A recent post questioned the relative power of engineers and MBA’s in the automotive industry. A quick scan of corporate rosters reveals that the biz brains control most companies. The hierarchy makes sense; automaking is a business. Yes, but– whether their MBA's came from Harvard, Yale, or Vinny’s School of Business and Mortuary Services in Hoboken, the “suits” should know that too much unsold inventory is a bad thing. As a corollary, continuing production as unsold inventory piles up is a very bad thing. As in fatal.
Last year, Tommy LaSorda’s mob over at Chrysler put the theory to the test. At one time, the guys stuffed Chrysler’s “sales bank” with 100K excess vehicles. And there they sat, waiting for the dealers to catch up and cough up. After drastic production cutbacks and “if you’re breathing you’re approved” financing offers, dealers managed to whittle that number down to something a little less, um, dangerous.
The holiday break certainly helped; the two week shut down cut off the unwanted flow at the knees. As the sun rose on the New Year, Chrysler’s supply was closer to the industry’s Maginot Line: 60 days. The carmaker claimed a 51-day supply of 300's, a 68-day supply of Jeep Libertys and a not entirely horrendous 110-day supply of gas-guzzling Dodge Rams.
When production started again, inventory levels rose with tidal inevitability. In January, Chrysler averaged 14 sales per dealer. Dodge dealers dealt 28 sales apiece, and Jeep dealers averaged 13 sales per store.
The Chrysler Group then added an estimated 152K new cars to their inventory. And so, by the first of February, Chrysler/Dodge dealers sheltered a 78-day supply of 300’s, a 98-day supply of Libertys and a 111-day supply of Rams.
Meanwhile, GM dealers are also choking on product. As of February first, GM’s “Like Always” brand (a.k.a. Saturn) had a 230-day supply of Ions (which is only 29K units, but there you go). GMC dealers were sitting on 20K or 211 day’s worth of Yukon XL’s, a 98% increase from January’s 113-day supply.
And the hits just keep on not happening. In January, Buick dealers averaged just four new car sales per store. No wonder they have a 170-day supply of LaCrosses and a 116-day supply of Lucernes.
Ford can’t afford to laugh at their cross-town rivals. Mercury dealers only managed to move six cars apiece in January, staring down the barrel of 7K unsold Montegos (enough to last 147 days). Ford stores averaged just 35 sales each last month (mostly trucks), with 24K post-pre-Taurus Five Hundreds (a 169-day supply) going nowhere slowly.
In a declining market with hundreds of available models, Toyota is the only transplant that seems immune to the temper of the times; they’ve got low supplies of, well, everything and an industry leading 126 sales per dealer.
Meanwhile, Honda holds a three-month supply of Elements and Ridgelines. Nissan can’t shift enough quirky Quests (144 days), Frontiers (122 days) and Maximas (113 days).
Even so, thanks to hot-selling Fits (25-day supply) and CR-Vs (19-day supply), Honda stores are cranking out 87 sales per dealer. While Nissan thanks its lucky Altima (51 days) and Versa (52 days) for helping dealers achieve 68 sales per month.
Mitsubishi? Not so good. The automaker started February with 3400 Eclipse Spyders (a 275-day supply). Relatively speaking, the Dodge-built Raider pickup is a hit. At the end of December, Mitsu had a 165-day supply. By the start of February, inventory had dwindled to 149 days. Of course, that’s still more than double the industry benchmark…
While manufacturers are quick to blame excess winter inventory on seasonal fluctuations, here’s the bottom line: unions.
Common sense says that when sales drop, you cut production. Unfortunately, the automakers’ contracts with the United Auto Workers (UAW) mandate that they must continue to pay their employees full whack even if The Big 2.5 cut back or stop production.
They’re caught in a classic Catch-22. Should they pay workers to do (and produce) nothing, or keep the lines running in hopes they might sell a few more vehicles? Either way they’re screwed.
Rather than force a showdown with the UAW, automakers are going hey diddle diddle, straight up the middle. They’re paying the workers a big pile of cash up front to go away forever. Market share may be lost forever, but hey, they're gonna hit something and that’s the way it goes.
Even with the buyouts, supply continues to outstrip demand, leading to drastic deals. Buyers looking for bargains wait for the desperation sales and the cars’ reputations suffer accordingly. Brands become synonymous with “cheap”– regardless of product quality. Sales fall further as most consumers turn to undiscounted brands, figuring they must have higher quality. (There’s your perception gap.) And the production lines keep moving.
One way or another, it’s a death spiral that has to end.
129 Comments on “Breaking the Law: Automaking’s Supply and Demand Dilemma...”
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Wow, you mean it isn’t because the domestics are the dumbest guys on the planet that they over produce? You mean there is a (legit) reason? I.E. contracts.
Wow, and like me, I can’t just not pay my mortgage one day because I think my mortgage contract isn’t right for me today, the domestics have to keep going.
And Toyota and Honda have 0.5 UAW factories between them in the U.S.
It is all starting make sense *now* (that is, to anyone living under a rock).
According to today’s e-version of the Dee-troit News Ford and GM have over $3000 in labor costs for each vehicle (apparently including health benefits for both active and retired UAW members). The way the pundits have it, the new union contract (old one up 9/14/07) will still have a jobs bank and e.g. Ford will have an incredibly hard time asking for a 20% wage rollback. With the large difference in labor cost between the 2.5 and the transplants, its clear the 2.5 have to decontent their vehicles to match the price points at which their competitors operate. Even nice looking door knobs etc. are too costly when you have to find a way to bring the cost down to cover an extra $2000 in wage and legacy cost. With a militant union, the only way to void legacy costs is to file…
Decontenting via General Chrysler could combine the worst of both worlds: hard ugly plastics, fake Sebring aluminum, fixed headrests in the rear seat, and no grip handles above the doors. Methinks this whole “bulwark against the furriners” line of thinking is an huge ego trip for Rick and Lutz, one that’s too big even for Ghosn.
Attention MBA’s: product also matters, just look at what’s languishing. Looks like Buick is edging towards the grave as we speak, Enclave’s just a speed bump along the way.
Excess inventories are a symptom of the real problems: Poor product development/planning, and inflexible production lines.
First, they design vehicles that people don’t want, and then their inflexible production methods commit them to building too many of them. Even when they come up with a bad idea (or three), they stick with it relentlessly so that a shallow pit is dug into a deep grave.
Successful automakers such as Toyota avoid these problems with flexible lines and better product development, matched with branding and marketing that suits the underlying products. They don’t hit home runs every time, but they run on enough cylinders often enough that the mistakes are eclipsed by the winners.
Shutting down production lines would slow the bleeding, but it doesn’t offer a long-term business plan. Companies don’t generate profits with idle production lines, they create them by using those factories to build stuff that we want to buy. If I wanted something called a Lucerne, I’d head to Safeway or to Switzerland, not a Buick dealer.
Excellent article Frank. One observation: in the beginning you mention a recent post questioning the relative power of engineers and MBA’s in the automotive hierarchy. We tend to focus on this in our discussions about the auto biz. How many posts have we seen about bean counters vs product engineers? And the matra “it’s about the product”. We talk about the unions too but this article at least for Detroit crystallizes what the main problem is – overbuilding because it will cost too much to not build. And it does – in strict accounting terms. What is not realized is the long term damage done to brand as perceptions about value and quality rise becuasde of the oversupply and firesale prices of these vehicles.
I can’t say why Mitsu and Nissan have oversupply since thier US plants are not union. Does anyone know what the labor agreements are in Japan and Korea vis-a-vie being able to idle plants due to over supply? Do they have to still pay their workers?
"In January, Buick dealers averaged just four new car sales per store. " FOUR sales a month per store?
My cousin sold 8 cars last Sunday…but they're Toyotas.
Methinks it's time for the General to dump this entire line altogether. Surely, GM can get more from this worthless brand by selling whatever rights it has in the side "holes" to Maserati. Afterall, the Italians will probably pay premium just to avoid being associated with junk.
A couple problems with Adrian Imonti’s statements…
They design vehicles that people don’t want? Last full year of numbers you could still multiple the total U.S. units GM sold by the percent of retail sales and the number is right around and possibly just above Toyota still. What you are stating is a myth and just not try.
Second, the sticking with bad ideas relentlessly goes back to contracts. Unless GM wants to *spend the money* (while in huge debt already) to design/plan a total second vehicle for each assembly line, it takes time to go to whole ‘nother vehicle anytime there is a problem.
Over simplification is a great thing, isn’t it?
BTW, anyone who would pick say an Avalon (with all its problems) over a Lucerne is crazy.
The only reason a company like Toyota would pass even Honda so fast is PR. Both have top Japanese engineering and manufacturing but one is gang busters… and one (gee, the same one) is waving the flag (not their own) in ever commercial, etc.
“I can’t say why Mitsu and Nissan have oversupply since thier US plants are not union.”
Windswords, therein lies the problem. It’s not only the unions, but the products as well. If you make good products, people will buy them, regardless if they’re expensive for made by unions.
Legacy costs, overcapacity, inflexible labor contract. There you have it.
It’s not going to get any better for cars built in the US. Wait, I just had an idea. Let’s have the US based production wither wither away, close production little by little, cut workers out by natural attrition. Accelerate it a little bit with buyouts.
Then let’s have out friendly neighbours build cars for us. It’s not like we don’t already have plants there. Up North: no legacy cost. Down south: no legacy, health care, union or anything to get in the way. Not to mention cheap labor.
So it’ll take a while, it will get worse before it gets better, and it certainly will not be an outspoken policy from the manufacturers, but, you know, we’ll call it a trend.
And that’s without even mentioning overseas where labor cost is really really low, and workers do not easily complain. Cough*LNJ-3.4V6*cough*China.
“One way or another, it’s a death spiral that has to end.” What about “- has NO end”?
I agree with everything you say, Frank, but consider this too: Building up inventory is a very short term way of keeping a seemingly healthy bottom line (not that there has been a healthy bottom line in Detroit in recent memory). Of course it kills your liquidity, of course it kills your ability to sell your inventory without a pile of cash on the hood, of course it is bad in nearly every way you look at it, but heck, those problems won’t hit us until next month!
I remember an article 20 or 30 years ago (in Fortune?) where one of Detroit’s finest (suits) ridiculed the bottom line of the Japanese. He said something to the effect that “our shareholders would never accept a bottom line like that”. So, once more, while the Detroit suits were busy propping up their bottom line for the end of THIS month, the Japanese were in it for the long term, thinking about their bottom lines 10 or 20 years down the road. No points given for telling which way was right and which way was the not-so-right one.
Where is Gordon Gecko when you need him…..
Seriously, Diamler looking for about $7B for Chrysler. The assets (including unsold autos) have to be worth much more than that. Anybody else think $7B is a laughably low price for Chrysler? Its like a HUD home price.
Excess inventories are a symptom of the real problems: Poor product development/planning, and inflexible production lines
The domestics have been slow to embrace flexible production facilities because they have a number of older plants. These plants were designed to build only one or two different cars and they can’t be adapted to flexible production techniques easily. The manufacturers can’t afford to rebuild or scrap them, so they just keep turning out the same vehicles instead of being able to shift production to meet demand for specific models. The transplants, on the other hand, are building new facilites and setting them up for flexible production from the start.
Methinks it’s time for the General to dump this entire POS line [Buick] altogether. Surely, GM can get more from this worthless brand by selling whatever rights it has in the side “holes” to Maserati.
The Buick brand is going great guns in China. In 2006 they actually sold more Buicks there than they did in the US. Even if Buick were to disappear from the American market there’s no way they’d kill it completely.
Even without unions it can also be tough to keep your produciton flexible enough to meet demand. There are lots of supplier and inventory factors to keep in mind, and even non-union works don’t like being sent home to not work and not get payed. Even Toyota and their more flexible factories would have problems if one day everyone realized how ugly the Camry is and began to not buy them.
Edit: Yeah I guess Frank explained this better while I was typing
TeeKay,
But if GM has just over a million vehicles on the lots and Toyota just over 300K right now (and those signify a build up at any given time) and GM sells 1.5 million (maybe only 1.2 million this year) more units than Toyota then it shows how not having control of the numbers (the UAW does indirectly) makes a huge difference. I.E. if GM could just reduce by 1.2 million units to match Toyota numbers then there wouldn’t be 700K difference in product on the lots.
Again, simple math, GM has 700K more units on lot and sells 1.2 million more. If GM made vehicles no one wanted they should have more than 1.2 million (the difference in sales) vehicles on the lot to be said that they have vehicles people don’t want.
And fleet, I love the fleet argument. Just about everyone on this site won’t buy a vehicle GM over fleets yet it is said to be an advantage of why they sell more than Toyota. Two thnigs, are any of these fleeted vehicles not necessary and just charity from Verizon and My Plumber, etc? No, they are necessary vehicles and mission critical to many companies. Second, fleet isn’t just a numbers builder it is a numbers killer too for retail buyers (when they see overly fleeted vehicle they don’t want it).
So the facts are as they are, GM sells many more vehicles than Toyota ini the U.S. and probably will for the next few years at least so all this “nobody wants” crap is ridiculous.
Yes, vehicles people don’t want. Outside the Rust Belt, where people have non-objective reasons for buying American, you simply don’t see American cars very often anymore; and when you do, you know they got it at a fire-sale with bad credit.
Wow, Mercury dealers *averaged* 6 cars sold each in January. That means at least some of them sold less than 6 cars. They must be getting killed in ‘flooring’ costs.
I’m beginning to think that the Big 2.3768 (the number right of the decimal keeps going down for some reason…:-D..) have gone past an ‘inflection point’ where they simply can’t downsize production and labor costs fast enough to get ahead of the demand curve.
Maybe if they had started radically cutting 2,3 or 5 years ago, they might have had a chance. But it looks like at least one of the Detroiters is going to crash land on Mount Chapter 11.
while the Detroit suits were busy propping up their bottom line for the end of THIS month, the Japanese were in it for the long term, thinking about their bottom lines 10 or 20 years down the road.
Jim Press, President of Toyota Motor North America, once stated “In our company, there are two planning processes, short-term and long-term. Short term means in our lifetime.” I doubt there are many other companies that could make that statement.
The obvious solution would be to have the contracted workers spend MORE time per car raising quality and thereby making a better product. This improved product should be sold at the same price as a car with less man hours in it, raising demand.
Yes, I know it doesn’t work that easily, but it’s the only solution that results in vehicles than might sell.
There’s another “short-term” Toyota perspective.
At the San Antonio Tundra plant, their parts suppliers are set up just off the assembly line.
As they begin assembling a Tundra, an order goes to Avanzar that builds the seats. You can walk back and forth between the assembly line as the truck is taking shape, and the people of Avanzar who are building the seats.
Takes them 85 minutes, and the seats are ready, built from scratch, to spec’s. They are ready just in time to be slotted into the car.
Avanzar owns the seat up until the moment it is placed in the truck.
BTW – great article in the NYT about Toyota. Worth reading before it goes behind the pay-per-read wall:
http://www.nytimes.com/2007/02/18/magazine/18Toyota.t.html?em&ex=1172206800&en=a1b5ac3c8b0241a3&ei=5070
suohtil wrote: So the facts are as they are, GM sells many more vehicles than Toyota ini the U.S. and probably will for the next few years at least so all this “nobody wants” crap is ridiculous.
Ok, you are right. If “nobody wants” then their sales would be zero.
FWIW, here are two people who “do not want”.
I can say I do not want anything that GM builds. This is based on my previous experience as a GM customer. I am now a Honda customer. My brother in FL does not want anything that Ford builds. This is based on his previous experience as a Ford customer. He is now a Toyota customer.
So that is two.
Add to this list the Ford customers who had their vehicles spontaneously combust. Also, add the Ford customers who had to replace triton aluminum heads ($3,000) for spitting spark plugs. It is safe to say these customers are gone forever.
*********************************************
Many people in recent years used their homes as ATMs and HELOCed to buy toys, including gas guzzling SUVs and trucks. House builders have traditionally been big buyers of trucks. These sales (demand) of trucks are now gone since RE is tanking big time.
Frank,
I think you are taking the numbers a tad too literally. I am fine with looking at inventory by division, and if it is significantly greater than 60, there is obviously a problem.
But looking at it by model, and highlighting the high inventory levels of niche vehicles take things too far. Vehicles like the Raider will always look like they have high inventory levels vs. sales because the dealer needs to have a few in stock just to give consumers some choice.
If you are going to look at inventory by model, I suggest you stick to ones that sell at least 60K per annum. You certainly made your point with the Ram inventory levels.
Allen5h
Add to this a Toyota customer that had engine sludge or a dodge customer that his wheels fell off or a honda customer that his hybrid shutoff in rush hour traffic, if you are gonna mention 1 mention them all or dont mention any of them.
When GM, Ford and Chrysler flame out, crash and burn, there are going to be major problems for car buyers and owners.
The actual capacity of Toyota, Nissan, Honda, Hyundai, Kia, Volkswagen, Subaru, Suzuki, GMDaewoo (part owned by SAIC and distributed by Suzuki in the US), etc. is not going to be enough to satisfy the demand in the US/Canada (despite a reduced overall sales picture due to the recession caused by the failure of GM, Ford and Chrysler!)
This will (potentially) cause car prices to go up (see graph above), allowing the Chinese to come in (selling cars at higher prices) which will make equilibrium again.
Except the US will be without a huge portion of once good paying jobs.
The lesson learned in future history classes will be – the greed of the companies in the early 20th century brought forth unions to fight the corporations, and the greed of the unions in the latter half of the 20th century and early 21st, brought the same companies down. That is, GM, Ford and Chrysler.
This is a well written editorial.
It’s clear, to the point and insightful.
I wish I had the talent to have written this piece.
Thanks.
Point well taken Tones03. Every car manufacturer has blundered miserably at one time or another.
Early production Ridgelines that leak water from the firewall, brand new Honda pilots with failed timing belts, Honda 4 cyl rear engine seals that leak oil, defective Honda auto trannies with 6 cyls, Honda oil filter gasket fiascos that have led to fires, and Chrysler brakes that incinerate on their previous gen 300’s.
Glenn A: Any chance of history repeating itself? Walmart in the 21st Century, same as the D2.5 in the 20th? Just say’n.
tones03:
I know of two people affected by those Toyota problems, both of which affected far less than 1% of recalled vehicles. My brother’s 04 Prius shut down and had to be transported to a dealer to have its computer firmware upgraded. He still loves it.
My wife’s ex-boss had a 1st gen Sienna with engine sludge. They initially gave her a very hard time, shortly afterwards they started replacing engines free of charge or compensating everyone who changed their oil in the past year. She now drives a 2nd gen Sienna.
The lesson learned in future history classes will be – the greed of the companies in the early 20th century brought forth unions to fight the corporations, and the greed of the unions in the latter half of the 20th century and early 21st, brought the same companies down. That is, GM, Ford and Chrysler.
Actually it is the greed of customers that kill off the laggards/fraudsters/hucksters. Greed is good. 3 cheers for Internet research.
I’m beginning to think that the Big 2.3768 (the number right of the decimal keeps going down for some reason…:-D..)
I am using 2.75 now since I think it is a better than 50/50 chance that an American investor (with more dollars than sence) will buy Chrysler. Chrysler will be relisted on an American Exchange (Pink Sheets?).
Glenn A.,
I like how the consumer (supply and DEMAND) is totally out of the blame for our job losses and for several reasons that is too bad (that they aren’t blamed).
I don’t see why corporations get blamed for greed but the consumer doesn’t. I don’t hear of too many people stopping from buying a product because the labor advantage was unfair and that, in a supply and demand scenario, would stop the companies from importing say Chinese made products. They are going to turn automobiles into the same $20 DVD players you see on the shelves. An almost throw away product. As long as I can get 2, maybe 3 years out of it then throw it away because it only cost $6000 then I am happy. So what if we 1) lose jobs 2) have even more full land fills and 3) other factory pollution, oh and 4) aren’t smart bombs smart because of all the electronics and software? Gee, lets help those who hate us learn how to better destroy us. Again, it is the companies going there with their products but the DEMANDer can so no and therefore supply would have to change to meet the changed demand.
With Ford’s marketshare dropping close to DCX’s, shouldn’t it now read: The Big 1.9786?
3) I meant more factory pollution in our sky in which we are all living under since China doesn’t seem to be nearly as strict.
Breaking news:
Vinny’s School of Business and Mortuary Services in Hoboken has moved a few miles down the turnpike to…
Union, NJ!!…..sorry couldn’t help myself….
startlightmica
it all depends on the person IMO, my dad had the transfer case go on his Chevy van at 37000 miles, leaving him stranded in pensylvania and he had to pay for it out of his pocket because it was out of warranty. When he got home he called GM and complained, they refunded him all but $100 because if they refunded the entire cost he would not get a warranty on the part and if he pays the $100 he gets x amount of years underwarranty on it. He will buy another GM for sure.
If the company takes care of you I think people are more proned to go back to them, if they say F.U. then most likely not. That is why I will never buy a Chrysler product.
Anecdotally, I observed first hand another reason why the domestics are having a hard time managing their inventory. On Monday I visited a Toyota dealership on a major interstate during the heavily trafficked early evening. The showroom was packed and abuzz – like a grocery store during peak hours.
A short time later I crossed the freeway to a Chevrolet/Subaru dealership that had about the same number of cars on the lot. The showroom was as quiet as a morgue. During my hour there I only saw only one other customer.
Toyota’s dealership was Mardi Gras and GM’s was a wake. The Toyota employees were relatively youthful and animated. The wizened GM staff were frumpy, coffee stained, and reeked of cigarettes.
William C
I wouldnt say that is a GM thing, I would think that would be a dealer issue. I doubt GM sends out broadcasts saying to be a bunch of bums while Toyota says act like you are still in college. I may be wrong tho, I know the GM, Ford and Honda dealerships here all seem to act the same and be the same.
I don’t mean to join William too far off topic, but I couldn’t agree more about the atmposhere a dealership and the age of the sales force influencing the buying experience. My wife and I were considering a Mariner hybrid (Hurrah HOV exception) but the World War II vet salesmen (that’s not an age related assumption, he actually had some WWII pins on his tie and lapel from his unit) was not at all up to selling a hybrid.
Yes, but– whether their MBA came from Harvard, Yale, or Vinny’s School of Business and Mortuary Services in Hoboken,
You’d be hard pressed to find anyone named “Vinny” living in Hoboken today. The native blue-collar types have been pushed out by Manhattan yuppies.
In 1974 my father was thinking about buying a 5 unit building on Park Ave in Hoboken. Asking price $40K. I saw a real estate ad a couple of years ago advertising units in said building. The newly renovated units were going for $500K each. Do the math.
I think I could go to almsot any dealership and walk in and know more about the car they are selling then they do, I have done it many times, all makes and models.
The salesmen are never as knowledgable as they should be and I think most dont care enough to learn more about the product they are selling.
suohtil:
Glenn A.,
I like how the consumer (supply and DEMAND) is totally out of the blame for our job losses and for several reasons that is too bad (that they aren’t blamed).
I don’t see why corporations get blamed for greed but the consumer doesn’t. I don’t hear of too many people stopping from buying a product because the labor advantage was unfair and that, in a supply and demand scenario, would stop the companies from importing say Chinese made products. They are going to turn automobiles into the same $20 DVD players you see on the shelves. An almost throw away product. As long as I can get 2, maybe 3 years out of it then throw it away because it only cost $6000 then I am happy. So what if we 1) lose jobs 2) have even more full land fills and 3) other factory pollution, oh and 4) aren’t smart bombs smart because of all the electronics and software? Gee, lets help those who hate us learn how to better destroy us. Again, it is the companies going there with their products but the DEMANDer can so no and therefore supply would have to change to meet the changed demand.
Don’t kill the messenger for the message. I never wrote anyplace that I wanted any of this stuff to happen. It is just how I think things are going to go down.
By the way, re: my comments above about a capacity crisis if/when GM, Ford and Chrysler go under? I did a bit of math work from a world cars book (2005-2006) and deduced quickly enough that even if “just” GM tanks, we’re in for some production capacity issues; if “only” Chrysler or Ford tanks, then it “might” not be such a big issue, for short-term pricing and supply shortages.
But if GM, Ford AND Chrysler tank, well, there is not enough excess capacity for building U.S specification cars left in the world to accomodate the market, even taking into account a fairly dramatic drop in sales volumes (which would be inevitable due to the loss of GM, Ford and Chrysler jobs and supplier jobs and the inevitable recession from same).
suohtil: I don’t see why corporations get blamed for greed but the consumer doesn’t.
Customers are not “greedy” by definition. The customer is always right — consumers are free to spend their money as they choose. Customer service is a one-way street, the consumer does not owe a business anything.
The Big 2.5 face the same dilemma confronted by every other company that is out of touch with its consumers: They make stuff that the consumers don’t want, which means that they incur expenses without the revenues to match. As the commentary implies, if you build something that people don’t want, the solution does not lie in building more of them.
Businesses that don’t serve customer needs don’t stay in business for very long. If Apple made i8Tracks instead of iPods, and limited its iTunes selections to Lawrence Welk ballads, they would be suffering a much different fate they they are today. Consider the Malibu, Five Hundred and the like as belonging in the 8-track category.
Jim Press, President of Toyota Motor North America, once stated “In our company, there are two planning processes, short-term and long-term. Short term means in our lifetime.” I doubt there are many other companies that could make that statement.
That conflicts with calls for the 2.5 to act more nimbly. If you stretch your short term planning out as long as they do, you have to be dead on with your planning. One miss and you could find yourself in the same boat as the 2.5, hedging your bets on the wrong deck with no way to change course to adjust.
Anecdotally, I observed first hand another reason why the domestics are having a hard time managing their inventory. On Monday I visited a Toyota dealership on a major interstate during the heavily trafficked early evening. The showroom was packed and abuzz – like a grocery store during peak hours.
A short time later I crossed the freeway to a Chevrolet/Subaru dealership that had about the same number of cars on the lot. The showroom was as quiet as a morgue. During my hour there I only saw only one other customer.
Toyota’s dealership was Mardi Gras and GM’s was a wake. The Toyota employees were relatively youthful and animated. The wizened GM staff were frumpy, coffee stained, and reeked of cigarettes.
If that’s all there is to making these cars sell, the Saturn dealerships would be struggling to keep their cars on the lot and not have 230 days’ worth of Ion’s.
“Buick dealers averaged just four new car sales per store…Mercury dealers only managed to move six cars apiece in January”
What the hell do these salesmen live on? Their commission income must be abysmal.
I can’t see the Gov’t letting any of the Big 2.5 go into the crapper; the effect on the economy would be significant, since the auto industry represents a large portion of domestic manufacturing (other than military contractors). The way these guys are running their business seems to reflect the attitude that a bailout is a likely thing, as the domino effect of an auto industry collapse could ruin a lot of 401(k)’s…
Glenn A.:
I have no idea what “suohtil” is on about, but I do have a couple counterpoints for your suppositions.
It may or may not be the case that the entire world’s capacity with the current capital stock(or whatever levels happen to be extant at the time of this hypothetical catastrophic failure) will be insufficient to equal in the short run the fall of production that would occur in the event of the simultaneous and total obliteration of the Big 3. I am fairly certain that every auto manufacturer on earth is not currently running 24 hour shifts at plants packed to the gills with employees and equipment, but since I have no proof, I will allow that.
I would also point out that spontaneous combustion on the scale of companies like these, let alone 3 of them simultaneously, is extremely rare except in times of egregious corporate misconduct such as Enron, but that is beside the point I am now making.
The point is, yes, a supply side shock will have the short run effect of reducing quantity supplied, which through price rationing will place an upward pressure on prices until a new equilibrium is reached; this is a shift inward of the supply curve. However, in the long run, as you at least appeared to astutely observe, the higher prices will raise the revenues available to auto manufacturers. This will stimulate them to increase production as well as entries into the market, lowering prices as volume of sales increase (movement along the demand curve). The long run supply curve, the locus of short run equilibria, reflects this effect (as well as the effect of improved technology) in that it tends to be downward sloping.
I’m not clear on what exactly this has to do with China. At current prices, the auto market is already extremely attractive to China, as evidenced by the massive expansion of capital investment their and increasingly frequent forays into auto shows and the like on the part of Chinese auto makers. Higher prices will certainly increase this incentive, but I see no reason to believe that it will “allow the Chinese to come in” any more than they are currently able to. The fact of the matters is they are simply years behind the established players in the market in more ways than one, and their endeavors to join those players will certainly and eventually succeed given the high productivity of capital in their labor abundant market, regardless of the existence of the Big 3.
Now, I won’t get into the neoclassical argument with your assertion that “the US will be without a huge portion of once good paying jobs,” I simply wanted to explore the bases and ramifications of your discourse, which I felt were sparse and myriad respectively, a relationship I endeavor to reverse in my own writing.
I don’t see why corporations get blamed for greed but the consumer doesn’t.
That is because we are all consumers. It would be, um, masochistic to blame ourselves for anything. A corporation is nothing more than a bunch of us consumers busting our butts to produce something for all to consume. Blaming corporations for being “evil” is sooo Hollywood/Dumobrat/Ignorant. I *hate* customers. I dream of life without customers (Just after dreaming of Jill Wagner) and wake up happy.
An almost throw away product. As long as I can get 2, maybe 3 years out of it then throw it away because it only cost $6000 then I am happy.
Sounds like a Chevy Aveo… Wouldnt that be great! Talk about an improvement to all our standard of living! Are you listening Porsche?
have even more full land fills
As CSN(Y?) says “We are stardust” or Kansas “Everything is dust in the wind”. Everything is dirt including Styrofoam and Spotted Owls. When a woman calls me dirt, I cant argue.
I live near a huge Autopark and every dealer is overflowing including Toyota… Odd.
Great article Frank.
So the facts are as they are, GM sells many more vehicles than Toyota ini the U.S. and probably will for the next few years at least so all this “nobody wants” crap is ridiculous.
Your logic is flawed. How can one really tell if Joe Blow bought that GM vehicle because he actually wanted the vehicle based on it’s own merits, or that he decided to buy it because of the huge discount he got on it? It could be he wanted the discount more than the vehicle itself.
Also, in the Midwest, Toyota and Honda dealers are very scarce. Some people have *no choice* but to get a GM vehicle because the nearest Toyota dealer is just too far.
Ever checked GM’s marketshare in California? It’s miniscule, and it certainly supports the idea that people in California don’t want GM cars. Maybe some of their trucks and SUVs.
An overwhelming percentage of GM’s sales come from full size trucks and fullsize SUVs. As for cars, the only GM cars that sell in any significant numbers are fleet queens.
Still not getting the message? It seems pretty clear that retail customers simply don’t want GM cars in any significant numbers, and fleet buyers continue to buy GM cars because they’re almost given away; that’s how cheap the fleet cars are priced.
Heck, I’d buy any GM or Ford model, if it was brand new and “given away” to me for only 10 – 12K. Many local dealers in certain areas are actually selling Silverados for 13K.
That conflicts with calls for the 2.5 to act more nimbly. If you stretch your short term planning out as long as they do, you have to be dead on with your planning. One miss and you could find yourself in the same boat as the 2.5, hedging your bets on the wrong deck with no way to change course to adjust.
Wrong. That’s a very simplistic way of interpreting Toyota’s statements. Toyota’s planning and thinking is extremely well rounded, and covers so many factors and variables. If one part of their planning was to fail, it would not affect them all that much, because all the other parts of the planning would be well-rounded.
Detroit automakers’ thinking is famous for being short-term “day by day” sort of thinking, that often tends to be narrow minded, ignorant, and naive. Detroit automakers are also famous for relying too much on one segment, or the “latest craze” in the market; they are known to put all their eggs in one basket, so to speak.
Toyota’s planning encompasses many segments and different markets, and Toyota never bets on any one segment, or any one model. Toyota’s short term thinking is very specific and equates to thinking years ahead. Toyota’s longer term thinking, in terms of decades and lifetimes is much more broad, and holistic.
Thinking decades ahead; you can’t really say that the Detroit automakers are known to do this.
The obvious solution would be to have the contracted workers spend MORE time per car raising quality and thereby making a better product. This improved product should be sold at the same price as a car with less man hours in it, raising demand.
Yes, I know it doesn’t work that easily, but it’s the only solution that results in vehicles than might sell.
alanp:
The problem with this argument is your basic assumption that the workers will produce a better built car if given more time. Not necessarily true. They may just spend more time resting. Even if they spent this extra time driving that bolt or rivet more precisely, etc., they would still be using the same components as before, and that is where a lot of the quality problems arise.
I think I could go to almsot any dealership and walk in and know more about the car they are selling then they do, I have done it many times, all makes and models.
As have I.
The difference is that at many of the domestic dealerships, I get called a wiseguy (and worse), while at the Honda dealership (the ones I mostly go into) don’t insult my intelligence and when they don’t know something, they go out of their way to find out.
Apparently, the Big 2.5 haven’t learned about JIT (Just In Time.)
My local Chrysler/Dodge/Jeep dealer’s lot is overflowing with unsold inventory. They may have to start renting space from the neighboring dealerships.
Glenn A,
I agree about being the messenger to wanting to not be confused with a desire of the message. I surely don’t want throw away cars though my comment about needing them for 2-3 years was taken out of context by someone else so I just want to be clear about that. Throw away cars will happen once the Chinese take over the market (or even when U.S., German and Japanese companies are still the brands and even owned by these countries but all vehicles are made in China i.e. when Chinese manufacturing takes over the car markets).