Automotive Soul Searching
Posted Friday, Jun. 22, 2012
By ED WALLACE
It would be hard to imagine a period that could create more turmoil in the automotive industry than the past four years have supplied. After all, the industry has experienced oil hitting a record high price, followed shortly by a financial meltdown, the loss of access to the commercial money markets for day-to-day financing, and the near-worldwide recession. Poor Japan - which, as you'll remember, makes some heavy hitters in the automotive world - suffered a devastating earthquake and tsunami that destroyed their ability to build vehicles in large volumes for the better part of last year. And then the yen strengthened to the point that it is now almost impossible for them to make a profit on cars they export.
Then, just when one thought that the fun would never end in Japan, there were horrendous floods in Thailand. Not only did the floods damage many of their factories there, they put Honda's plant completely out of commission.
The auto industry has endured both shortages of rare earth materials needed for production and commodity prices that have climbed as quickly as oil's. Now in Europe the newest financial crisis - which is simply a continuation of the debt issues still lingering from 2008 - or the threat that it could get much worse, has seriously impacted the industry there.
And through all of these trials and tribulations the auto industry is still standing; here in America new car sales are posting improvements for the third year in a row. Now try to think of any other major industrial endeavor that has gone through so many major upheavals in so short a period and managed to come out of it relatively successful.
Then again, during its lifetime the industry has experienced more difficult times. Certainly automakers' survival worldwide was in far more peril during the Second World War. One could look to the Great Depression as another time when it was questionable whether the industry could be saved.
What is unique now is how many auto executives are baring their souls to the public, wondering whether the direction of their respective car companies has been all that it could have been during the past few years.
Scapegoating Is Back
One interesting comparison to make between our homegrown companies and those in Japan is who gets blamed when things go horribly wrong: The Japanese never seem to bash their workers or the pay they earn building cars. Even now, with the yen nearing a record high and companies like Honda admitting that they lose money on 100 percent of the vehicles they build and ship to the United States, in Japan the blame is correctly placed on the currency exchange.
The exact same situation exists between the U.S. dollar and the Canadian loonie, but GM CEO Dan Akerson asserts that Canadian autoworkers are paid so much that Canada is now the most expensive place in the world in which to build automobiles. That was his justification for announcing the closure of another GM factory north of the border. In any case, for decades when the dollar-loonie exchange rate created huge profits for U.S. automakers that built in Canada, GM never brought up wages as being any problem at all.
Of course Akerson's premise was faulty to begin with. German autoworkers are paid far more per hour than Canadian autoworkers. And the incredible lack of productivity at many factories in countries such as Italy has long been known to make them the least profitable plants in the world. Wages are only part of the equation; man-hours per vehicle built and line productivity count even more - and yet those two issues are functions of engineering, styling and management.
Exchange Rate Wars
You have to wonder why, when we have problems in America's auto industry, we always blame the workers. No one ever points the finger at equally or even more problematic factors like the financial costs of exceptionally large debt obligations, or a slowdown in the market, or even the exchange rates between countries where cars are imported and exported on an ongoing basis.
In fact, at times in our past the exchange rate has been a bigger detriment to sales success than anything else. A great case in point: When the Mercedes 300 SD made its first appearance in 1978 it had a list price of $26,995. Within four years and mostly due to the exchange rates' fluctuations, the cost of the second generation of the 300 SD had risen to well over $40,000.
Yet the second generation of the 300 was a huge worldwide success, so consumers didn't complain. Nor did Daimler's executives suggest that it was the fault of their workforce; no, they said repeatedly that their cars sold here had much higher prices because of the international exchange rate.
But that wasn't entirely true, either; just ask anyone who purchased grey-market cars during that period. This is true: Companies and individuals were purchasing new Mercedes in Europe, importing them to this country and installing the necessary safety and emissions equipment to meet both the EPA and the DOT requirements for legal sales. And, after purchasing those vehicles with U.S. dollars and spending $4,000 to $7,000 more for the conversions, they could still sell those German luxury cars for substantially less than the same models specifically built for the American market cost.
But things change. Few remember the Deutschemark-dollar problems of the 1980s. That situation allowed the Japanese to bring over new lines of luxury cars, starting with Acura in 1986. In that period the fully equipped Acura Legend had a lower price than the smallest Mercedes sold here. When Lexus introduced the LS 400 a few years later, it was barely over $40,000.
You may remember the very public battle over Japan not allowing American cars to be sold in that country and not purchasing enough U.S.-made automobile parts. As a result of that spat, by the mid-nineties we forced the exchange rate to 79 yen to the dollar - which had the effect of raising the prices of their top line luxury cars by nearly 25 percent almost overnight. At the same time, realizing that their business model for the United States was completely broken, companies like BMW and Mercedes rethought their engineering and assembly practices. Their goal was to massively reduce the cost of their vehicles sold here and reestablish their pre-Japanese-invasion dominance. The Germans simply reengineered their cars and improved assembly line productivity to lower the overall cost.
For what it's worth, the Japanese caved in 1995 to the Clinton administration's pressure and purchased more U.S.-made parts, while allowing companies such as Ford, Chevrolet and Saturn to sell their American-made products in Japan. But it turned out that, when they could buy a Toyota Camry or Honda Accord, Japanese consumers weren't all that interested in purchasing a Chevy Cavalier, even if it was rebadged as a Toyota for that market. In the end Toyota sold them at 50 percent of cost to get rid of them.
As for the U.S.-made parts situation? Shortly after winning this political victory, GM and Ford banished their in-house parts manufacturing companies anyhow.
CEOs Deserve Combat Pay?
Today everyone from Dan Akerson at GM, to Toyota's Akio Toyoda, to Takanobu Ito at Honda are sharing with the world all the issues facing the automotive industry and how their respective companies seem to have lost their way. Additionally, Sergio Marchionne of Fiat Chrysler laments the problems facing his company in Europe, while praising the workforce and dealers that have done an exceptional job putting Chrysler back on track here. Marchionne is deeply worried about the future state of the Euro Zone.
Carlos Ghosn of Renault Nissan, meanwhile, claims the Euro will survive. But at the same time his company has quietly approached France's new government about reviving state aid for their car companies.
The point to all of this is that in any given period the auto industry always has some sort of major ongoing crisis. Exchange rates, financial meltdown, natural disasters, oil prices, uncontrollable commodities, political manipulations, safety or fuel standards, crusaders demanding massive product changes, and certainly a fickle public - who, all too often, don't really know what vehicle they want to buy next until the day they see it at their local dealership. And through it all, the industry survives somehow. It survives because those running the world's car manufacturers find the best ways to adapt to those problems. It's because of those problems that we have the exceptional vehicles we have today.
That's right. It's the worst crises that improve our vehicles the most. Because they force the automakers to deal quickly and effectively with whatever the newest set of problems has thrown in their path. Therefore, as I have long maintained, the auto industry is the microcosm showing us our own society in the mirror. The only difference is that automakers have to adapt to the new realities long before we individuals do.
Beyond that, though, we just want to know if we can get a great deal on a car this weekend.
© Ed Wallace 2012
Ed Wallace is a recipient of the Gerald R. Loeb Award for business journalism, given by the Anderson School of Business at UCLA, and is a member of the American Historical Association. He hosts the top-rated talk show, Wheels, 8:00 to 1:00 Saturdays on 570 KLIF AM. E-mail: [email protected]
, and read all of Ed's work at www.insideautomotive.com