Editorial: Re-Inventing The American Auto Industry

Today’s automotive industry stands on the cusp of great change. The automobile will remain but its powerplant will change and evolve. Within two to three decades, today’s hybrid systems will look like museum pieces, as engineering resources around the world are devoted to alt power propulsion. For the United States to participate fully in this coming technological revolution, it needs a healthy automotive industry. It must fix the fundamentals.

The Presidential Task Force on Automobiles is supposedly addressing Detroit’s structural problems. But one thing will not change: the automotive industry requires massive capital investment. The blistering pace of technological innovation forces every automaker to invest heavily in research and development, to prevent obsolescence and provide a marketing advantage. Rapidly evolving government safety and environmental regulations place enormous pressures on resources, in both the short (three to five years) and long term (ten years and beyond). And competition for consumer loyalty has never been more fierce—or expensive.

General Motors and Chrysler have reached the point of no returns: their capital bases are essentially non-existent. Even if the US government wrote GM a check for $100B and gave Chrysler $30B, it’s highly unlikely either company could regain profitability. It’s still not enough money. In fact, to paraphrase Don Henley, there’s not enough cash in the world to resurrect their fortunes.

It’s not all about money. Chrysler and GM’s de facto bankruptcies (and Ford’s potential C11) are not merely the result of the credit crisis (as they claim). Their plight reflects decades of philosophical weakness: management’s determined and misguided pursuit of short-term gains at the expense of long-term goals and sustainability.

Don’t blame Wall Street. Chrysler’s private equity owners have proven that Motown makes its own bed. As does history. For decades, Chrysler, Ford and GM have failed to address their own weaknesses and their competition’s strength in their core market. Instead, The Big Three have looked elsewhere for profits and growth. Sometimes this quest occurred within the industry (through acquisitions or global expansion), sometimes without (non-related industries with which they had no experience).

Unfortunately, it worked (right until it didn’t). The bottom line appeared healthy, even as Chrysler, Ford and GM surrendered US market share. Worse, risk avoidance and short termism at the top trickled down throughout the entire management system. Up and down the executive food chain, the message was the same: don’t rock the boat. Why would you? There was plenty of room—and money—for yes men.

Outside reformers never stood a chance, even when the need for root and branch reform became obvious. When GM acquired Ross Perot’s EDS—a business with solid margins and rapid growth though wholly unrelated to vehicle design and assembly—it acquired a proven entrepreneur with an instinct for action not discussion. Board Member Perot was paid to go away. In 2006, investor Kirk Kerkorian installed former Chrysler and IBM finance executive Jerry York on GM’s Board. York pleaded for GM to cull brands and address domestic woes. York and Captain Kirk were shown the door.

Instead, The Big Three embarked on countless, indeed endless rounds of restructuring, reorganizations and renegotiation. Every attempt at incremental change proved fruitless. Head counts were reduced, production curtailed, suppliers squeezed and labor contracts restructured. None of this mattered to consumers. Motown’s mission critical U.S. market share continued its inexorable march downwards.

To hit reset, The Big Three must refocus on their core operations. To start, they must mimic Michelangelo’s philosophy when creating David: they must remove the bits that aren’t David. GM’S foreign operations are, to them, a lost cause. They must abandon their dreams of global domination as unaffordable and, frankly, unattainable. Then they must slice brands, kill models and cull dealers.

Second, they must recapitalize. Whether it’s by government debtor-in-possession financing or Chapter 7 re-imagining, they must make return as much, MUCH smaller companies. Third, they must redefine their corporate culture; management rewards must be tagged to long term reinvestment and sustainable profits, not short term “boosts.” And lastly, a new generation of leaders must be installed: outsiders with fresh ideas and a track record of success in other industries.

Ford Motor Company provides a template for the future. Just a few years ago, Ford was no better off than its Detroit brethren. Bill Ford, Jr. threw in the towel and tapped Boeing exec Alan Mulally to run the family firm. Mulally’s focused Ford on a few key markets, forced commonality of platforms around the world, and eliminated distractions (e.g., Jaguar, Land Rover and, soon, Volvo). Equally important, Ford has continued to strategically invest in new technology for new products.

Lead, follow or get out of the way. The feds should force GM to follow Ford’s example. Chrysler should get out of the way. And then, with American talent and determination, our auto industry can once again be the envy of the world.