Why American Car Manufacturers Fail

Just when you think the Big 3 learned their lesson, they go and repeat the same things that got them in trouble to begin with. One would think that after 2 decades of bad decisions and one other major bailout from the government the industry would get its act together, but that is not the case. The only one of the Big 3 I have respect for is Ford (F), who told the government to pound salt over the terms of a bailout, but that makes me question why they went to the bailout table to begin with.

However, all three just made the worst decision of all time, well kind of. It appears that they bought into the whole ‘the economy is recovered’ and that the artificial demand for cars, through cash for clunkers, is somehow permanent. In fact, there is little demand left for new cars and all the pent up demand for cars was pushed forward to now through the very expensive government incentive. Unfortunately, the greatest recipients of the whole cash for clunkers deal were the Japanese car makers, not the Big 3.

Toyota (TM) has realized this and has recently cut their production by 10% and, for the first time ever, closed a plant down. However, the Big 3 have done the exact opposite of Toyota, which shouldn’t surprise anyone. GM and Ford recently announced the addition of more shifts, rehired workers and boosted output by 10%. All when traffic in dealerships is reported down 10% below June's traffic.

I guess when you are backed by the government, except for Ford, you can afford to do this, but it is not reassuring to me to see that type of decisions being made. Especially since we are, more than likely, not out of the recession and the consumer is still not spending money. Not to mention that 25% of people buying cars under the cash for clunkers program have buyer’s remorse which goes to show they really never wanted to buy a car, but free money is free money.

What you can surmise from this is that the Big 3 are living in a fantasy land while Toyota, Honda (HMC) and Hyundai (HYMLF.PK) continue to clean the clocks of their US competitors. It makes zero sense that the Big 3 would ramp up production when the more successful Japanese makers are cutting back, perhaps GM and Ford know something we don’t, but I highly doubt that.

Based on this recent decision to ramp up production it is really no wonder why 2 out of the Big 3 failed, miserably I might add. Not to mention this is Chrysler’s third chance at survival after they were successful after the first bailout, but their second failure just illustrates how bad their business plan was to begin with. In my opinion, any car maker is far from a buy as I see shrinking credit and lack of demand driving car sales further down instead of up.

Comments

[ctjaeger:]

Except to understand that while there was "big demand for SUVs and pickup trucks" Toyota, Honda and Hyundai were gaining market share. Yes, there was a decided demand for the large vehicles, but to claim that there was, in essence, little or no demand for smaller more fuel efficient vehicles is simply ignorant.

Had the Big 3 actually been focused on bringing smaller, fuel efficient models to market at a profitable price, they would have been in a better position to battle the foreign makers. If their cost structures prohibited selling smaller cars at a profit, I would only draw the conclusion that management failed to address the situation early enough to counteract that fact. It isn't like Honda and Toyota haven't been around for 30+ years slowly taking market share. Ignoring your competition - especially when it is successful - is done at your own peril.


On Sep 01 08:49 AM John Bowman wrote:

> It's fashionable to bash Detroit nowadays. But up until the exploding
> fuel prices a year and a half ago, they were selling vehicles that
> many Americans wanted. There was little demand for small fuel efficient
> cars and a big demand for SUVs and pickup trucks.
>
> They were making most of their profits from the large vehicles and
> very little if any on the small ones.
>
> Shortsighted? Maybe...but they got caught in short term predicaments
> which they couldn't control and which affected their fragile profit
> structure.

Sep 01 09:29 AM

[Graham and ...:]

"Cash for clunkers" was the litmus test that exposed the lesser desirability of American cars to foreign ones.

Sep 01 09:33 AM

[john s. gordon:]

build for inventory is the current plan.
when the retail lots are full again the plants will have to be closed again.
> jack

Sep 01 09:54 AM

[hoffman23:]

I am in GM dealerships every day due to my occupation. The author has never spent one day in an American dealership within the last month. If he had done REAL research, he would see a new desire by Americans to buy "American" again. How do I know? They say so to the salespersons. The only reason Toyota outsold the other brands had to do to an inventory "backlog". Their numbers this year were way down and they had their highest dealership inventories in years. GM ran out of cars and trucks otherwise we would have led the market. Leave your "ivory castle" once in a while.

Sep 01 10:09 AM

[John Bowman:]

Did I say there was no demand for small cars in America? I stated that there was little demand for Detroit's small cars but a large demand for their pickups and SUVs.

In essence, you could say they satisfied a niche market. And that market was very large (50%) in 2007, the year selected before skyrocketing fuel prices. And by the way, small fuel efficient cars only accounted for 16% of sales in that year.

Detroit's profit structure is precarious mainly because of their tremendous payouts to pensioners and health care costs. And when the workers were laid off, they received a high percentage of their pay.

So their overhead was still very high even if they produced few or many vehicles.

You can't turn a boat the size of the Titanic around in a short period of time. And I bet that if prices stay in the $2.50 per gallon range (unlikely) that the demand for larger vehicles would remain constant.


On Sep 01 09:29 AM ctjaeger wrote:

> Except to understand that while there was "big demand for SUVs and
> pickup trucks" Toyota, Honda and Hyundai were gaining market share.
> Yes, there was a decided demand for the large vehicles, but to claim
> that there was, in essence, little or no demand for smaller more
> fuel efficient vehicles is simply ignorant.
>
> Had the Big 3 actually been focused on bringing smaller, fuel efficient
> models to market at a profitable price, they would have been in a
> better position to battle the foreign makers. If their cost structures
> prohibited selling smaller cars at a profit, I would only draw the
> conclusion that management failed to address the situation early
> enough to counteract that fact. It isn't like Honda and Toyota haven't
> been around for 30+ years slowly taking market share. Ignoring your
> competition - especially when it is successful - is done at your
> own peril.

Sep 01 10:17 AM

[Davewmart:]

It must be right that the Government bailed auto makers were told that they had to ramp production.
This is part of the desperate Government efforts to engineer a confidence based recovery.
In my view the problem was debt, not fundamentally confidence, and if so they have just delayed things slightly, not created a recovery.
If this is right, then demand will not and cannot recover to prior levels.
Of course even if there is no further fall in sales, this would not replace the American fleet.
I think that is exactly what will happen, and sales will remain at or below current levels for several years, with more and more old cars in a declining fleet.
Toyota's cuts are likely to be too modest, although the demise of some of their competitors may make some extra space in the market.

Sep 01 11:11 AM

[dybydx:]

i blame the past failures of GM and Chrysler on poor mgmt and greedy unions.

i blame the next failure of GM and Chrysler on the American voters - for voting those pork barrel politicians and thus endorsing bailouts and too-big-to-fail firms.

Sep 01 11:35 AM

[User 480413:]

Looks like another blog from an author that doesn't know jackshit about the automotive industry. I retired last year after 31 years in the automotive world, starting in dealerships and ending as a salaried manager with Ford. The reason for the Big 3 increasing production has already been answered in previous posts; they have no inventory left and need to get the sheet metal up against the fence. Ford is increasing production of the Taurus, which is looking like it will be a big hit with consumers. If this goober would get his chin out of his hand and actually visit a dealership and/or talk to someone that works for the Big 3, he might actually be able to write an intelligent article, although I still doubt that would happen.

Sep 01 12:11 PM

[480422:]

The bottom line is that the Asain's have been subsidizing their automakers with their government's dollars, your tax dollars, their own workers and WWII POWS for years! They have nationalized healthcare as well.
Read Linda Goetz Holmes book titled "Unjust Enrichment: How Japan's Companies Built Postwar Fortunes Using American POWS" (
More recently, the June 2008 National Labor Committe's report on human rights violations at Japan's Toyota Prius factory.
"The Toyota You Don't Know-Race to the Bottom"
Did you read (google) today's LA Times about their ex laywer Billings and their hiding of evidence of substandard vehicles???
Check out Eamonn Finkleton's site and books too!
Alabama gave Mercedes-Benz $250 million to build its plant there. The plant created about 1,500 jobs. This is a situation where the state of Alabama gave $250 million in various incentive schemes in return for 1,500, which puts the price per job at $168,000. This is certainly more than what workers at the U.S. automakers in Michigan make. The state of Tennessee gave Volkswagen $577 million in tax incentives to build its plan there. Mississippi gave $284 million to Toyota; and Georgia gave $324 million to Kia. These are all foreign companies that have gained a significant comparative advantage over their American competitors because of the subsidies that those states had given to them. These are the RECENT ones, dig deeper you'll see how YOUR tax dollars helps these foreign makes but not until recently did we help Detroit!
The American middle class was brought to you buy its labor unions. It was the labor unions that brought you your weekend's off, overtime pay and of course, a decent living wage. Many non-union employees are unaware that their employer isn't simply being nice to them because they're nice people, but in order to retain a quality employee base it is essential to peg their payroll to those of competing unionized businesses here in the U.S. Blame the unfair trade laws that enable a systematic dismantling of the middle class an. the busting of our unions by foreign owned manufactureres who put of token ASSEMBLY plants so the American "sheeple" will buy them!
It is truly sad to see our elected government officials going the way of totally unbridled free trade when our nation's own founding fathers were against it! I'm surprised Mt. Rushmore isn't cracking apart as they look down upon our great nation! Did you know George Washington delayed his inaugural speech in order to have an American tailor make his American made suit? Abraham Lincoln said: "If you buy from them we get the goods and they get the money, but if you buy from us, we get the goods AND the money! Teddy Roosevelt cried" Thank God I'm not a free trader!"
So go ahead, knock American's institutions until we need to change the name of our July 4th holiday THEN you'll cry for help!
Karl Marx's quote in 1848 "The Protective system...is conservative, while the Free Trade system works destructively. It breaks up old nationalities and carries antagonism of proletariat and bourgeoisie to the uttermost point. In a word, the Free Trade system hastens the Social Revolution. In this revolutionary sense alone, gentlemen, I am in favor of Free Trade" is never repeated by those who are gaining as they decimate our working class.

Sep 01 12:30 PM

[Davewmart:]

U480422,
I think you are correct in seeing most of the troubles of the US car industry as originating outside it, in dysfunctional systems.
In the US some of the finest, much more efficient products are made by them.
They did enthusiastically participate in some of te creation of their troubles, such as the ludicrously high pay of executives, who are paid multiples of that of Toyota - yeah, sure, they are way better!
This is another example of some of the trends you mention though, with the worker being ground down by outsourcing, whilst the differential between the top and bottom of society widens ever more.
Health care is also a monster, and it's uncontrolled costs in the US can alone sink companies.
In the US 16% of the GDP is used by healthcare, and still many millions are not covered.
By comparison, France provides universal health care and uses 11% of GDP to do so - and has higher life expectancy, with women having a life expectancy of a staggering FOUR years more than in the US.
The US is a proud 35th in life expectancy, just above Albania, and 33rd in infant mortality.
Many millions more are due to join the American underclass, so God knows what will happen to those figures.
Meanwhile, the huge costs not only threaten bankruptcy to individuals, but unless contained must ruin companies, whatever band aids are applied.
American car companies are still capable of some great engineering, but will be ruined by the dysfunctional social systems they are embedded in unless real reform , above all to the financial sector and to limit wealth differentials, but also including health care and pensions are undertaken.
Unfortunately the reason for their present ruinous postions of power are due to their capture of the regualtory process, and ownership of the regulators.

Sep 01 12:56 PM

[Oh come on now:]

GM went down due to horrible management. Oh, by the way, they have the same management, now.

Ford just lucked out, and they got their loans a year earlier. They will be at the trough, soon.

However, this automotive mess occurred because the Japanese government subisdized their shipping of Hondas and Toyotas, etc. over here for two decades. Japanes cars were cheaper here than in Japan where they built them.

Don't be deceived by Japanese plants here, either. We have all seen how easy it is to shut down a plant.

Japan could care less about us (actually they are still at war against us - just economic war), but we have sure heaped the economic love on them with our consumption habits. I am not saying it was not deserved, but when the governments are in cahoots for dumping, what is the consumer to do? Buy Jap.

Yes, the American government is taking away all free enterprise with bone head programs like cash for clunkers, while they take over all aspects of our country. Everyone knows that the auto market tanks after incentives. Now the car makers are looking down the barrell of a $4500 incentive with 0% interest.

If the auto companies are expanding production, they know something we don't, huh? How do you top that last debacle? Of course, cash for clunkers 2, with expanded models and higher rebates. There goes American capitalism. Hello Communism.

Sep 01 01:48 PM

[notsosmart:]

if you need a car just buy a ford.start buying america. i do.its hard.you can hardly find anything not made in china.

Sep 01 04:16 PM

[User 396215:]

Make a product cheaper and better and I'll buy American. My wages are minimum currently, GM Union worker $50 per hour? Yeah those Unions really helped my employer see the light. Socialist!


On Sep 01 12:30 PM User 480422 wrote:

> The bottom line is that the Asain's have been subsidizing their automakers
> with their government's dollars, your tax dollars, their own workers
> and WWII POWS for years! They have nationalized healthcare as well.
>
> Read Linda Goetz Holmes book titled "Unjust Enrichment: How Japan's
> Companies Built Postwar Fortunes Using American POWS" (
> More recently, the June 2008 National Labor Committe's report on
> human rights violations at Japan's Toyota Prius factory.
> "The Toyota You Don't Know-Race to the Bottom"
> Did you read (google) today's LA Times about their ex laywer Billings
> and their hiding of evidence of substandard vehicles???
> Check out Eamonn Finkleton's site and books too!
> Alabama gave Mercedes-Benz $250 million to build its plant there.
> The plant created about 1,500 jobs. This is a situation where the
> state of Alabama gave $250 million in various incentive schemes in
> return for 1,500, which puts the price per job at $168,000. This
> is certainly more than what workers at the U.S. automakers in Michigan
> make. The state of Tennessee gave Volkswagen $577 million in tax
> incentives to build its plan there. Mississippi gave $284 million
> to Toyota; and Georgia gave $324 million to Kia. These are all foreign
> companies that have gained a significant comparative advantage over
> their American competitors because of the subsidies that those states
> had given to them. These are the RECENT ones, dig deeper you'll see
> how YOUR tax dollars helps these foreign makes but not until recently
> did we help Detroit!
> The American middle class was brought to you buy its labor unions.
> It was the labor unions that brought you your weekend's off, overtime
> pay and of course, a decent living wage. Many non-union employees
> are unaware that their employer isn't simply being nice to them because
> they're nice people, but in order to retain a quality employee base
> it is essential to peg their payroll to those of competing unionized
> businesses here in the U.S. Blame the unfair trade laws that enable
> a systematic dismantling of the middle class an. the busting of our
> unions by foreign owned manufactureres who put of token ASSEMBLY
> plants so the American "sheeple" will buy them!
> It is truly sad to see our elected government officials going the
> way of totally unbridled free trade when our nation's own founding
> fathers were against it! I'm surprised Mt. Rushmore isn't cracking
> apart as they look down upon our great nation! Did you know George
> Washington delayed his inaugural speech in order to have an American
> tailor make his American made suit? Abraham Lincoln said: "If you
> buy from them we get the goods and they get the money, but if you
> buy from us, we get the goods AND the money! Teddy Roosevelt cried"
> Thank God I'm not a free trader!"
> So go ahead, knock American's institutions until we need to change
> the name of our July 4th holiday THEN you'll cry for help!
> Karl Marx's quote in 1848 "The Protective system...is conservative,
> while the Free Trade system works destructively. It breaks up old
> nationalities and carries antagonism of proletariat and bourgeoisie
> to the uttermost point. In a word, the Free Trade system hastens
> the Social Revolution. In this revolutionary sense alone, gentlemen,
> I am in favor of Free Trade" is never repeated by those who are gaining
> as they decimate our working class.
>
>
>

Sep 01 04:35 PM

[Mini62:]

I believe there is still a pent up demand for new vehicles and will show itself when the consumer regains confidence in the economy. The "clunker" program helped only those people who had vehicles with bad mpg figures or vehicles that were worth less than the rebate. There are still vehicles on the road that are older but did not meet the crieria for clunker rebates and those people will soon make a purchase as well, but without a rebate from the government.

Sep 01 06:04 PM

[Thinking Fool:]

This guy is just another innumerate ideologue:

A) The program will save about 4.5 billion over its life just on the avoided cost of imported oil. (see below for details)
B) What matters to a company is having the cash when you need it not at some point in the future. So the critique that future sales may be canabilized is irrelevent.

Milage Yrly driving Yrly gallons
Old Car: 24.9 15,000 602
New Car: 15.8 15,000 949.

Consumption Impact
Gasoline reduced per car -347
Crude oil reduced per car -520

Trade Deficit Impact
Number of Cars Sold 690,000 Gallons oil reduced per year 359,100,961
Barrels reduced per year 6,529,108
Savings per year @ $70 Barrel $457,037,586

Sep 01 06:16 PM

[jbocht:]

TF,

Who will save the $4.5B? (I am assuming that you projected the annual amount over 10 years to arrive at that amount)

Some winners:
690,000 owners, 3,470 gallons ($8,675 each over the 10 years)

The losers:

Those were ineligible for the program or those who deemed it unwise to go another $15K in debt for a $4500 handout.

The U.S.treasury: out the $0.18/gal = $646,381,728 of at-the-pump tax revenue. They will also miss out on the corresponding corporate revenue from our big oil pals ($ amount unknown). And don't forget they printed nearly $3B to fund the program.

States will be out their cut as well ($0.17 for mine, so $58.99/car/yr; # unknown by state)

Additionally, reducing demand will cause OPEC to further constrict the oil supply to maintain acceptable prices. This will always be the case until we develop a true alternative to petroleum based fuel.

Finally, we all lose since this (and other) deficit spending will bring about more inflation.

I hope we all enjoyed the immediate gratification this brought us, now let's get ready to deal with the fallout.

Sep 01 08:27 PM

[Chancer:]

I just bought a used Toyota for my college student granddaughter.

1986 Toyota Corolla SR5. Original 82K miles. Paint, interior, Bridgestone tires all good. Only problems; insurance salvage with a big dent in door sill, and passenger door does not open.

Price: $600. We were offerrred $900 while getting smog inspection.

These cars are pre-computer and run for a long time.

If she takes care of it, I might buy from her when she gets another car.

Sep 02 02:26 PM

[480422:]

As of 12/08 foreign woned automakers have received 3.6 billion dollars in state and local subsidies according to a report released today by Good Jobs First, a DC-based non-profit economic development research center.
“As elected officials debate aid for the Big 3, taxpayers have the right to know the full extent of government involvement in America’s auto industry,” Greg LeRoy, the group’s director, said in a statement, “And while proposed federal aid to the Big 3 would take the form of a loan, the vast majority of subsidies to foreign auto plants were taxpayer gifts such as property and sales tax exemptions, income tax credits, infrastructure aid, land discounts, and training grants.”
Honda, Marysville, OH, 1980, $27 million*
Nissan, Smyrna, TN, 1980, $233 million**
Toyota, Georgetown, KY, 1985, $147 million
Honda, Anna, OH, 1985, $27 million*
Subaru, Lafayette, IN, 1986, $94 million
Honda, East Liberty, OH, 1987, $27 million*
BMW, Spartanburg, SC, 1992, $150 million
Mercedes-Benz, Vance, AL, 1993, $258 million
Toyota, Princeton, IN, 1995, $30 million
Nissan, Decherd, TN, 1995, $200 million**
Toyota, Buffalo, WV, 1996, more than $15 million
Honda, Lincoln, AL, 1999, $248 million
Nissan, Canton, MS, 2000, $295 million
Toyota, Huntsville, AL, 2001, $30 million
Hyundai, Montgomery, AL, 2002, $252 million
Toyota, San Antonio, TX, 2003, $133 million
Kia, West Point, GA, 2006, $400 million
Honda, Greensburg, IN, 2006, $141 million


On Sep 01 12:56 PM Davewmart wrote:

> U480422,
> I think you are correct in seeing most of the troubles of the US
> car industry as originating outside it, in dysfunctional systems.
>
> In the US some of the finest, much more efficient products are made
> by them.
> They did enthusiastically participate in some of te creation of their
> troubles, such as the ludicrously high pay of executives, who are
> paid multiples of that of Toyota - yeah, sure, they are way better!
>
> This is another example of some of the trends you mention though,
> with the worker being ground down by outsourcing, whilst the differential
> between the top and bottom of society widens ever more.
> Health care is also a monster, and it's uncontrolled costs in the
> US can alone sink companies.
> In the US 16% of the GDP is used by healthcare, and still many millions
> are not covered.
> By comparison, France provides universal health care and uses 11%
> of GDP to do so - and has higher life expectancy, with women having
> a life expectancy of a staggering FOUR years more than in the US.
>
> The US is a proud 35th in life expectancy, just above Albania, and
> 33rd in infant mortality.
> Many millions more are due to join the American underclass, so God
> knows what will happen to those figures.
> Meanwhile, the huge costs not only threaten bankruptcy to individuals,
> but unless contained must ruin companies, whatever band aids are
> applied.
> American car companies are still capable of some great engineering,
> but will be ruined by the dysfunctional social systems they are embedded
> in unless real reform , above all to the financial sector and to
> limit wealth differentials, but also including health care and pensions
> are undertaken.
> Unfortunately the reason for their present ruinous postions of power
> are due to their capture of the regualtory process, and ownership
> of the regulators.

Sep 04 01:32 PM

[480422:]

Add this to the list of Assembly plant give aways that I just posted that US tax dollars have paid for:
Total: more than $3.58 billion
* total of direct subsidies to all Honda facilities in Ohio
** includes about $200 million for expansions of Smyrna and Decherd plants
List does not include joint ventures with U.S. companies
These data, drawn primarily from contemporary media accounts, are very conservative. They do not account for inflation; some would be worth far more in today’s dollars. They do not include any estimate of subsidies granted to hundreds of foreign-owned auto supply companies that have located in the same areas, virtually all of which were also heavily subsidized. Finally, they do not reflect later news accounts, which often place higher subsidy values.


On Sep 04 01:32 PM 480422 wrote:

> As of 12/08 foreign woned automakers have received 3.6 billion dollars
> in state and local subsidies according to a report released today
> by Good Jobs First, a DC-based non-profit economic development research
> center.
> “As elected officials debate aid for the Big 3, taxpayers have the
> right to know the full extent of government involvement in America’s
> auto industry,” Greg LeRoy, the group’s director, said in a statement,
> “And while proposed federal aid to the Big 3 would take the form
> of a loan, the vast majority of subsidies to foreign auto plants
> were taxpayer gifts such as property and sales tax exemptions, income
> tax credits, infrastructure aid, land discounts, and training grants.”
>
> Honda, Marysville, OH, 1980, $27 million*
> Nissan, Smyrna, TN, 1980, $233 million**
> Toyota, Georgetown, KY, 1985, $147 million
> Honda, Anna, OH, 1985, $27 million*
> Subaru, Lafayette, IN, 1986, $94 million
> Honda, East Liberty, OH, 1987, $27 million*
> BMW, Spartanburg, SC, 1992, $150 million
> Mercedes-Benz, Vance, AL, 1993, $258 million
> Toyota, Princeton, IN, 1995, $30 million
> Nissan, Decherd, TN, 1995, $200 million**
> Toyota, Buffalo, WV, 1996, more than $15 million
> Honda, Lincoln, AL, 1999, $248 million
> Nissan, Canton, MS, 2000, $295 million
> Toyota, Huntsville, AL, 2001, $30 million
> Hyundai, Montgomery, AL, 2002, $252 million
> Toyota, San Antonio, TX, 2003, $133 million
> Kia, West Point, GA, 2006, $400 million
> Honda, Greensburg, IN, 2006, $141 million

Sep 04 01:39 PM

[AVF salesma...:]

The reason why Ford is uping production is because we have no new cars on the lot..duh. The biggest winner from the cash for clunker program was Ford, Ford was up 17% year over year compared to Toyotas weak 6% and Nissan was down 2%. Another reason why Ford is uping production is because our market share increases every month, that we take from your beloved Toyota. Keep in mind all the profit goes back to Japan when you buy a Toyota, lord knows we don't need the money. Ford is #1 in quality

Sep 06 02:49 PM