Thoughts on the American Automakers

“Wow, GM is going into Bankruptcy!” “Can you believe it?” Of course I can believe it.

What is surprising to me is the apparent surprise everyone is claiming to have about it. “Who could have known?” I’ll tell you who could have known – the millions of buyers of cars made by Toyota, Honda, VW, BMW, et al.

I remember a conversation I had early last year with a Babson classmate during a business trip to St. Petersburg, Russia. My classmate was from Michigan and staunchly defended the Big Three and didn’t see that they had any problems – beyond the usual claptrap about the unions being at fault for everything (she was a b-school classmate after all). My point was that the big three’s steadily declining market share was obvious to everyone as were many of the reasons attributed to it. I argued that their biggest problem above all else was that not enough people wanted to buy their cars. While there was much blame to be shared by many parties, it just comes down to the fact that an entire generation, now going on two, hasn’t looked first to Detriot when thinking about buying a new car. And if you are in the car business you better be selling cars, preferrably to young people so you can take advantage of customer loyalty over their lifetimes.

Among my peers very few people drive cars made by GM, Ford or Chrysler. Since a new car is typically the 3rd biggest purchase someone makes, with college and a house being the two biggest, people are voting with their dollars. As I look up and down my street in the city of Providence I see about 15 cars – and only two are Ford, Chrysler or GM products. Now one street may not be a fair sample, but I can see about five Hondas, several Toyotas and VWs, and a mix of BMWs, Nissans and Hyundais.  Plus a few Volvos (pre Ford purchase so they don’t count).  If my street is any indication I don’t see how the big three can be called big or even three any more.

Looking back what’s even more amazing is that only a decade ago in halcyon 1990’s SUV’s were selling like candy, especially for GM. And like candy they were  highly addictive and not good for you. Those high-profit products were cash cows, and like almost all cash cows they eventually run dry. Again there are lots of reasons why those cash cows dried up – high gas prices, declining home values, job losses, increased competition, etc. But a basic lesson they teach in any good business school is that you milk a cash cow while you develop new products with the knowledge that eventually the cash cow will not generate enough cash to cover it’s costs. Somehow that basic MBA lesson escaped the brain trust at GM and Chrysler. Ford at least realized that they needed to make a good small car in order to be competitive on the world market so they are in a much better place right now. We’ll see how long it lasts but for now it’s looks like Ford will do okay.

The big three were able to disguise the fact that fewer people were buying their cars every year by buying other brands – Volvo, Saab, Jaguar, Etc or engineering mergers – but ultimately it caught up with them. What’s also fascinating is watching what happened to the niche brands purchased by Detroit. Volvo was once a proud brand with a unique style and a fiercely devoted following due to their strong safety record and in spite of their boxy exterior.  In fact I once dated a girl whose family so liked their newly purchased Volv0 240 wagon that they sold their Oldsmobile Delta 88 to buy a second one. I don’t know anyone who is that devoted to Volvo anymore. That might be because Ford acquired Volvo and slowly “evolved” all the design uniqueness away in an effort to “reach a broader customer base” obliterating both a unique shape and a devoted following in one fell swoop. Can you really tell the difference between a Ford Taurus and Volvo Wagon with only a quick glance?

In case you think I might be biased I’ve owned GM and Ford products along with Honda and VW products.  Some were good and some most definitely were not. My 79 GMC was overall a good pickup truck but whose bright idea was it to put tw0 20-gallon gas tanks in it with gas caps on each side of the truck? Trying to fill up both tanks at the same time was painful and required straddling the middle of the gas station row and stretching hoses to both sides hoping they’d reach, and they didn’t, often as not.

Unlike this beauty my wagon was a solid shade of brown.

Unlike this beauty my wagon was a solid shade of brown.

My ’73 Ford Gran Torino Station Wagon was my first car and if ever there was a bigger land yacht I’ve yet to drive it. With manual steering the car truly handled like a yacht and should have been factory equipped with red and green running lights. And much like a yacht, the car was a money pit and exemplified all that was wrong with Ford quality control in the 1970s. I bought the car when it was 12-years-old and over the course of two years replaced the transmission, exhaust system, starter (three times), alternator, water pump, fuel pump, brake cylinder, ignition system, battery, radiator, and the list continues. By comparison I’m driving a 13-year-old Honda and I’ve replaced very little. Even with 185,000 miles I’ve only replaced the muffler a few times in addition to tires and brakes. It’s not the coolest car but I must confess I’ve become addicted to the complete lack of car payments.

I don’t want to pick on Ford too much because I greatly enjoyed my ’93 Ford Escort Station wagon. As a young sailor in the Navy it wasn’t the most exciting car but I traveled cross-country in it twice and it was on one of those trips that I met my wife. What it lacked in excitement it more than made up for in great gas mileage (34mpg on the highway) and reliability. But as it aged it did leak oil, various plastic parts became brittle and were difficult to replace. I sold the car in 2003 to a nice Brazillian family conducting the transaction in a mix of english, portuguese, spanish and sign language. The Honda became my car because my wife bought a new TDI VW Bug and her old Honda was newer, had fewer miles and was in better condition than my trusty old Escort. 

As a frequent traveler on business I’ve had the opportunity to drive most of the cars available in the fine rental fleets of Avis, Hertz and National. And I have to say given a choice VWs are still my favorite, but I recently drove a Cadillac CTS and it was a great car. I’d have to drive it a few more times and wait several years to see if the reliability was there before I’d consider buying one. Most of the other cars were acceptable as transportation and that’s all I can say about them. Maybe someone else can explain to me in 21st century terms the reasons for and differences between Ford and Mercury; and Chevrolet, Pontiac and Buick. Thankfully most rental cars today have the electronic key fobs because it’s only by clicking the key fob that I can remember which car I rented. They all blend together, except for that CTS. Maybe those Led Zeppelin backed commercials are actually working.

 Back to the argument. While I did think that GM’s best days were behind it, I had no idea I’d be joining 300 million other American as 60% owners of the company. I thought that the company would continue shrinking and maybe they’d lose one or two more brands along the way, but I didn’t place any money on that bet. My loss. Eventually my classmate and I agreed to disagree about the American car industry and decided to settle our differences over a nice meal of Georgian food and a frosty glass of vodka – we were in Russia after all.

As to Chrylser, I will say that I always thought that the private equity play was laughable. The only winners were the people who put that deal together. Just goes to show what happens when you have more financing than common sense. Nothing personal against Bob Nardelli but why the heck would anyone chose someone with no car industry experience who couldn’t run a retail company properly to run your newly bought car company? I am interested to see what Fiat will do with Chrysler. I’ve always loved Jeeps and I’d like to see someone continue building those no-nonsense rugged vehicles. There is very little that compares to the feeling of driving through the sand in a two-door Wrangler with the top down bouncing along. Hopefully good quality Jeeps will continue to get made.

All flippancy and schadenfruede aside, I realize that millions of American livelihoods and their communities are at stake. I, like all Americans (and the foreign holders of our T-bills), now have a vested interest in GM whether I want it or not.  I have to hope that GM has seen the light and can turn things around. Only time will tell. Either way I’ll be sitting on the sidelines since I’m not in the market for a new car.  What about you? What do think? Are you in the market for a new car? If so what make of car will you be buying? -t

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