Friday, 21 November 2008

Micro-Level Trends – US Autos – Huffing and Puffing over Detroit

The Huffington Post, and the views of a primary contributor / journalist Diane Tucker, has become a regular read for many Americans over the last few years who initially sought out a distinctive liberal-leaning voice some years back in the face of an ever publicly 'removed' Bush administration.

Reading and riding the the obvious zeitgeist of a politically frustrated middle-class angst, Softbank Capital and Greycroft Partners financially backed the venture to grow into a what's fast becoming an apparent de facto 'independent' news source and 'speakers corner'.

The pro and anti stances of Democrats and Republicans regards the tax-payer support of Detroit's Big 3 has taken up much of the news-sheet over the last few weeks, with an interview structured repost from the respected journalist and author Peter de Lorenzo endeavouring to demonstrate that, to alter a hackneyed quote: “not all is rotten in the Kingdom of Detroit”.

Peter de Lorenzo is fighting Detroit's corner and puts forward strong argument that the automakers have been on their way to turnaround for some time before the credit crisis broke. And whilst it is undeniable that GM, Ford and Chrysler have indeed been successful in trimming over-head and piece costs, primarily through plant and labour retrenchment and trying to re-balance the supply-demand see-saw by manipulating auto demand elasticity through extended credit periods, the profitability goal posts have sharply moved due to a previously rapidly changing, volatile global economy; essentially undoing the good work done to date.

Two main elements demonstrate the innate schism: The brokered UAW VEBA deal was rightfully applauded but the previous policy implementation of extended & sub-prime credit was ultimately value-destructive; delaying the per unit break-even period and so reducing the unit, division and corporate IRR.

However, even foregoing such back-firing short-termism, the truth of the matter is that US Automakers are endemically structured from a sector template devised over half a century ago and long past its peak. Recent events demonstrate the acute level of global automotive sector competitiveness and highlight the predominance of credit-dependency over and above product-purchase objectiveness. It has been evident that for years the often better paid white collar 'rationalists' on East and West coasts have bought into the Japanese & Germans, whilst the less financially able blue-collar 'emotionalists' were loyal to the US 3 who via their own credit arms were able to create fiscally attractive deals. (The Koreans sat squarely between the 2).

But ultimately the operational model has, quickly and painfully, been seen wanting. Ongoing headwinds encompassing everything from hyper-oil-price to mis-matched product mix to over-lapping (and untapped) brands to an unstable supplier-base to unfortunately still uncompetitive labour cost 'legacy' responsibilities to still under-capacity, therefor over-cost, poor production efficiencies.

Like US products vs Japanese peers, Peter de Lorenzo believes that Detroit is really victim to an image problem, its reputation (as viewed by Congress) suffering now due to past deficiencies. But the truth is that like its products it is forever in 'catch-up' mode, and as with the cars no amount of PR spin about domestic product or sector improvement changes the evident reality.
Yes fuel efficient cars are evident and in the pipe-line, but where were GM-Chevrolet's real competitors against Yaris and Corolla that should already be part of its global small and compact car portfolio?

The solution earlier this decade was to demploy a strong small car competance from the new GMDAT, risen pheonix-like from the ashes of Daewoo? Instead the asset base was commercially exploited, attaching Chevy badges to Daewoo cars and undertaking low-cost re-skins and part re-designs as part of a plan to maximise profit but forestall on tomorrow's investment. That tomorrow has arrived and what should be an sparkling asset, whilst undoubtedly commercially viable, could be accused of suffering from an arrested development consequential of lack of parental supervision. As rightly reported, vehicle rankings in "U.S. News" demonstrate that 7 of the 34 affordable small cars are produced by the Big 3, but the best performing is the Chevrolet Cobalt, managing a paltry #20, while #1-3 are all Hondas.

Honda's small and compact car ability, in fact innate knowledge. also highlights the possible foible of GM looking to advanced yet unproven and industrially expensive battery technology as the green-tech panacea. The Chevy Volt, using L-ion batteries, goes against the conservative philosophical and real-world proven grain of Honda's & Toyota's use of far more proven Ni-MH technology. These companies have become the effective Hybrid & EV mainstream and are the demonstrable knowledge creators and, along with their suppliers, the de facto knowledge brokers. Whilst the use of L-ion is growing its applications are currently limited, best viewed in the 2009 Mercedes Bluetec S-class which will be sold in limited numbers, closely followed in operation by Daimler R&D specialists and given class-leading customer support. The paradox of a mainstream Chevy and rarefied Daimler limousine sharing technology which is still 'cutting its teeth' is all too apparent - especially as the real impetus for GM to shift into future-tech dwindles as the oil price hovers at $50 as a consequence of the global economic slow-down.

Yes Toyota (down 23% YoY) and Honda have taken a hit with plunging TIV sales due to broken consumer confidence, but they are in better condition to weather the storm. Their innate operational flexibility and product strength demonstrated by speedy cut-backs of worldwide production capacity, and critically, their ongoing ability to continually improve all-important Chinese market-share. (GM will suffer locally caught between the dually deserved fine build reputations from the modern Japanese & older German models that are viewed as risk-averse and maintain depreciation values).

Historically, Detroit's Big 3 have played-out 3 types of differing modus operandi. Their differing fortunes relative to their reaction to the sector's periodic shifting sands driven by economic cycles. Their strategic & operational roles and methods are almost endemic to the corporations, best understood by each's general and reactive styling and engineering strategies.
GM has been the conservatively-led mainstay of the domestic sector, a heavily laden and almost sector-responsible super-tanker (or rather 'mother-ship') orchestrated by the ideology of economies of scale over all else, and as such been the centre-ground mainstream that, for the most part, proffers a diluted array of once meaningful brands which have been so 'inter-morphed' in the search to generate profit that resultantly they have long-lost their innate individual magic. As such it has been the marathon runner, long on stamina but experienced ever-ongoing depletion (slow shrinkage) of reputation and profitability up until this 'rupture point'.

Ford has been the middle-man, seen as middle-ground and conservative but in fact often the stylistic and so expectational game-changer for the industry. (From the Model T to the '30s Zephyr to the '61 Lincoln Continental to '80s Sierra & Taurus to New Classics like Thunderbird & Mustang and beyond possibly re-inventing itself through Model U and affiliate US transport brands like Airstream and Super Chief). As such it has played a domestic role as paradigm shifter whether through Aerodynamics, Euro-Modernism, Retro-Design and perhaps now Diesel instigator along with VW). It has endeavoured to re-invent itself to fit the zeitgeist (as with creation and dilution of PAG) and maintain credibility and importantly profitability. As such it has been the periodic pace-setter, thrusting forward to alter the pace, then settling back into the mileau.

And in contrast Chrysler has been the periodic performance 'spurter', with a profile and profitability that 'yoyos' between lacklustre, plodding at the back of the pack, to rapid energisation that propels momentarily to the front for short periods before slipping backward. As the smallest and weakest of the Big 3 the propellants have been external capital (Government, PE and Trade), alliance formations (eg Simca-Roots, Mitsubishi & Daimler) and product 'injections' (eg '80s Minivan, 90s cab-forward LH cars, '00s PT Cruiser & 300H); the combination of which markedly improved performance for short periods.

So yet again Detroit sits at yet another “historical juncture”, the obvious answer touted being another round of marque extinction and sector consolidation with GM's absorption of Chrysler and latter-day re-organisation. But that would only extend the financial and social angst and pain as cultural clashes, internal politics and massive budgetary requirements emerge to forceably shrink the 2 headed monster. After the turmoil and experiences of the Daimler-Chrysler relationship, Chrysler knows only too well that it would suffer under such powerful 'guardianship'; re-align leading to inevitable expiration as GM leverages its muscle to obtain the best of Chrysler's assets and run-down competing products, brands, dealerships etc for its own advantage

The North American solutions of the past have demonstrated themselves to provide only ever more marginalised breathing space for the survivors as round after round of domestic consolidation momentarily alleviates domestic pressure only to be re-pressurised by foreign newcomers from both ends of the price spectrum. Thus, such understandable yet reactionary behavioral dynamics of the past, in reality amounted to re-runs of familiar tactical fire-fighting providing at best mid-term reprieve.

But today is very different for North America. The credit-melt-down demonstrates the vulnerability of a business model whose heavily capital intensive operations were reliant on the absolute stretch of patriotic good will and floods of liquidity to shift what has effectively become a commodity product, the best item bought at the least serviceable cost to the buyer.

That squeeze between product design & production costs and incentivised sales programmes to shift millions of units was always a disaster waiting to happen. So as that all too critical tide of easy credit rapidly withdrew, even with the deflation of input costs, the Big 3's economic structural inefficiencies are all too apparent. Soros' much bounded euphemism about “now seeing who's been swimming with their pants down” has never been so true.

Ironically, the world outside of the US, that ever-present threat that has evolved for decades, is not such a foreign land. The Big 3 have been operating there, beyond the US borders for much of their own existence and know it well; indeed planted the seeds of growth with their own brands and JV ventures. They know only too well that growth and commensurate auto-demand (particularly in Asia) is only achievable with sound national macro and micro economic principles, fiscal and monetary policy guided by ambitions of national growth to climb ever higher up the economic value curve. But that value curve is dependent upon innate industrial structures that rely on domestic and foreign trade demand. The very tenants of Anglo-American capitalism, that of domestic wealth creation reliant upon educational aspiration and the subsequent self-momentum effect which was once the preserve of the US is now that of Asia and beyond.

And this is the dilemma that Wagoner, Mulally & Nardelli now face. The economic miracle and the complex, capital intensive industrial structure that the Big 3 represented in the 20th century is now well under way to being successfully replayed in BRIC regions, even with the unease of their current temporary slow-downs.

America now has the challenge of re-inventing its own PESTEL order to create a new economic platform from which it can map a new value curve to climb and so regenerate national growth and accordant well-being.

And that is why Detroit must be helped, but also put under the auspices of a qualified invigilation to ensure that the assistive funds provided are indeed used to remould the companies as new era entities in new industrial territories, and not simply left fight over the crumbs left on the table in what is now, for the west, essentially for the most part a value-destructive sector. After much academic and consultancy forewarning (from notably the likes of John Wormald and Graham Maxton) the credit-melt-down is perhaps the final wake-up call, and Detroit must heed the tolling of the bell, just as Warren Buffet did.

There has been, and will be, much more 'huffing and puffing' over Detroit, and whilst Peter de Lorenzo makes his points well, he and others must appreciate the industry in global and economic context and recognise the size of the over-riding challenge.