How to fix the Auto Industry in 5 simple steps
james May 3rd, 2009
I intended to post similar content in Summer 2008 when the big 3 automakers were just starting to bleed money but I feel these concepts are valid today as well:
- Globalize the crash and emissions standards between modern industrialized nations. Today this largely means Western Europe, Japan and North America. Auto manufacturers spend billions on the minutia of local safety and emissions standards. The excessive time and energy spent to bring an already designed and produced car to another market prevents the most appropriate cars from being sold in the appropriate markets. GM and Ford DID and DO make great small cars that would have competed wonderfully against the best from Japan and Korea during our recent $4+ gas price spike. The problem is that GM and Ford only sell them in Europe and couldn’t bring them over because they cost billions and several years to do so. Now imagine if those costs and time were eliminated due to a homologation of standards…. GM and Ford would have a strong full line of great products to pull from at will as the market demands. Concurrently GM and Ford could have been serving Japan and Europe with some of the muscle cars they crave (albeit in smaller numbers). Personally I’d like to see some of the great turbo diesel high performance vehicles lay into the sedate and uninteresting hybrids for some real competition for what a “green car” will be. “Green” doesn’t have to mean boring as seen by many great diesel cars only sold in Europe.
- Create “fair trade” laws. We allow cheap imports from Japan, Korea and China to come into this country with few tariffs while our exports are HEAVILY taxed to those countries. Japan, Korea and China want Harleys and Levi Jeans but we can’t deliver them due to massive restrictions. Go to Japan with a suitcase full of stylish, modern US clothing and you may have enough profit for a free trip! On the flip side, we want cheap TVs and vehicles made in these countries on which we place few taxes and restrictions. Ironically the world is tightening it’s trade allowances and raising tariffs but the USA would arguably not have the massive trade imbalance today if we forced a “fair trade” policy in which we levy reciprocal restrictions and tariffs. Japan wants to tax 65% and place limits on Harleys and Levi Jeans? I argue the response should be to tax 65% on all Japanese goods until Japan lets US companies trade fairly in Japan. This either leads to a massive increase in domestic and NAFTA manufacturing or Japan quickly caves and we are once again able to shift the trade balance. Relative to Japan and Europe, the US is a lower wage but skilled workforce with excess manufacturing capability due to losses in manufacturing over the last 25 years.
- Kill incentives, rebates, special deals, etc. Most people cannot haggle a strong deal on a car and in the modern world, few US citizens haggle for pricing on their products. I periodically argue the benefits of haggling and have been able to help family and friends purchase items in special conditions under cost but this is rare. Most people strongly dislike the car buying experience, sleazy sales people and stories of our friends, parents and grandparents being ripped off at a car dealership at the sales or service level. Car buying in general needs a revitalization in the US where the sales people need FAR more training on their product and far less training on how to squeeze the most out of their customers. Carmax, Saturn and Scion have attracted customers for years with fixed pricing leading to happier, more loyal customers.
- Change the dealer model. The current vehicle sales model holds the dealership as the manufacturer’s customer and the end customer (eventual vehicle owner) at an intermediary level. Dealers want to move what is on their lot with Machiavellian advertising in the local paper for cars that don’t actually exist (GM Malibu on the lot for $1!… you go there and you are told it already sold an hour ago). This process needs to change from the top down where the real customers (eventual vehicle owner) become the manufacturer customers. These customers should not be pushed into what is on the lot but rather what that automotive manufacturer has to offer. Carmax does this in part now with the ability to move cars among local facilities but manufacturers have FAR more leverage to build a vehicle to order or to find one easily within a vastly larger network. I purchased a new truck in 2005 and remember every local dealer saying the options I wanted didn’t exist. I hopped on the internet and using the manufacturer’s website in an unintended way, did a grid pattern search of the east coast, found several vehicles with exactly the options I wanted. I then went to one of those dealerships and made my purchase. When you change this process to focus on product and manufacturer -> end customer and take the focus off of the dealership as the manufacturer customer, everyone wins. Dealerships can still run special programs like free maintenance, track day events, customer focus events, etc to keep customers loyal. Educational material, training and testing for salespeople should be mandatory and we should have a greatly improved training program for mechanics dealing with increasingly complex vehicles.
- Drop CAFE and implement taxes on energy. CAFE (Corporate Average Fuel Economy) doesn’t work. CAFE is the politicians way of trying to force better fuel economy but when these regulations went into place, US buyers simply went to unregulated products (trucks) with big engines and drove more miles with the same poor fuel economy as the pre-cafe vehicles. I understand that raising tax on fuel is a flat tax but this could be offset in income tax if politicians are serious about being green and fixing the auto industry. The only way to quickly and effectively change energy usage is to push consumer demand towards better fuel economy. These taxes levied on energy MUST be spent on infrastructure for transportation (roads, high speed rail, etc) and renewable energy / energy efficiency. I strongly support the idea of dumping a lot of this money right back into our domestic auto manufacturers renewable R&D budgets as the Chinese and Japanese have been doing this for years for their domestic manufacturers. Competing auto manufacturers have enjoyed healthy government support while US manufacturers have been pummeled with additional burdens and government criticism.
Once you add these changes up, I should be able to go to a Ford dealership where I can get information on the vehicle I wish to purchase. I should be able to choose the options I WANT where the dealer can tell me either where the nearest one is or the closest vehicles with similar options are all via computer in real-time (not wait 20 minutes and come back with sparse poorly considered information). I should also be able to choose, say a Ford Mondeo family sedan with a great 2.2L Turbo Diesel engine getting 40+mpg (even if not sold in the US directly, I should be able to choose a european model due to global standards and perhaps pay a bit more to transport the exact model that I want that is sitting somewhere in Germany right now).
Being an engineer in the automotive sector, I believe all of the above issues are logistically possible and would lead to a quick turnaround of the automotive industry in general. There are a lot of complexities that I don’t have time to go into except to say that the issues can be readily solved and that the Global Standards would be for very safe and very clean vehicles first and manufacturers and countries wanting to adopt the standards could do so but not at the risk of bringing the standards to the lowest common denominator.
Perhaps most interesting is that manufacturers like GM have stated that major improvements in fuel economy are too costly as they will add a great deal of complexity to the emissions systems. I argue that this is exactly the wrong approach and wrong way to look at the situation. Let’s take a look at a 1997 Honda Accord V-6 and 2009 Honda Accord V-6. The 2009 Honda Accord V-6 is 268 Hp and gets 19 city / 29 highway MPG. The 1997 Honda Accord V-6 is 170 Hp and gets 17 city / 23 highway MPG (adjusted at fueleconomy.gov for new standards). Now lets complicate this a bit with a 2009 Honda Accord Inline 4 cylinder with 190 Hp and gets 21 city / 30 highway MPG. Honda’s Inline 4 cylinder gets better fuel economy and makes more power than their V-6 from just 12 years ago. The current V-6 makes a solid 100 Hp more! Frankly, this is ridiculous as a late 90s sports car would be envious of the power a 2009 family sedan has? Heck, this 2009 Honda V-6 family sedan makes just a few Hp short of a Nissan 350z Sports Car in 2003.
My point here is that our scale has been altered by US consumers putting power before economy in a perceived boom time from 1999 to 2007 and that all needs to change now. Rather than ADD complexity and cost to a vehicle, I believe the family sedan should drop significantly in power and fuel economy. Fuel costs will eventually go up and government should drive them up artificially now with fuel taxes to force the free market to create better vehicles before we have a repeat of times past. GM can’t do this easily because when they do offer smaller engines with better fuel economy, consumers simply choose the larger engines or go to another manufacturer. CAFE does not solve this problem, only increased fuel costs can do so.
The alternative is a group of headstrong manufacturers fighting amongst themselves for bigger and better numbers. At the time of the last fuel crisis the heavy domestic auto manufacturers were caught off-guard by small, reliable inexpensive Japanese cars. The Korean manufacturers have been making inroads on cost and reliability this time and they are also taking share from the Japanese. Manufacturers should learn this repeated lesson and offer small efficient cars rather than letting every vehicle drift into bigger, more powerful packages endlessly. The only way to maintain such a relationship is to follow a higher fuel cost strategy which necessarily puts efficiency as a primary concern for the vast majority of the market as is done presently in Europe.
Soon a wave of cheap Indian and Chinese cars may be taking even more share from the domestic manufacturers until they realize that greater complexity and cost is not the answer to every problem. Small, efficient, light and reliable has been a necessary staple market proven since the at least the 1960s. So to GM, I say you don’t need greater complexity and cost to meet CAFE. You need light, reliable and lower power offerings. Unfortunately the catch-22 here is that US consumers keep choosing big, heavy and more powerful vehicles which is why only a fuel tax and government intervention will drive development in the right direction for all parties involved.
