Editorial: Does Detroit Have The Will To Succeed?

Detroit’s financial predicament today rests squarely on the shoulders of its executive leadership going back nearly four decades. The American auto industry failed mostly in its will to succeed in a changing business environment marked by the entrance of new competition, adoption of new technologies, and demands for greater fuel efficiency. Had Detroit taken those actions necessary to be leaders, rather than laggards, its overall situation of falling market share, reputation for poor quality (in comparison to certain foreign competitors like Toyota and Honda mostly), and weakening financials might have been avoided.

The automotive industry undergoes significant changes as measured over any ten year period. Each decade since the beginning of the automotive era starting in 1900 has witnessed rapid and unpredictable volatility due to market forces, economics, new technology, and more recently, vehicle production economics and global competition. This has tested the ability of each auto company to adapt to these elements of change. The equity markets place a premium on those auto companies that have organizational, product and production flexibility to best respond. No forecaster can accurately predict the most basic aspects of the industry from the actual sales volume of the next decade to the model mix and market share distribution or profitability from any individual automobile manufacturer. Over the last 100 years, auto companies succeeded or failed on the appeal of their vehicles, their corporate resources and the talent of their managements, which reduced the field of U.S. assemblers to only four (GM, Ford, Chrysler, and AMC) some forty years ago from a much larger field of competitors.

But in the forty years since then, profound and rapid changes in the US domestic auto market have occurred unlike in the past. Two factors stand out: oscillation in energy prices and the growth of foreign brands. And in response to both, Detroit failed. It could not repel the Japanese invasion as a result of the first and second oil crisis in the 1970s with its lack of will to build competitive small, fuel efficient vehicles. Then, as imports grew in scale and scope of product offerings, Detroit looked elsewhere for profit opportunities without fixing its core North American auto business.

At the same time, Detroit often blamed a host of factors beyond its control for its shortfalls. To wit, currency manipulation, rising health care costs, unfair trade, and labor intransigency would be cited. But the sad fact remains that Detroit is still losing market share as consumers gravitate to the import brands. Strangely, it is not a matter of pricing – Detroit vehicles, especially in passenger cars and CUVs, are less expensive to acquire than those from mainstream competitors. The Wall Street Journal recently ran a story documenting the price differential between the Honda Civic and comparable offerings from Detroit.

Now with GM’s and Chrysler’s admissions of impending failure, a firestorm of debate has erupted as to whether Detroit is deserving of government assistance. That is not the question. In fact, there should be no debate as to whether the United States, as a modern economy, should have its own domestic automotive industry. Without it, we sacrifice our ability to determine our own solutions to future transportation needs. In fact, the current crisis offers a historic opportunity to complete recast the direction of this industry to prepare it for the future. It now remains a question of how many US automakers will make it to the next decade and who should lead them.

I submit that the US should have two remaining auto companies: General Motors and Ford. Chrysler is not viable as an auto company as it lacks future product development capabilities having its engineering capabilities mostly gutted by Daimler and Cerberus.

General Motors does have prodigious engineering talents worldwide which it can leverage. What’s been missing has been executive will to apply this talent to its North American business in recent decades. Only recently have we seen a slow rejuvenation of some products, but the overall portfolio of vehicles remains too broad and non-descript. “Too little, too late” might be the most apt description. In addition, the company has never addressed its multiplicity of overlapping brands, vehicles, and dealers. All of its efforts so far have mostly been to reduce installed production capacity.

With any government assistance to GM, one key requirement should be for wholesale reform of its Board of Directors and top executive management team. They should all be jettisoned for their failure to address known and obvious problems. This is not an ad hominem attack; rather the results of the business in North America over the last forty years mostly prove the point. What’s needed are new executives willing and enabled to make those hard decisions, not beholden to the past practices and culture within this giant corporation. Giving money to executives schooled in the past is no recipe for future success.

Ford Motor Company was, until 2006 and the arrival of Alan Mulally as CEO, in exactly the same situation as GM today. But as an outsider, Mr. Mulally took a fresh look at the company and its operations. By the time of his arrival, Ford had implemented the first of its “Way Forward” plan – which was to reduce installed capacity. But this would prove to be ineffective. Instead, Mr. Mulally outlined his “One Ford” plan – which jettisoned extraneous brands (Jaguar/Land Rover already and Volvo soon) while integrating vehicle platforms between Europe and America. Moreover, with new executive talent recruited from other auto companies/distributors, Mr. Mulally has reoriented his management team with fresh thinking.

Ford, unlike GM, does not face immediate prospects of demise (barring a bankruptcy of General Motors). It has outlined for the industry a view of its future, its new products, and the expectation that by 2013, there will be 100% commonality of its European and American platforms. I credit Bill Ford Jr. with understanding his company’s need to place a skilled executive at the helm, with the full backing of the Board to make the painful but requisite actions. So in Ford, we have seen an example of how a change in top leadership can make a difference – though profitable results may be years off and interim government financing may be necessary.

So for the American auto industry to survive and prosper, we need Congress to understand that importance of a domestic auto industry. Second, Congress should recognize that it too must make some hard decisions with taxpayer money. This would be to allow Chrysler to fail and be sold in pieces to others. It must also recognize that labor cannot be protected to any more degree than other creditors. Jobs will still be lost; VEBA’s underfunded for the time being. Third, Congress needs to craft a funding program tailored to the needs of the remaining two automakers. In the case of GM, even without a bankruptcy, a complete recapitalization and restructuring of the company must occur. This will require new leadership at the Board and executive management levels with the will to succeed. And Ford just needs time and a little bit of money.