AUTO INDUSTRY Big Three appear to be lumbering toward failure
They haven't earned enough to cover their cost of capital.
WASHINGTON POST
WASHINGTON -- Six years ago it was Chrysler. Then four years ago, Ford was on the ropes. Now General Motors, facing a $2 billion loss this year from its carmaking operations, has been forced to lay off a quarter of its white-collar workers and plead with union workers to begin contributing to their health insurance.
As in the past, there is a tendency in the industry to believe that if GM simply closes another couple of plants, wrings a few concessions from its unions and comes up with a snazzier line of cars and trucks, all will be well. Don't believe it. In a global industry plagued by chronic overcapacity and steadily declining margins, the Big Three have been unable to earn enough to cover their cost of capital, even in their good years. And now they are locked in a competition with foreign producers that they cannot win.
"The track they're on is heading toward a train wreck," says David Cole, who heads the Center for Automotive Research in Ann Arbor, Mich.
It's not that the Big Three and the United Auto Workers haven't already made tremendous strides in improving productivity, outsourcing work and dramatically reducing the time and cost for designing new vehicles. They've mastered just-in-time and continuous improvement and boast some of the best quality ratings.
Prisoners of their past
But for all that, the Big Three remain prisoners of their past, not only in terms of retiree obligations that run to $2,500 per car, but also an outdated dealer network, inflexible industry-wide labor agreements and an entire system geared to maximizing volume rather than profit.
Today's marketplace, for example, demands a greater variety of distinct products aimed at ever-smaller market segments. But to pull off such market segmentation would require a revolution. Final assembly plants would need to be flexible enough to turn out six different models. And to give customers the greatest choice of colors and options while reducing the number of cars sitting on lots, these plants would have to guarantee a two-week turnaround between order and delivery.
Also, companies would need to reorganize their marketing and distribution around these distinct market segments, rather than around meaningless nameplates such as Buick, Pontiac, Mercury or Dodge and their competing dealer networks.
Years ago, the United Auto Workers decided to accept lower pay raises in exchange for company promises to pay laid-off workers 90 percent of their regular wage. The perverse result is that Ford and GM run plants even when there is no demand, forcing dealers to take cars they don't want and automakers to spend $3,000 in incentives to move them off the lots.
And it's just not possible for any firm in any country to stay in the game paying $60 an hour in wages and benefits to workers at every stage of the supply chain.
As George Stalk of the Boston Consulting Group sees it, the Big Three today are in roughly the same pickle as the integrated steel mills back in the early 1980s: Their choice, he says, is either to make radical changes in their business model and cost structures or suffer a long, slow death.