cadillac in U.S. auto sales

·         Leverages rapid product development to design and release new models for production in about a year, less than half the time of their American counterparts.

·         Is regularly rated higher in Consumer Reports and A.C. Nielsen on product quality and customer satisfaction than GM and Ford.

Remember all the fervor about “Buying American”?  If this writing appears overly critical, it is because GM and Ford have given us no reason to support them.  It is hard to be a protectionist when the product is inferior.

It didn’t have to be this way. Within the last year, history has repeated itself in the form of runaway energy inflation and a spike in demand of fuel efficient cars (a la the OPEC Oil Crisis).  It is rumored in a 2005 strategic planning meeting, GM Chairman Rick Wagoner took a stance on moving toward alternative fuels; only to be shot down by his colleagues who were consumed with the high margins afforded them by trucks and SUV’s. In the case of automobile manufacturing, collective myopia robs companies of the vision or resources to take calculated risks. Toyota’s core philosophy includes “Base your management decisions on long term philosophy, even at the expense of short term financial results.” Thus, the investments made by Toyota in the early 90’s paid off in the form of the Prius which was released in October, 1997; eleven years ago!

GM has to take some extraordinary steps to remain solvent, and it is likely that will happen through Bankruptcy. Many view Bankruptcy as a failure, but when employed properly, reorganization under the Bankruptcy code is merely a sound strategy. Bankruptcy will enable automakers to:

1.       Renegotiate union contracts that are putting them at a severe competitive advantage. The union leadership (also in a state of collective myopia) will have to accept less desirable terms now that the company is on the verge of collapse.

2.       Restructure debt and reposition GMAC and other financial services organizations as profit centers.

3.       Retool their plants to produce more efficient cars (which is difficult as GM and Ford don’t have any cash)

4.       Provide American workers higher value jobs.  It is simply a harsh, bitter and unfortunate reality that a large block of jobs will be eliminated and short term U.S. employment rates will escalate.  Peter Drucker pointed out that the key to American prosperity is increased productivity (at about 3%) per year, so the number of vehicles produced per worker should increase at that rate every year (requiring less labor).

5.       Consolidate dealerships, and make use of more efficient sales and distribution methodologies.  U.S. dealers are somewhat protected by firm contracts with automakers, but as they go out of business, the distribution system is ripe for an overhaul, using more Just In Time principles and the Internet to create a demand driven system, in lieu of the current supply driven system (cars are mass produced and shipped before they are sold).

6.       Shed non performing brands such as Saturn

7.       Catch up to Toyota and other Japanese manufacturers in lean manufacturing and Six Sigma techniques that promote both efficiency and quality.

Perhaps the largest obstacle to the health of the industry is the need to balance American’s thirst for performance with the need to move to alternative fuels.  Energy policy is complex as it combines political, economic, social, technological and ecological factors into a witches brew. Yet examples abound with companies such as Telsa who have proven that the technology exists to produce cars that perform (0 to 60 in four seconds) and are fuel efficient.