Monday, 26 September 2011

Where are the French?

...they must have all the love they need at home...
Mike Smitka
First it was the Japanese. Then a couple Germans and the Koreans. Now the rest of the Germans. The Italians have one foot in the water. But except for a fleeting presence through American Motors, both with Simca as a subsidiary and later with Renault as an owner, the French -- who dominated the global industry in its formative years in the 19th century -- are nowhere to be found. Why?
Now it may be that Renault's control of Nissan represents de facto entry. Certainly purchasing is handled on a global basis, and there's cooperation in engineering. It may be that some Nissan products currently on sale in fact use a Renault platform (Perhaps one of my readers can fill in the gap.) But the absence is puzzling.
That's even more true of PSA (Peugeot-Citroen). The last time I looked (I'm probably showing my years!) they were doing well in Europe and solidly profitable. They keep up with technology, as seen in the customer base of the winners of the PACE Supplier of the Year innovation award for which I'm a judge. They're simply not here.
So what is their strategy? Do they believe that sufficient technology resides in the supplier base that they do not need sheer size to fund the R&D for tomorrow's products? Are they making enough money in small cars that they've chosen to "stick to their knitting" -- not venture into segments with which they have no experience -- and are therefore passing up the US market with its cheap gas and penchange for fuel guzzlers?
I don't know, but I've started to think about the variance in such "macro" strategy across the top vehicle assemblers. Suzuki strikes me as the closest analog, but they have a strong base in India, though it's probably no longer accurate to say that they dominate the market through their joint venture Maruti. Then there's Daihatsu, but they were gobbled up by Toyota and so, for better or for worse, are shackled to the small vehicle niche. Daihatsu long ago exited the US market; Suzuki seems likely to. So maybe PSA made a sensible strategic decision, and refused to join the herd in entering (and now exiting) the US.
My curiosity is piqued, but I have no answers.

Wednesday, 14 September 2011

Can an Automaker Incentive Battle Goose the Economy?

David Ruggles
As the economy wallows in the doldrums, is there any cause for optimism? The outcome of the European debt crisis is still unknown, and we know how markets despise uncertainty. There are still plenty of uncertainties associated with the so called “Arab Spring” uprisings in the Middle East, and those could be with us for a while. While fuel prices have somewhat moderated, they remain high. The country’s credit rating took an unnecessary hit, although plenty of money seems to still be seeking to buy our debt. When the Dow fell dramatically after the downgrade of our credit rating, much of the money that left equities found its way into our “downgraded” Treasury bonds. Either the European debt crisis or our government being hamstrung by ideologues has sent the Dow on a downer after the debt ceiling crisis “semi resolution.” The 12-member “Super Congress” still has an important job to do, and there is additional uncertainty attached to that, that will take weeks to resolve.
The economic recovery that seemed so promising 10 months ago has stalled. Real estate prices continue to drop in many markets with many foreclosed properties not even listed to lessen the perception of burgeoning inventories of distressed merchandise. In Las Vegas a realtor friend mentioned that 50% of her deals these days are cash, as many properties don’t qualify for a certificate of occupancy and can’t meet standards for a mortgage. Only 20% of real estate market sales are “conventional sales,” she says. To put this in perspective, previous Federal Reserve Chairman Alan Greenspan says we shouldn’t expect any kind of robust recovery until home values rise at least 10%. His comment was made in an interview before values retreated another 5%.
Unemployment has plateaued at about 9%, with under-employment and fear of unemployment stifling consumers’ will and ability to buy. The President’s new jobs plan has been met with a collective yawn by Congressional Republicans. It is yet to be determined if can even pass, let alone actually make an impact if passed. The first stimulus package of the Administration managed to stem job loss of 780,000 per month, but did not achieve its stated goal of keeping unemployment below 8%. Despite stemming the job loss, the word “failure” is bandied about in political circles. As it turns out, the initial calculations of how much stimulus might be needed were based on preliminary numbers, which showed the economy contracted 3.8% in the last quarter of 2008. Once all the numbers were in, the real numbers showed a 6.2% retraction in that quarter. It turns out that to do the job promised, Paul Krugman, Nobel Prize-winning economist and New York Times columnist was correct, the stimulus needed to have been twice as large. Regardless, we are where we are, the original stimulus has exhausted its funds, the economy is stagnant, domestic auto stocks have tanked, and recovery has been stopped in its tracks.
This economic downturn isn’t like our previous ones. This one was caused by a financial crisis, with a near-collapse of the financial system averted at the last minute by government intervention. In my own business career, I recall the auto business being a major player in dragging the country out of economic stagnation. In late 1971, Pres. Richard Nixon repealed the excise tax on automobiles, touching off a spurt of business that pulled the economy out of stagnation and carried us forward to the first 10 million unit sales year in 1973. That momentum was halted in late 1973 by the OPEC oil embargo, fuel price spikes, and the associated economic downturn. Chrysler and Joe Garagiola helped pull us out of that one in 1975 with the “Buy a Car, Get a Check” promo. We then went through the Iranian hostage crisis in 1979, another spike in fuel prices, inflation, and the recession associated with the Carter/Reagan era and the first Chrysler bailout. Chrysler’s resurgence helped lead the economy out of the depths. In the past 10 years, GM led the industry and the economy out of the doldrums caused by the Sept. 11 attack with “Keep America Rolling” and 0% interest. That was followed by the “Employee Purchase Plan.”
This time around, we experienced the recession, the near insolvency of the banking system, a real estate crisis of epic proportions, and one that stubbornly hangs on, the temporary disappearance of financing of all kinds, bankruptcies of two of the three domestic automakers, and unthinkable job loss. After the restructuring of the auto industry, and a less than perfect “Cash for Clunkers” program, and a brief period of revival, any forward momentum has stalled.
Currently, new vehicle inventories are low. This isn’t a particularly abnormal situation for this time of year, as it is typical for dealers to clear out previous year’s stock to make room for the new model year’s models. But Japanese manufacturers, in particular, have lost ground against their competition because of the supply interruption caused by the tragic Japanese earthquake and tsunami. And they want their marketshare back. According to Kelly Blue Book, Japanese brands were approaching 40% of the U.S. market. Bus since April, that share has fallen to about 30%. Most SAAR projections are running behind pace, including my own. People are talking about an incentive battle from now through the end of the year. As Japanese brands gear up, domestics are expected to respond. And the domestics now have a much lower breakeven point than before their restructuring.
Incentive wars usually drive down used-vehicle values. But we have been experiencing an acute pre-owned inventory shortage. Dealers would welcome some relief.
Rental fleet replenishment is still in long-cycle mode. Wouldn’t it be nice to rent a vehicle again with less than 25,000 miles on it, riding on smooth tires? Can a case be made for a production orgy and short cycling of rental vehicles for a period of time as we had in the 1990s? For all the negativity attached to “push-marketing,” could this be an ideal time for it? The idea of manufacturing plants running at full capacity, paying overtime and adding shifts, and the trickle down through the supplier base and the financing community sounds pretty good right now. And the market could use a supply of low mile pre-owned units. Customers of Hertz, Avis, Dollar/Thrifty, etc., would be happy. And perhaps the auto industry could help touch off recovery like it has in the past.
David Ruggles has spent his career in every phase of the retail side of the auto business, new and used, sales and management, including consulting and training in both the U.S. & Japan. Ruggles has been a dealer for Mercedes-Benz, Chrysler, Dodge, GMC, Ford, Mazda, and Subaru, and has consulted for one of the world’s largest privately owned Toyota dealer groups located in Japan. He blogs at autosandeconomics.blogspot.com and writes regular columns for several publications.

Wednesday, 3 August 2011

Bob Lutz - "Car Guys versus Bean Counters" Book Review

"Car Guys vs Bean Counters"
The Battle for the Soul of American Business
By Bob Lutz
The automotive world has been waiting for this book for months. Lutz gave a preview to a group at a fleet conference I attended in Las Vegas last summer, where he received a Lifetime Achievement Award from the Automotive Fleet and Leasing Association (AFLA). His previous effort, “Guts: 8 Laws of Business from One of the Most Innovative Business Leaders of Our Time” made “best seller” lists.
Now 79, Lutz knows his auto industry history better than most. He has lived it in the most inner circles, having held executive positions for GM Europe, then, BMW where he coined the phrase, “BMW, The Ultimate Driving Machine.” Then worked with Lee Iacocca at Ford, followed him to Chrysler, where he lost out to Robert Eaton for the top job, perhaps the biggest mistake Iacocca ever made. After a stint as CEO of Exide Battery Corp., he rejoined General Motors. Who better to tell us the story of the struggle for authority and dominance in the various domestic auto companies, as well as the recent history of GM’s fall and rise?
According to Lutz, the GM he found when he returned in 2001 epitomized , “The tyranny of process over results.” He does so in true Lutz style as evidenced by his personal motto, “Often wrong but never in doubt.” Anecdote after anecdote kept me chuckling while I marveled at the man’s insight and ability to articulate. While Lutz comes across as confident, he also impresses with his candor and humility, free to admit a personal mistake or miscalculation. Then there is his notorious acerbic wit and occasional tendency to be blunt with comments like, “Global Warming is a total crock of sh*t,” made during a private lunch with reporters in 2008 but repeated over and over again by the press.
Lutz gets some things off his chest as he rails against government over reach, Toyota, CAFE, MBAs, and the “liberal media” one minute, then skewers Limbaugh, Beck, and the radical right wing the next. He spends a chapter on second guessing the tenures and decisions of others but does it in a humble way, pointing out that those people made sincere decisions based on their personal beliefs and information available at the time.
Lutz chronicles the history of GM from the days when iconic stylists like Harley Earl and Bill Mitchell ruled the roost. GM achieved market dominance by executing stylish cars that people lusted for because of their innovation and beauty. Post war Cadillacs, finned V8 Chevrolets, the Corvette, sixties era Toronados and Rivieras, and many other exhilarating vehicles resulted from when “Design” was dominant. This was replaced by the premise that, “You can’t manage what you can’t measure,” which led to bureaucratic process where no one tried to achieve anything other than to be perceived as not having made a mistake. Lutz calls it “analytics run amok,” preferring “art over science,” but seeing the need for both. “It’s the balance that has been out of whack.” He cites “penny wise and pound foolish” anecdotes one after another to make his points.
He singles out for particular scorn the “brand era” at GM, headed by Ron Zarella, brought over from Bosch and Lomb to be president of GM North America. Instead of designing desirable products first and then creating the underpinnings to make that design work, the first step in the new “bean counter” dominated GM was to create cost constrained underpinnings. The Design Department was then given the mission to “wrap the underpinnings in something that looks as good as it can under the circumstances.” This is the opposite of how things were done when “Design was Dominant” at GM. Lutz cites the ill fated Aztec, the “Quasimoto of Crossovers,” as an example. Over the years, GM had established “a stifling thicket of criteria: where the wheels had to placed relative to fenders, how the windshield should slope to permit easy viewing of traffic lights, how ash trays were to open and close, etc. etc.”
GM had purchased a Chrysler 300 to try to determine how Chrysler could develop such a vehicle, but GM couldn’t. The Design Department covered the car with 90 “Post It” notes, identifying areas where Chrysler had violated GM design criteria.
There was a time when GM paint was intended to be purposefully dull so as to not reveal flaws, in search for an optimum JD power score. There was no desire to excel or develop a “smash hit. The focus was on meeting “data points.” By following “process,” executives could avoid the accountability of failure as long as it was perceived they had followed the GM process.
Brand managers were recruited from companies like Procter and Gamble, and cars were developed and marketed by people who were deodorant, baby wipe, and toothpaste experts.
“The ebullient, dynamic, seductive volcano of creation had been transformed into a quiet mountain with a gently smoking hole at the top, spewing forth mediocrity upon mediocrity,” says Lutz.
The internal confusion at GM is exemplified by a conversation Lutz relates with an automotive supplier over lunch. At the time, Lutz was President of Chrysler. He asked the supplier who his favorite customer was. The answer came back, “GM!”
Why,” asked Lutz.
It seems the supplier was able to sell the same bearing under seven separate parts numbers, but in seven different boxes at wildly different prices. The purchasing departments rarely talked to each other. According to the supplier, doing business with GM was sure hard to keep straight, but it was mighty lucrative.
Lutz is careful to exclude GM trucks from excoriation, pointing out that the truck division produced success story after success story. Of course, everything changed when fuel prices suddenly increased, as they did in 2008. Not only did profitable truck sales suddenly cease, but the GMAC mortgage business, which had been subsidizing overall North American operations, started hemorrhaging cash at an astonishing rate.
Lutz tells his own version of the auto CEOs going to Washington D.C. on their private planes. He talks realistically about the firing of Rick Wagoner, and the role President Obama, Steve Rattner, and others played in the bailout. He discusses the fierce debate over whether or not the government should have taken a stock position in the new GM and about whether or not the UAW was favored in the deal. But you’ll have to read the book to find out what he said!
Lutz says, “In a sense, the decline, failure, and rebirth of General Motors is simply a metaphor for what is happening to business in the whole United States.”
According to noted automotive journalist, David E. Davis, Jr., “This book should be required reading for any young person who seeks a business degree." He also applies his advice equally to the current management of GM.