Thursday, December 18th, 2008

How to save Detroit

How to save Detroit
Email to a friend Comments (34)

I’m going to risk alienating some of my readers today; nevertheless, I believe this to be an important discussion, worthy of a few ruffled feathers. As I write this, American auto-makers are scrambling to tap TARP funds that might keep them on life-support, and I believe their wish will be granted. I also think it’s shortsighted, disastrous and highly un-American.

Champion of the underdog

The lore of America is largely formed on the notion that everyone has the potential to rise to the top, given a good idea, hard work, and a little luck. Just consider the innovation that came from America during the 20th century. Hollywood, the silicon chip, rock and roll, the assembly line, the franchise model… No matter what criticism “Brand America” may have had in recent years, the truth is that most nations still aspire to its values, affluence and cultural landscape.

But American civilization is peculiar. It seems that in some respects it makes greater gains as a “challenger”. As an underdog, or against insurmountable odds, it seems to continually surprise and overcome. In the “champion” role, however, it becomes lumbering and complacent. My case-in-point lies with the Big Three. Certainly, there have been breakthrough products, such as Chrysler’s mini-van in the 80s; however, as each of these companies has become larger, each has eked closer to the doom they currently face.

Brand erosion, inferior quality products, a disinterest in meeting consumer needs, lack of regard for the environment, bad business practices, disproportionately powerful unions… The fact is that these companies have become too big and too slow to adapt. As much as the notion may seem interesting, we simply can’t bring back the dinosaurs.

The bailout won’t work

The bailout (albeit perhaps necessary) is tantamount to burning the American flag. It’s another nail in the coffin for innovation in America and the belief in a free market system. Allowing it to occur will tell the world that capitalism doesn’t work. The message is loud and clear: we love the notion of freedom, free-will and the entrepreneurial-spirit, but… if it doesn’t work out, and you’re big enough, taxpayers will break your fall.

Not having a safety net is what makes entrepreneurs succeed. This is my personal reality. I need to sell work. If I don’t, I lose my business, my home, and my possessions. There is no employment insurance for owners of small companies such as myself. Additionally, there will never be a bailout should our business fail to meet market demands. As such, we manage our budgets carefully, and are highly motivated to avoid bankruptcy.

For the most part, this works. It’s a clean, clear and simple model of natural selection that all free market companies operate within. Some of us do well and some of us fail, but the playing field is for the most part level. The notion of a bailout for the American auto-industry, however, says that the rules don’t apply to them.

Worse yet, it will only stave-off the inevitable. If they couldn’t keep up in the free market before, why will that change with an injection of cash? Consumer confidence is shaken beyond repair and the machine is clearly broken. (Throwing more money at your coke-head brother isn’t going to sober him up.) Given our current course, a bailout will at very best buffer how the crash comes, but it will nevertheless come.

The “Ameri-car” is a harrowing notion

One idea that I continue to hear about is that of a merger of sorts, resulting in one large, consolidated American automobile company. Isn’t it strange how this feels more like something we’d have expected of the fallen Soviet Union than of America: A single state-enabled national auto-maker. (Doesn’t that whole idea make the hair on your neck stand up a little?)

In large part, the problem we’re facing relates to how big these companies are. If one of them fails it will drag many other related companies into insolvency. This clearly illustrates how dangerous the centralization of the American auto-industry is. We can’t keep tying all of our hopes into a few large organizations. It’s the antithesis of the American way, and doing so stands in the way of competition, innovation, and entrepreneurial spirit. Consolidation is a notion that can only make things worse.

Additionally, the American automotive industry is a brand disaster.

I know that a BMW is well engineered. I believe that a Volkswagen is fun to drive. I trust that buying a Toyota is a responsible decision given their quality and value.

We don’t know what an American car stands for any longer, because they all end-up being the progeny of the same companies. What does a Pontiac stand for? How about a Buick? (Do they even make Buicks any longer?) “General Motors” says it best. They’re general. They’re utilitarian. There’s nothing there to delight or surprise. It’s just one big, fat machine with no focus or meaning. And whether the aging champions of industry want to believe it or not, the public wants to buy products that we can believe in.

A solution

Tell me this: when GM CEO Rick Wagoner was flying on his private jet, to ask Congress for a bailout, do you think he for a moment thought “Gee, I wonder how we could make the Cobalt a better car?” Of course not. GM is too big, and its management is (figuratively) way too far off the ground.

To build a better product… to build something that people care about, means that you too have to believe in it. As companies become larger, it’s highly uncharacteristic for management to care as they would in an entrepreneurial operation. Examples to the contrary might include the likes of Patagonia’s Yvon Chouinard and Apple’s Steve Jobs. (And look at how their steadfast belief has fortified their companies.)

Consider this possibility: Our governments (this is, by the way, a concern in Canada as well) grant the bailouts that are being asked for in an effort to buffer all of us from an economic landslide. This is given with a caveat: Each brand housed by the automakers must be transitioned into an autonomous business unit. In this approach, Jeep leaves Chrysler and becomes “Jeep”. Hummer leaves GM and becomes “Hummer”… and so on and so forth. Each becomes an independent company that must then fight for its survival. Those that are unsuccessful die, and those that succeed live to see another day.

It’s simple and it gives all of these companies a strong impetus to become entrepreneurial, innovative and efficient. And want to talk about belief? When your survival is on the line, you believe. You care, because the brand matters to you. Its livelihood and yours are intrinsically tied to the same fate. I’m willing to bet that we’d see some powerful brands rise out of this, instead of the watered-down crap that we’ve become accustomed to from the American automobile industry.

Some will say this is logistically impossible. I argue that in the interests of our collective fates, we need a bold and aggressive return to an entrepreneurial landscape. We can no longer allow overpaid management teams to act without consequence, when they have no “skin in the game”.

Happy trails

As noted at the beginning of this post, I recognize that some of you may take issue with my position. I apologize for any offense. It goes without saying that I’m speaking out of my ass; I don’t know anything about running a car company. Then of course, it seems like few in Detroit do either.  ;-)

Meanwhile, I wish you happy holidays! I probably won’t post much over the next couple of weeks, as we’ll be reorganizing the office, pushing out a couple of projects, and perhaps having a drink or two. That being said, I always appreciate you taking the time to read these long and meandering posts, and for sometimes responding and sharing your perspectives.

And if I didn’t already plug it enough, please visit undrln. It’s our new baby, and is a great way to get the scoop on what’s happening in advertising, marketing and design.

Follow @karj to hear about these posts first.

Comments & Trackbacks

  1. Evan Meagher says:

    Being a proponent of letting the shit hit the fan, I agree with you completely. US automakers have been making crap cars for decades and it's about time that the natural selection of an open market caught up with them. Yes, many people's livelihoods and possibly lives will be ruined, but sometimes you have to break something before rightfully fixing it.

    I like your idea about breaking up the big three into an assortment of independent companies. Competition fuels innovation and thus would lead to better cars and undoubtedly a stronger auto economy.

  2. Pingback: » The Best Post I’ve Read All Day Robert C. Green II

  3. Rob Green says:

    Simply awesome and eloquently stated. Thank you for writing such a truthful article!

  4. "Not having a safety net is what makes entrepreneurs succeed."

    Truer words have never been spoken. Well done, sir.

  5. Anthony says:

    Why don't we give them the money to retool for mass transit - bicycles, buses, subway cars and passenger trains.

  6. Shawn Petriw says:

    Furthermore, spin the manufacturing plants into their own units, owned collectively by the auto units. Operate them like Flextronics.

    http://www.flextronics.com/en/default.aspx

  7. Pat says:

    You're absolutely right. Personally, I think both management and employees are both responsible for the apathy that has brought down these three companies. There is no accountability, no reason to drive (pun intended).

    I don't know that dividing the companies up by brand is the best route. My first reaction would be divide by category (cars in one company, SUV's in another, etc). Thought, that may still leave each company too large.

    The other interesting consideration is those in the car dealership industry. They are not helped by a merger. In fact, they will be most likely hurt more, as car companies will no longer have to compete for pricing. If cars are priced too high, there is still no reason to buy from these companies.

    I say government keeps their hands to themselves in this one. If America's auto industry transitions to more closely reflect that of Canada and Mexico (industries that work domestically but are controlled elsewhere), it may be a good stepping-stool to allow the auto industry to rebound and push through with new innovation.

  8. Great post Eric.

    For those interested in the future of the auto industry, let me also recommend two articles about Shai Agassi's (SAP's head of products) intriguing plan to turn electric cars into reality. One article is from wired, the other the NYTimes. I started the first article thinking: "Yeah right" and finished the second thinking "Of course. It's Inevitable."
    Wired article: http://www.wired.com/cars/futuretransport/magazine/16-09/ff_agassi
    NYTimes article:
    http://www.nytimes.com/2008/12/10/opinion/10friedman.html?em

  9. Ryan Merrill says:

    As someone who works every day and tries to make an honest living, there's nothing more than I would like to see than those three large behemoths that have refused to innovate go bankrupt.

    But the fact is that their collapse, albeit a deserved one, would hamper the U.S. economy so bad to cause a multitude of casualties.

    There's a lot of blame to go around. The Unions are to blame. The CEOs are the blame. American consumers are to blame.

    The Unions at American automakers have way too much power and are draining each company of its resources.

    The CEOs have failed to innovate and have pumped out gas guzzler after gas guzzler because it was what worked. They failed to see the future.

    The consumers didn't demand that American automakers build more fuel-efficient cars and continued to buy SUVs. The (smart) ones that wanted hybrids bought them from foreign automakers.

    I hate to see them do it, but the government needs to bail out the automakers. The job losses at the factories alone would be a huge blow, but there are many connected sectors to these automakers.

    There are the equipment manufacturers, sales dealerships and mechanics to name a few. Plus the communities of these crumbling factories would be hit even harder. As someone who has lived in a town where a Ford dealership has shut its doors, I know from first-hand experience that it is hard. The people and a community who have relied on this large dealership to power the local economy are hit the hardest. We cannot let these companies fail.

    I know, I know. I might sound like I don't believe in capitalism. I might sound like a socialist who is naive enough not to know any better. But I know where you're coming from. I do. We just cannot afford to go down that road.

    We need to bail these corrupt, inefficient businessmen out because we cannot afford not to. But we need to impose restrictions on the bailouts. They need to produce more fuel-efficient cars. Produce more innovation. Produce real change in a time that needs it.

  10. Ben Reimers says:

    The corporate bail-out is in the air around the globe, unfortunately. Here in Australia our mining industry is facing disaster as the demand for our coal and minerals is plummeting. Sadly, at least in my opinion, our federal and state governments are promising billions of dollars in bail-out funds for the regions affected -- and this is already after the billions that went into car manufacturing and our largest childcare provider. This shits me (pardon the French) no end.

    This industry has been making a whole lot of money on the back of China, and the employees have been making a motza as well. The average wage for a miner is probably three or four times what I currently earn as retail lower-management. Unfortunately I also fall into a demographic that is completely overlooked when it comes to tax-breaks, lump-sum "bonus" payments, and any rebates that married couples with or without children might get.

    Anyway, it angers me that my hard-earned tax-dollars are being used to bail out people who earn far more than I do. I say let them fail and go bankrupt. Let the miners earning $150K/year find more reasonably paid jobs. Lessons will not be learned if these companies are allowed to fail and then be relieved of all responsibility of their actions.

    I would rather have the money I earn go into my pocket to secure my own future, not go towards helping people who took advantage of a great situation but were too stupid to plan for when it all came crashing down.

    Grrrrr!

  11. David Airey says:

    There's not much I can add, Eric, except to express agreement, and congratulate you on 'undrln' -- some excellent articles have been submitted to the site, so I'll definitely be visiting again.

  12. undrln has been a nice surprise. We really didn't expect for it to receive the reception it has. :-)

  13. Zinni says:

    Eric,

    I must say that I have been saying the exact same thing you have been saying here for a while now. Unfortunately so many people are afraid and can't seem to think past the media and what is happening now that they buy in to the idea of a bailout. I wish they would call it what it really is a cop out. If auto makers had been proactive and cared about meeting the needs of the consumer they never would have got this far, I haven't even considered purchasing an American car in my life. No one my age wants one, and who would now?

    Also, congrats on undrln, it is a fantastically simple and extremely functional app. It sure came at a great time too, just as designfloat went out... I'm sure that has helped adoption.

  14. Thanks!

  15. kelly says:

    since the leadership teams of these dinosours has already failed completely, in Chrystler's case more than once, they should flush the top and completely start over. fresh leadership from outside should be a requirement.

    the government should also create an oil tax to pay for this joke. the us auto industry has been in the oil selling business for a while now. it's time for ol' Standard and opec to give back a little.

    lastly the wages the auto union members make are the biggest joke of all. the government needs to step in an get them in line with the workers at foriegn company,nonunion plants.

    if they dont we might as well get ready to go through this again next year.

  16. Doug J.

    Second article looks promising. Thanks for posting.

  17. navin harish says:

    In the early 20th century US had more than 500 car companies and look at what they have now. Some of them died a natural death, some of them were eaten up by the big three and the ones that still remained were killed. For a very long time I have been thinking why the cars today don't have any character as they used to long time ago. Now all the cars look alike and if you replace the logo and the name no one would be able to tell the difference. It is funny how I never really thought about the reason behind it till I read your post.

    Bailout in any form will not work. What Dubya had planned earlier is bound to fail as well. They are pumping water out of the boat but no one has thought of plugging the hole to stop more coming in.

    Economies like US are not sustainale anyway because what you are selling is not a value after a certain point. It is not a need but a want. You don't really have more, but a perception of more. You see more wealth because it is kept circulating at a very high rate. It is like a big group juggling. The moment a few f them start dropping the balls, all the balls come down.

  18. navin harish says:

    I also wanted to add that companies like Ford has not only bought companies in US but else where as well like Volvo and Mazda and not to forget Jaguar and Rover that Ford sold to Tata, an Indian automobile company. When they go down, their other ventures go down too and not for any of their fault. In 1964 Henry Ford almost bought Ferrari but the deal fell through at the moment. I am glad they didn't own Ferrari.

    Rick Wagoner didn't think about making Pontiac a better car, he didn't even think about flying an airline instead of his private jet. I meant how can you digest something like that.

  19. yael says:

    No matter what you talk about, Eric, you always make so much sense.

    This is definitely not your usual subject matter - that's for sure!

    Still, I agree with your lucidly expressed points of view on this entire subject.

    You know what it's about? Saving people from facing harsh reality - all the supportive industry to the automakers don't need protecting. Did anyone protect DHL's domestic arm? What about the huge layoffs everywhere? Did those hardworking, smart people get any 'protection'?

    We grew up quite poor and somehow survived - no one 'bailed my family out' or any other family in a similar income bracket. If I was spoiled my whole life I would never have been able to start my own successful business with serious drive. Just because you used to have a job and had a good income, doesn't mean you will not survive on a lower standard of living.

    Americans are scared to be 'poor'.

    Yes, people will lose their jobs and they may even have trouble putting food on the table, but America is not a place where people starve to death. It's not the end of the world.

    As communities face vast layoffs and many more needy people eventually, we should all be looking out for each other and helping one another. If you have means (even a little more than you need to survive) think about those that don't and those that used to have and now suddenly don't.

    Eh, that was a serious ramble... I guess I'm getting a bit emotional about this. It really has been troubling me.

  20. Great article! This is exactly how I feel about the whole auto bailout situation. It's sad that so many fine hard-working people will lose their jobs. I know that any money that goes to the Big 3 will only benefit upper management and not the company nor the employees on the front line.

  21. Good points and well written.
    There have been and will continue to be, layoffs in other industries besides the automotive. It's a tough pill to swallow for those men and women, now finding themselves jobless, whose tax money must go to bail out others, but not themselves.

  22. Its a tough situation but i guess all we can do is the best we can with what we have. Nicely written.

  23. i agree with you, every other commenter that i read agrees with you, and almost every opinion piece i've read on the subject agrees with you. too bad the politicians we elected to represent us don't give two craps about what we think.

  24. Pingback: Saving Detroit | Pat Dryburgh

  25. I have to agree: it's unfortunate, and it will be painful, but the only way this industry's problems will be solved is when the companies are facing death.

  26. Jay Godse says:

    Eric, I disagree. The bailout will work. Here's how. American people and politicians need to learn 2 lessons:

    1 - If the automakers go bankrupt, everybody in the auto industry will not lose their jobs. I need my car fueled and serviced as do most of my neighbours. I need spare parts to keep my cars running. In a few years I'll need a new car, though probably a Canadian or American built Toyota. Ditto for my neighbours. There's money to be made in cars.

    2 - Keeping auto workers working building products that nobody's buying (just like in the former Soviet Union) serves nobody, but that's not what they believe.

    The bailout will teach them that doing the same old thing (all indications point that way) will get the same old results. Once the bailout fails, but the auto industry continues to thrive, they'll realize that the big three automakers are not the car industry, and that Toyota, Honda, Hyundai, and others can satisfy the demand, as could anybody who buys up assets of the big 3.

    The bailout will teach them that they didn't need a bailout. That is good lesson even if expensive.


    On another note, consolidation is not of itself a bad thing. With consolidation, you get standardization, commoditization, and price reductions. These are all good things for consumers. The bad behaviour occurs when consolidation results in monopolies. Price gouging, poor customer service, bad business practices are forms of monopoly rent collection. Think back to the 1900-1960 where we had a plethora of communication protocols. The phone industry didn't take off until we standardized on ideas such as 64 kilobit PCM, tip & ring, T1, etc. In the 1980s we had a plethora of computer communicatino protocols, but the internet didn't take off until we consolidated with HTTP and TCP/IP and ditched the rest. With the internet, innovation still took place, but at a different level. Innovation was also possible because no company had the ability to lock other companies out of innovating at higher layers. Unfortunately, the consolidation in the phone industry also granted the phone company a monopoly which allowed them to lock out other innovators until the legislation of 1984 and 1996 allowed other companies to innovate on the standard platforms of the phone service providers. The bad behaviour in the auto industry is more because of monopolies than consolidation.

  27. Matt K says:

    It's the Auto industry of England all over again....
    But nevertheless - I thought something was on with the new Mustang. The Camaro, even the GTO. I've never owned an American car, being an European, but will never own a car built in India, Japan or Germany - or a SUV for that matter. And it has got nothing to do with how they run their store, how environmentally thoughtful they are, how they look, what is considered hip, cool or modern. It's a matter of how I choose with my heart and personal preferences - just like I choose other products. And since Americans stopped buying American cars, just like the British stopped buying their own, the industry will fall flat on its face no matter what. And Toyota will to, when the flavor changes. No, a Volkswagen doesn't drive great. It's like a brick. A Toyota is Dull, and there are tech issues with those as well. A Prius is a bull**** way of pretentious driving in denial of the environment. The new Mini is a nightmare of tech errors. The new Beetle is a Golf (Rabbit to the U.S) in disguise. A Volvo was a luxury in the US when every burger-flipper had one here cause it was so cheap. IMO, its about trends and marketing. And there's nothing that can change it until the trend turns. No matter how many bailouts are forked out and in...
    Hmm maybe sliding out of T here...

  28. I see your point But I don't think it would work. Not because of it's validity, but because the one's that would be chosen to manage these firms would be "friends" of the ones that sunk the existing ones just because they have this right, because now they own the companies.

    None of them would come out of the brand/history itself, so the passion you mention all too well would simple be nonexistent.

    But it's a good exercise.
    I say "kill" the worst one, sell it's assets to the other two, for the highest bidding. The dissappearing of one of them would make the supply and demand adjust. If none of the existant ones would like to buy the falling one, the state should do it and distribute it's "Intelectual property" to the public domain (University netwoks for instance). That would be better than just to inject funds on them to be wasted exactly the same way they have been.

    It would hurt... but it will hurt anyway!

  29. I like what Joseph Stiglitz of Columbia University said in a recent NY Times article:

    "Bailouts…are aimed at correcting the mistakes of the past, so they are backward-looking. We would be much better off spending our money forward-looking. If we spend $700 billion on new technology and innovation, we’d have a stronger, new, real economy. Up to now, the discussion has focused on the sectors that have been mismanaged rather than the sectors that are creating our future."

    I'm not a total pessimist. I do believe the automakers can and should play a role in creating our future. An op-ed piece from a couple of months ago by Robert Goodman aptly argued that as a condition of financial assistance, Congress should insist that automakers shift from manufacturing just cars to becoming innovative "transportmakers."

    "As transportmakers, the companies could produce vehicles for high-speed train and bus systems that would improve our travel options, reduce global warming, conserve energy, minimize accidents and generally improve the way we live."

    There is precedent for this suggestion. For instance, if you go back in time to the turn of the century when the automobile industry was just emerging, the carriage industry was plummeting. Studebaker, founded in 1852, was the world's largest producer of horse-drawn vehicles. They managed to turn the automotive disruption to their advantage. (For meatier details, I blogged about it a while back. http://tinyurl.com/63d9pj )

    I think we're living in a most interesting time. All of the automakers won't survive but near-death experiences have a tendency to catalyze big time transformation. Who will make the cut? Only time will tell.

  30. Walt Hucks says:
  31. Web Designer says:

    I like the way you have written the article. All the qualities of a good writer.

  32. Great points. I heard Joe Francis (yes, of Girls Gone Wild fame... bear with me here) on the Adam Carolla show and he actually had some great commentary on the bailout. Why does the auto industry get money? What about every other industry? What makes their business so important that THEY get money, and no one else does? Well, except banks.

    But if GM can't turn a profit, that means they're not doing well enough in business. Toyota has five manufacturing plants in the US. Are they getting a bailout too? Why not?

    After a trip to Japan, I wrote a blog post called "What Japanese toilets taught me about the US Auto Industry"
    http://tinyurl.com/6wrr9r
    Enjoy.

  33. David O. says:

    Regarding "American automotive industry is a brand disaster."

    I think Ford, Dodge(Chrysler), Chevy(GM), all had an image of building tough trucks, muscle cars and super cars. But they did not focus on those niches and wanted to compete in the arena of compact cars, family cars (and family vans), etc. They failed and their branding became a disaster. I think Ford, Dodge and Chevy could have had a strong brand image if they just focus on building trucks, muscle cars and sports car. Sure they will sell less cars, but in the long run they would have been more profitable
    if they focus on their niche.

    To illustrate Ferrari and Ashton Martins are gas guzzlers, they are expensive. Yet these companies know their market and they know how to excite their consumer base and keep them coming back for more.

    In fact one of the few cars dodge is actually selling in this recession is their resurrected Challenger muscle car.
    But it's only recently these three companies have returned to building muscle cars, perhaps it's a to little, to late. Moreover Dodge plans on discounting its viper sport cars in 2011.

  34. Amy says:

    I agree with what you wrote & I think the sentiment has been echoed in various degrees by many economists & a number of op-eds for the nyt (Thomas Friedman, for one).

    In my humble layperson opinion-we didn't bail them out because we thought we should-we bailed them out because we simply didn't feel we had any other choice-given the rather horrific timing of their demise & the number of people they employed. If your prediction is right, they won't have the proper incentive to innovate better products (despite or because of their enormous crutch) & the govt will invest poorly in a gigantic company that will eventually fail anyway...& this will ultimately be for the best...assuming it happens when our economy is in a healthy mend & we can actually sustain the impact of their collapse..

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