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Why Will the American Auto Industry Fail?

June 18th, 2009

Following a system of management, distribution, and production that was destined to fail (call it “Sloanism” if you’d like), it is a miracle that there are any American auto manufacturers in existence today. The entire system is fatally flawed, has been for decades at least — maybe always like this.

It’s the Henry Ford plan, whereby the customer can have any color he wants, as long as it’s black. And this is exactly what we’re seeing during the GM/Chrysler shutdown: no new vehicles until the old ones sell.

Dealerships as Scapegoats

Dealers were strong-armed (under threat of losing their franchise) into taking inventory when they knew they couldn’t move it, just so The Corporation could pretend that the unsold vehicles were someone else’s problem. In order to move any inventory at all, in accordance with the Laws of Economics, the companies so desperate to keep the wheels moving in order to keep their unit-costs down, were forced to offer rebates to the customers, via the dealers. This worked only so long as the manufacturers were able to make up their losses on financing, which came to an abrupt halt in late 2008.

So the dealerships are now sitting on unsold inventories of 2009 model-year vehicles which wouldn’t sell at sticker price when they were new, and certainly won’t sell at sticker price now that they’ve been sitting in a parking lot for 6 months or a year, which is time, which is money.

Which of course, in accordance with the Laws of Simple Mathematics, means that new-vehicles are no longer profitable for the company (although they may still be for the Dealer). And now, because certain Dealers’ new vehicle sales departments are not posting operating profits for The Company, many of those Dealers have lost their franchises (and all appurtenances thereto) anyways.

Part of the blame may be with the Dealerships, just like part of the blame is on the UAW, and part of it’s on Management. But closing down half of the Dealerships isn’t going to solve the problem presented by selling every vehicle at a loss.

Push Distribution neglects the consumer

The consumer must buy a car off the dealer’s lot, rather than buying a car with the specifications s/he actually wanted. (I hear that they do the latter in Japan, and can deliver new vehicles to customer spec in 3-4 working days!) The Sloanist push-distribution method can only be accomplished with high-pressure sales pitches, gimmicky marketing, and round-the-clock production. It also means that the company is less responsive to actual customer demand than she otherwise could be.

A quick perusal of local inventories, for example, shows that dealers are full of Dodge Caliber SRTs, a pseudo-Rally compact crossover/hatchback that costs $28,000 — compared to the base-model Caliber SE (about $15k). Dodge/Chrysler is not making any new SEs, SXTs, or RTs until the shutdown is over, which would be tolerable if they were honestly attempting to liquidate the outstanding inventory, rather than pretend that knocking 8% off the sticker price of overpriced, over-optioned car that’s been rotting in inventory for a year is actually a “deal”.

If you were interested in one of these models, you’ll probably start looking at what new vehicles are on the competition’s floors.

Must take delivery from Dealer stock by 7/1/2009

“This is what we’ve got on the lot, these are the prices and incentives. Heaven knows what the incentives will be, week-after-next, so if you want this great deal, you better move quickly!” They give you a fake offer expiry designed specifically to push you towards making a $20,000 impulse-buy, and to sweeten the pot, they tell you that you can have the $6k option package (the only model they have left) for a $2k discount — which is only really a “deal” if you wanted the $6k option package in the first place. It’s not a deal if you didn’t want those options, or weren’t prepared to spend for them.

We’ll beat any offer!

Except this is a meaningless guarantee, since none of the dealerships making this bold claim are ever willing to actually provide customers with a legally binding “offer” in the first place. Try asking for a price quote, on letterhead and signed, so you can shop around. I’ll be damned if they don’t laugh you out of the showroom.

Not all buyers will qualify for the advertised price

Go ahead. Call your local dealer about an ad you saw in last week’s paper. Or place an inquiry on the internet. I’ll bet you dollars to doughnuts that they give you a lengthy response which doesn’t answer any of your specific questions, and they’ll probably note that the vehicle you’re interested in “starts at” such-and-such a price. Except you’re not interested in the “starts at” price, you’re interested in the actual price you’re going to pay. And of course the price quoted includes all possible discounts/rebates, for many of which you won’t qualify (General Motors is now advertising prices based on the fine-print assumption that customer has $4,000 worth of “points” on a GM credit card which can be redeemed much like frequent flier miles on a new GM purchase). Do you have a GM card with $4,000 worth of GM-Points? Doubtful.

Good Riddance to Bad Rubbish

None of these companies care about making a car you want to buy. They don’t care about giving you an honest price, or a fair price. They don’t care about you, and it’s pretty clear they don’t give a damn about their employees or franchisees, either.

“Good Riddance!”, right? For sure, but it’s got to get a whole lot worse, I think, before it gets any better. One or both of these companies won’t survive; were it not for massive taxpayer bailouts and clever bending/ignoring certain laws, they’d already have been sold for scrap.

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  • Reverend Draco says on: June 21, 2009 at 3:44 pm

     

    Automobiles are pretty much the only product you never see at a real discount. . .
    I mean, look in your local newspaper, and you'll see ads for home furnishing, 50-70% off. . . or big discount sales of items that have been sitting on the shelves for 6 months. . . but autos? You're lucky if all the "rebates" and "dealer incentives" amount to 10%.
    And why, O why, do we let them get away with selling 100+/- year old technology at State-of-the-Art prices? If pocket calculators were cars, they'd cost $20k, instead of having dropped from an initial cost of approx. $300 down to (in some cases) 1% (or less) of that amount. Of course, there is no United Pocket Calculator Workers union to drive production costs through the roof. If cell phones were cars, an iPhone would run about $80k, as the original 'brick' cellphone ran about $2k (figuring from a Model T at about $395 to a comparable car at $20k today – an increase of more than 4,000%). But then, who ever heard of the United Cell Phone Workers union demanding obscene wages and perks?
    Cars should never cost more than a few grand, as the technology (not talking about bells & whistles) is so old as to be obsolete.

    • Zach S. says on: June 26, 2009 at 3:11 am

       

      It's because we aren't paying for the technology. We are paying for the inflated costs of employees thruogh the whole supply chain (aka the UAW) and we are also paying for the laziness of auto executives who still believe in push production, not pull production.

no third solution

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