In the wake of the dotcom bubble of 1995-2000, and the real-estate-bubble catastrophe of 2003-2008, economists and policymakers are looking around anxiously, trying to predict the next bubble to burst. In all their casting about, they are quietly ignoring the dead moose lying right there on the coffee table in the middle of the room: China.
Consider the dotcom bubble for a minute. The bubble was caused by a bunch of entrepreneurs who jumped on the make-money-fast-on-the-Internet bandwagon (the ".com" suffix, pronounced "dot-com," became a new word and a label for the whole fiasco), and all the investors who fed them money. Greed fueled the dotcom bubble. Even people who should have known better, smart and educated Wall Street professionals, bought into the boom. Some college professors and very conservative investment advisors warned that both the entrepreneurs and the speculators were ignoring the basic principles of investing, but others said that the dotcom boom had rewritten the rules. I actually heard several "experts" on public radio saying, "This time it's different."
Well, that time, it was no different. Most of the dotcom businesses went bankrupt in a few years. The entrepreneurs and the investors lost everything. The money simply disappeared, along with everything built on that money.
When you get right down to it, the cause of the dotcom bubble was pure and simple greed: people wanted to get rich quick.
The real estate bubble was the same way: Before the bubble began, mortgage lending was governed by strict rules. A potential homebuyer had to have a large enough down payment to indicate a serious intent to keep the property, and a demonstrated ability to make the required monthly payments. Potential lenders did serious evaluations of buyers' ability to pay: the credit appraisal. Millions of homebuyers have experienced the anxious waiting period while their credit appraisal was being completed, wondering what kind of credit risk the lender would assess them at, and what mortgage terms they would be offered as a result.
Suddenly, almost overnight, the lending rules changed. The required down payment dropped from 20 percent, to 10 percent, then five percent, and finally zero percent. No down payment was required to get into a house. At the same time, credit terms were relaxed. There was no longer any need to demonstrate that a buyer could sustain a mortgage payment - not for one month, let alone for 30 years. And finally, an insidious form of mortgage which had been quietly gaining in popularity for 30 years seemed to take over the market. This was the negative-amortization loan, which allowed a buyer to make smaller payments than the minimum required by the traditional formulas, with the accrued interest being added to the principal, so that the buyer owed more and more money as time went on. Some of these negative-amortization loans had a a schedule of gradually increasing payments as the years went on. Some only had a term of three to five years, with a huge "balloon" payment at the end, with the unwritten (but oft-spoken) mutual expectation that the buyer would arrange new and better financing before the loan expired.
Two things happened as a result of this relaxation of the rules. First, people who should never have been buying houses started buying houses. Second, everybody - well, almost everybody - started buying houses bigger than they could afford. Then sellers started realizing that they could get a lot more money for their property than they were expecting, and so they started jacking up the prices of their homes. Home prices had been rising steadily for decades anyway, but suddenly the prices accelerated their upward trend.
Everybody was getting rich. Buyers were getting bigger houses than they could afford. Sellers were making lots of money. Lenders were getting lots of mortgages - meaning that they owned lots of homes. Then the sellers, mostly banks, started bundling the mortgages together (think of the physical metaphor, all of those paper mortgage agreements, stacked up and held together with rubber bands) and selling them to each other as investment instruments. Heck, if all those buyers actually made their payments for 30 years, those mortgages represented a lot of income for the lenders!
(We haven't even talked about China yet. Stay tuned.)
So buyers, sellers, lenders, and stockholders saw the chance to get really rich, really quick, and they jumped on it. Once again, as with the dotcom bubble, people ignored the safe and sensible rules of investing, caught up in the chance to make money off the rapid rise in property values. Builders built, banks lended, flippers flipped, and real estate agents (and their friends, the mortgage brokers) paid cash for fancy new cars and stuff. As before, greed ruled the day.
This entire house of cards was built on a foundation of borrowers - home buyers - who couldn't afford to pay back the money they had borrowed. When these people eventually ran out of money and defaulted on their loans, the lenders exercised the terms of the mortgage, kicked them out of their homes, and took over their property. But foreclosed property doesn't make the banks any money. They try to get rid of it as quickly as they can. But the banks had acquired so many homes that they couldn't sell them all - not quickly, not slowly, and not for anywhere near their appraised value. That's because the home values had been horrendously inflated in the price runup that was the bubble.
Now the banks had the properties, but not the cash flow that the properties were supposed to generate. Without money coming in, the banks couldn't take care of their own financial obligations. So the banks started failing, or at least were in danger of failing. The only way they could generate money in a hurry was by selling some of their investments. And the vast majority of investments were those bundles of mortgages - "mortgage-backed securities," they were called - and since those mortgages were in default, they were worthless pieces of paper. Nobody wanted to buy them.
So the homeowners lost their homes, the banks lost their money, and the investors lost their money. Banks couldn't afford to pay their bills or their employees. All the money that went into the real estate market disappeared and was gone forever. The ripple effects from this disaster led to failures in other, tightly connected industries, such as investment broker Merrill Lynch, insurance company AIG, and automaker General Motors. That's when all the banks, the investment companies, the insurance companies, and the automakers ran crying to the government, saying "we're too big to fail."
In case you haven't figured it out yet, I'll say it again. The entire dotcom bubble and bust was caused by greed. The entire real estate bubble and bust was caused by greed.
And that brings us to China. I speak of China here as one monolithic entity, encompassing its government, its financial institutions, and its industries. Some of you may object if I include Taiwan and Hong Kong in the monolith, but for now that's what I'm doing. I may lump the Chinese people in here as well, because the individuals are what make up the aforementioned institutions.
China is the next big bubble, and when it busts, the results will be a worldwide catastrophe. And as with the dotcom and real estate bubbles, the driving force behind it all is greed.
China has systematically undercut prices for manufactured goods all over the world. Because of the low prices offered by Chinese manufacturers, many American companies have moved all their manufacturing from North America to China. It saves the American companies lots of money, which shows up in their corporate profits. Besides, it lets them sell their goods to American consumers more cheaply, and American consumers like "cheap." Most American consumers prefer "cheap" over "quality," but I don't think we'll get into that here.
As a result, most, if not all, of the American companies who make their goods in China are trapped. For example, all of Apple's iPads and iPhones are made in China. They could not stay in that business segment if they were suddenly forced to make them here. Even if they could set up an assembly line, they couldn't run it without the components - the display, the batteries, and so on - because the components are also made in China.
(There was a great article in Forbes recently, called "Why Amazon Can't Make a Kindle in the USA.")
Much of today's high-tech gadgetry, including the cheapest cellular phone on the market, depends on some exotic minerals known as rare earth elements to operate. Those rare earths used to be mined in Africa, Russia, and North and South America. Several years ago, China started mining them and selling them at drastically reduced prices. The other mines could not compete and shut down, leaving China as the sole source for these rare earths. Recently, China has been talking about jacking up the price or restricting the supply of these minerals. Guess what would happen to Nokia and other (non-Chinese) cellphone manufacturers if rare earths became too expensive to buy, or simply unavailable? That's right!
Recently, I wanted to buy my wife a new kitchen mixer. I went to three department stores here in the western U.S. Every single mixer I looked at was made in China. The venerable domestic brands like Sunbeam, and the classy European brands like, um, Braun (I think) all had "Made in China" stamped on the box somewhere. And they were all made in China because it's cheaper.
Our first vacuum cleaner was a Hoover. It was made in America (or Canada, I think) and it was mostly made of metal. Our second vacuum cleaner was also a Hoover. It was mostly made of plastic, but it was still made in America. Together, those two vacuum cleaners lasted over 30 years. They were sturdy machines, and we used them A LOT. Now we're shopping for our third vacuum cleaner. We looked at the offerings from Hoover. They're made mostly of plastic. They're made in China. They have a terrible reputation for workmanship, reliability, and vacuum-ability. Why should we buy Hoover again? We won't.
Hoover's not the worst, nor is it the cheapest. There are cheaper vacuum cleaners. They don't work very well, either. And guess where every single one of them is made?
It gets worse. Shall we look at automobiles? The concept of a "made in America" automobile, even a manly American pickup truck, is laughable. All of the electronics are made in China, or assembled in the U.S. (or Mexico or another country) from components made in China. The bumpers and fenders may be made in the U.S. (or Mexico or Ohio), but the raw materials for those metal bumpers and plastic fenders were shipped to the U.S. from overseas - mostly from China! Even the fabric or vinyl upholstery for the seats comes from China. The light bulbs! The floor mats! Detroit has outsourced all of it, in an effort to make a buck.
(John Deere, in Iowa, still makes a lot of their own components. But Chinese electronics are starting to make inroads there, even.)
How did the U.S. government finance the bailout of the companies that got caught in the 2008 financial crisis following the bust of the real estate bubble (especially the "too big to fail" companies that should have been allowed to fail, or else cut up into smaller pieces that were no longer "too big to fail")? They sold government-backed securities to other countries. And which country bought the lion's share of those securities? Which country was so flush with cash (or the promise thereof - remember how the real estate bubble worked!) that it could step in and buy billions of dollars of U.S. treasury bonds without flinching? Well, China, of course!
And guess where China got all that money from? From America, of course! They sell us their stuff, they collect our money, and then they buy our country and our future.
But it's all a house of cards, just like the dotcoms and the housing boom. China has looked into their future and they're forecasting massive growth - so massive that they've gone out into the countryside and carved out entire cities from nothing. Street lights, apartment buildings, government buildings and shopping centers have risen out of the pastures and are waiting for people to move into them. These "ghost cities" can be seen on Google Maps, and they're eerily empty. The Chinese are mining coal and burning it at a furious rate, to literally fuel their growth. They are damming rivers and gouging out strip mines to supply their hungry industries with raw materials.
And they are engaging in a centuries-long tradition of imitation and deception. They take products made in the West, try to figure out what makes them work, and then try to come up with a copy that looks the same - right down to the trademarks, the colors and the textures. Some of the patented and trademarked cable that my own employer makes has appeared in counterfeit form in Asia - made in China.
In the ultimate irony, they duplicate not only Apple's computers and handheld products (and remember, the legitimate ones are also made in China), but they sell them in 22 imitation Apple stores. The stores are not affiliated with Apple Computer in any way, but their layout, decor, and even employee uniforms and name badges are exact duplicates of what you will find in real Apple stores. The deception is so complete that some of the store employees think they are really working for Apple Computer.
I have already written about the sham (and the scam) that was the 2008 Beijing Olympics. It was a plastic imitation of the real thing, a shameless ripoff of other people's hard work, enabled by the duplicity of the Chinese government and the gullibility of the rest of the world. In the same way, the duplicity of monolithic China and the willingness of the rest of the world to be led around by the nose (or other body parts) has contributed to the growth of the house of cards that is the Chinese bubble.
Actually, that's not completely accurate. At the core of everything, it is the greed of monolithic China and the greed of the rest of the world that have contributed to the Chinese bubble.
One day, the U.S. government or another government will not be able to make good on the financial instruments that China holds. China will find out that it is holding on to worthless pieces of paper, and that China does not have enough real money to keep operating. With no money to pay its own obligations, power plants and mines will shut down. Trains will stop operating. With no way to get raw materials, factories will shut down and send their workers home. With no jobs and no money to spend, Chinese people will stop buying their own goods. With nothing to ship, ships will stop crossing the ocean, and Americans will no longer be able to buy Hoover vacuum cleaners, Sunbeam mixers, or Apple iPhones. Without the raw materials and components from China, American automakers (and Japanese and German ones, too) will no longer be able to build cars.
Printing presses, computers, traffic lights, tables, chairs, dishes, cutlery, light bulbs, furniture, clothing: all of it will come to a stop until alternative sources can be found or tooled up. Those alternative mines and factories will spring up all over the world, but they won't start producing overnight. They will take years. And the wealth, or commerce, or economic prosperity - the money - that was lost forever will take even more years to replace.
It may take a decade for the bubble to burst. Some people will argue with me and say it will never happen. But it ony took 15 years for the gigantic Japanese economic machine, which was also supposed to take over the world, to come crashing down. It surely did, and the Chinese one will come crashing down just as surely. And when it does, it will take years for the world to recover.
From its own greed.
Showing posts with label Big Three. Show all posts
Showing posts with label Big Three. Show all posts
Friday, September 16, 2011
Thursday, March 25, 2010
Saturn: How General Motors Screwed Up a Good Thing
This posting started out as a request for somebody to write a book with this title. I didn't intend to write a posting about it. I can imagine that Saturn: How General Motors Screwed Up a Good Thing, written by an industry insider, would make the nonfiction bestseller list.
Actually, a more appropriate title might append the word Again to the title, as GM has screwed up several times in the last few decades.
Moreover, GM has screwed up so many times that their mishandling of Saturn Corporation might end up being a single chapter (or three chapters) in a book with a simpler title: How General Motors Screwed Things Up.
General Motors Corporation have accomplished a lot in their corporate history. They are responsible for bringing many automotive innovations to the mass market, for use by the common man. And indeed, they have led the way with innovative features in their more elite market segments, such as the Corvette and the haute-luxury end of their Cadillac line.
But GM have had more than their share of screw-ups, too, one of which was their mismanagement of Saturn.
Saturn Corporation was an innovative way to run a car company, and the Saturn was an innovative product line. After the initial model release in 1985, Saturns attained popularity quickly, because they were perceived as something newer and better than the same old stuff Detroit had been churning out. But GM required Saturn Corporation to sell their models at a loss in order to build market share, so the subsidiary didn't show a profit (did it ever?). They could have jacked the price up to par or to a slim profit, and people would have paid the extra -- the cars were that good. But they didn't.
When it started in 1985, Saturn offered a different kind of car and a different kind of car-buying experience. The public loved the car, the no-haggle, no-pressure showrooms, and the customer-comes-first-and-we-treat-you-like-royalty service departments. As a result, the public bought lots of Saturns - and two bad things happened.
("Bad" depends on your point of view. These things were only bad from the point of view of other GM divisions, which, being much bigger, older, and more heavily invested than Saturn, had the ready ears of the executive suite and the boardroom. You'll see where this is going shortly.)
First, Saturn sales cut deeply into sales of existing GM product lines. That's no surprise, considering the unequivocal junk that Chevrolet, Oldsmobile and Pontiac were turning out in the late 1980s and 1990s.
Second, Saturn employees adopted a "snooty" attitude (GM's word, not mine) towards other GM employees. That's because Saturn employees, being nonunion, had to work hard for their success, and they had a lot of success to show for their hard work.
GM could have (and unequivocally should have) learned a lesson from both of these phenomena. They could have figured out why the public preferred the Saturn SL2 over the Chevy Beretta, for example, and either redesigned the Beretta to match the SL2's quality and features, or killed the Beretta, cut their losses, and consolidated their product line. Likewise, they could have taken a page from Saturn's playbook on no-haggle pricing and real customer service, and transformed GM's showrooms and service departments from a demeaning and distasteful experience into something enjoyable. Instead, they punished Saturn for their success. Rather than raise the rest of the corporation to Saturn's level, they lowered Saturn to the level of the rest of the corporation.
GM closed the dedicated Saturn factory at Spring Hill, Tennessee, and required all Saturn vehicles to be built on the same production lines as other GM cars, by the same people that built the other GM cars. Guess what happened to product quality? Yep: Down the toilet.
Then, rather than allow Saturn designers to design their own cars from scratch, GM imported designs from their European brand, Opel, and rebadged them as Saturns, thereby eliminating the uniqueness of the brand and the designed-in quality that had characterized the earlier models. Believe me, the public noticed the drop in quality, and while sales momentum held for a while based on the brand name, eventually sales dropped because the cars had become average.
(But the GM product line didn't completely regain its lost market share. Any idea who picked up the slack? It was Toyota, a resurgent Honda Motor Corporation, and a newcomer from Korea called Hyundai.)
The upshot of things was that while GM undercapitalized Saturn, they continued pouring money into crap like the Pontiac Aztek (and the entire Pontiac and Oldsmobile product lines) and excesses like the Cadillac Escalade and the Hummer product line.
Then, when the division was stumbling along, half-starved, without a loyal fan base, without direction and without the qualities that made it unique, GM announced that they were getting rid of it because it was no longer profitable. The executives and the board of directors at General Motors were directly responsible for meddling and mismanaging Saturn to death.
Actually, a more appropriate title might append the word Again to the title, as GM has screwed up several times in the last few decades.
Moreover, GM has screwed up so many times that their mishandling of Saturn Corporation might end up being a single chapter (or three chapters) in a book with a simpler title: How General Motors Screwed Things Up.
General Motors Corporation have accomplished a lot in their corporate history. They are responsible for bringing many automotive innovations to the mass market, for use by the common man. And indeed, they have led the way with innovative features in their more elite market segments, such as the Corvette and the haute-luxury end of their Cadillac line.
But GM have had more than their share of screw-ups, too, one of which was their mismanagement of Saturn.
Saturn Corporation was an innovative way to run a car company, and the Saturn was an innovative product line. After the initial model release in 1985, Saturns attained popularity quickly, because they were perceived as something newer and better than the same old stuff Detroit had been churning out. But GM required Saturn Corporation to sell their models at a loss in order to build market share, so the subsidiary didn't show a profit (did it ever?). They could have jacked the price up to par or to a slim profit, and people would have paid the extra -- the cars were that good. But they didn't.
When it started in 1985, Saturn offered a different kind of car and a different kind of car-buying experience. The public loved the car, the no-haggle, no-pressure showrooms, and the customer-comes-first-and-we-treat-you-like-royalty service departments. As a result, the public bought lots of Saturns - and two bad things happened.
("Bad" depends on your point of view. These things were only bad from the point of view of other GM divisions, which, being much bigger, older, and more heavily invested than Saturn, had the ready ears of the executive suite and the boardroom. You'll see where this is going shortly.)
First, Saturn sales cut deeply into sales of existing GM product lines. That's no surprise, considering the unequivocal junk that Chevrolet, Oldsmobile and Pontiac were turning out in the late 1980s and 1990s.
Second, Saturn employees adopted a "snooty" attitude (GM's word, not mine) towards other GM employees. That's because Saturn employees, being nonunion, had to work hard for their success, and they had a lot of success to show for their hard work.
GM could have (and unequivocally should have) learned a lesson from both of these phenomena. They could have figured out why the public preferred the Saturn SL2 over the Chevy Beretta, for example, and either redesigned the Beretta to match the SL2's quality and features, or killed the Beretta, cut their losses, and consolidated their product line. Likewise, they could have taken a page from Saturn's playbook on no-haggle pricing and real customer service, and transformed GM's showrooms and service departments from a demeaning and distasteful experience into something enjoyable. Instead, they punished Saturn for their success. Rather than raise the rest of the corporation to Saturn's level, they lowered Saturn to the level of the rest of the corporation.
GM closed the dedicated Saturn factory at Spring Hill, Tennessee, and required all Saturn vehicles to be built on the same production lines as other GM cars, by the same people that built the other GM cars. Guess what happened to product quality? Yep: Down the toilet.
Then, rather than allow Saturn designers to design their own cars from scratch, GM imported designs from their European brand, Opel, and rebadged them as Saturns, thereby eliminating the uniqueness of the brand and the designed-in quality that had characterized the earlier models. Believe me, the public noticed the drop in quality, and while sales momentum held for a while based on the brand name, eventually sales dropped because the cars had become average.
(But the GM product line didn't completely regain its lost market share. Any idea who picked up the slack? It was Toyota, a resurgent Honda Motor Corporation, and a newcomer from Korea called Hyundai.)
The upshot of things was that while GM undercapitalized Saturn, they continued pouring money into crap like the Pontiac Aztek (and the entire Pontiac and Oldsmobile product lines) and excesses like the Cadillac Escalade and the Hummer product line.
Then, when the division was stumbling along, half-starved, without a loyal fan base, without direction and without the qualities that made it unique, GM announced that they were getting rid of it because it was no longer profitable. The executives and the board of directors at General Motors were directly responsible for meddling and mismanaging Saturn to death.
Thursday, December 11, 2008
American automakers think we're stupid
Okay, the American economy is in meltdown. After 12 months, the experts finally decided to call it a "recession." Maybe this time next year they will have decided that it's not a recession, it's a depression. Those of us who are out of work must be smarter than those experts, because we already know it.
Credit is hard to get right now, because most of it is tied up in those "toxic securities" -- secret code for "bad mortgages," which the lenders and investors might as well write off and forget about, and start over.
The domestic automobile industry, at least that overweight segment of it known as The Big Three, has been in Washington D.C. twice begging for money to "bail them out," because they're too incompetent to bail themselves out of the mess they created. For years now they've been ignoring the signs of the times, the writing on the wall, the metaphor of your choice for the consumers who abandoned the Big Three in favor of Toyota, Honda and other Japanese (and Korean!) brands.
Detroit ceded the market for medium, small and subcompact sedans to Japan without a fight, choosing instead to concentrate on "luxury" cars, muscle cars, SUVs and manly pickup trucks. When gasoline jumped to $4 per gallon this summer and Americans suddenly stopped buying all those thirsty Detroit products, the Big Three's collective income fell far below their outgo, and they started losing money fast.
What Detroit should have done is instantly change their product mix and convert factories from making trucks and SUVs to making the smaller, leaner cars that Americans wanted. They should have noticed all the Priuses and Civic hybrids on the road and rushed to get their own hybrids into production. But they didn't have any smaller, leaner cars, and they didn't have any domestic hybrid options.
Actually, that's not strictly true. They didn't have any smaller, leaner cars that Americans wanted. What they offered for smaller cars was ugly and poorly put together. What they offered for hybrids got worse gas mileage than the Japanese non-hybrid alternatives, and again, they were poorly put together.
Our senators and representatives in Congress, bless 'em, were persuaded that giving Detroit zero dollars, while it would have been a bold and courageous move, might not be the right thing to do, but they were able to see past the Big Three CEOs' self-serving arguments and pare down their request to something more, um, realistic. I'd still like to see Congress try something bold and courageous for a change. But at least they got it down from over $30 billion to under $15 billion before the proposal got snagged on a tree branch.
In the meantime, while the car companies are crying to the government about all the money they're losing, Dodge aired a TV commercial this evening that makes one slap one's forehead and cry, "What in the world are you thinking?"
This was an advertisement for what Dodge called a "luxury truck": a dual-cab monstrosity with leather seats, built-in WiFi, a backup camera, built-in toolboxes, a really thirsty engine and a suspension that would do the Army proud.
Hey! Dodge! Which Americans are you trying to sell these air haulers to? Haven't you been listening to the majority of the American public? We don't want luxury trucks! We want vehicles that take less gasoline (or diesel), or no gasoline (or diesel) at all! These ain't them!
Dodge wants to push this "luxury truck" for one reason only: because of the profit margin. They make more money per sale on "luxury trucks" than on more sensible vehicles. I guess they don't expect people who need car loans to buy these things, do they? Because, according to the news and the CEOs themselves, car loans are hard to come by right now, so the buyers of these beasts will need cash.
The commercial, naturally, emphasizes the manliness of the truck, and appeals to the buyer's need to feel manly. The commercial goes over the top in an attempt to get the buyer's insecurity (or need to compensate for perceived deficiencies elsewhere) to override his caution and the frugal attitude so vital in this economic climate.
This truck is the reason why the majority of Americans don't want to give the Big Three one red cent of their money. It's symbolic of everything that's wrong with Detroit right now.
The first thing the Car Czar should do, once he's appointed and the Big Three get their bailout money, is fire the sorry idiots at Chrysler who approved the design and construction of the "luxury truck," and the sorry idiots who approved this advertising campaign, and the sorry idiots who signed the contract with the advertising company, and the advertising company itself.
After that, it wouldn't be a bad idea to go after the associated idiots responsible for the Cadillac Escalade, the Ford Excursion and supertrucks, and the Hummer product family.
Credit is hard to get right now, because most of it is tied up in those "toxic securities" -- secret code for "bad mortgages," which the lenders and investors might as well write off and forget about, and start over.
The domestic automobile industry, at least that overweight segment of it known as The Big Three, has been in Washington D.C. twice begging for money to "bail them out," because they're too incompetent to bail themselves out of the mess they created. For years now they've been ignoring the signs of the times, the writing on the wall, the metaphor of your choice for the consumers who abandoned the Big Three in favor of Toyota, Honda and other Japanese (and Korean!) brands.
Detroit ceded the market for medium, small and subcompact sedans to Japan without a fight, choosing instead to concentrate on "luxury" cars, muscle cars, SUVs and manly pickup trucks. When gasoline jumped to $4 per gallon this summer and Americans suddenly stopped buying all those thirsty Detroit products, the Big Three's collective income fell far below their outgo, and they started losing money fast.
What Detroit should have done is instantly change their product mix and convert factories from making trucks and SUVs to making the smaller, leaner cars that Americans wanted. They should have noticed all the Priuses and Civic hybrids on the road and rushed to get their own hybrids into production. But they didn't have any smaller, leaner cars, and they didn't have any domestic hybrid options.
Actually, that's not strictly true. They didn't have any smaller, leaner cars that Americans wanted. What they offered for smaller cars was ugly and poorly put together. What they offered for hybrids got worse gas mileage than the Japanese non-hybrid alternatives, and again, they were poorly put together.
Our senators and representatives in Congress, bless 'em, were persuaded that giving Detroit zero dollars, while it would have been a bold and courageous move, might not be the right thing to do, but they were able to see past the Big Three CEOs' self-serving arguments and pare down their request to something more, um, realistic. I'd still like to see Congress try something bold and courageous for a change. But at least they got it down from over $30 billion to under $15 billion before the proposal got snagged on a tree branch.
In the meantime, while the car companies are crying to the government about all the money they're losing, Dodge aired a TV commercial this evening that makes one slap one's forehead and cry, "What in the world are you thinking?"
This was an advertisement for what Dodge called a "luxury truck": a dual-cab monstrosity with leather seats, built-in WiFi, a backup camera, built-in toolboxes, a really thirsty engine and a suspension that would do the Army proud.
Hey! Dodge! Which Americans are you trying to sell these air haulers to? Haven't you been listening to the majority of the American public? We don't want luxury trucks! We want vehicles that take less gasoline (or diesel), or no gasoline (or diesel) at all! These ain't them!
Dodge wants to push this "luxury truck" for one reason only: because of the profit margin. They make more money per sale on "luxury trucks" than on more sensible vehicles. I guess they don't expect people who need car loans to buy these things, do they? Because, according to the news and the CEOs themselves, car loans are hard to come by right now, so the buyers of these beasts will need cash.
The commercial, naturally, emphasizes the manliness of the truck, and appeals to the buyer's need to feel manly. The commercial goes over the top in an attempt to get the buyer's insecurity (or need to compensate for perceived deficiencies elsewhere) to override his caution and the frugal attitude so vital in this economic climate.
This truck is the reason why the majority of Americans don't want to give the Big Three one red cent of their money. It's symbolic of everything that's wrong with Detroit right now.
The first thing the Car Czar should do, once he's appointed and the Big Three get their bailout money, is fire the sorry idiots at Chrysler who approved the design and construction of the "luxury truck," and the sorry idiots who approved this advertising campaign, and the sorry idiots who signed the contract with the advertising company, and the advertising company itself.
After that, it wouldn't be a bad idea to go after the associated idiots responsible for the Cadillac Escalade, the Ford Excursion and supertrucks, and the Hummer product family.
Saturday, November 22, 2008
Bailing out the Big Three automakers
You know, I don't think it's too much to ask that a car company build the kind of car we want to buy, instead of the kind of car they want to sell us. An AP wire service article in today's paper started with this paragraph: "Ford Motor Co.'s F-150 pickup is the top-selling vehicle in the United States this year, with more than 432,000 purchased through October. But when people stop buying the F-150, it's not just Ford and its workers that suffer." The article goes on to list all the suppliers whose products go into the Ford F-150 pickup truck, who will have to lay off workers and maybe declare bankruptcy if you don't buy a Ford F-150.
If you reread the article, you'll see that it's a thinly veiled attempt to make you feel guilty about not buying a Ford F-150 pickup truck, "the top-selling vehicle in the United States this year." Now there's a new strategy from the automakers: guilt as a selling tactic. Here's what they're really saying: "If you don't buy our truck, we'll go out of business before Christmas, and so will our suppliers, and it will all be your fault."
Do you feel guilty about not buying an American-made car? Let me tell you: earlier this year, we went shopping for a new car for my daughter. (For the record, we ended up buying American. We bought a used Saturn, built back in the days when Saturn still built high-quality vehicles.) We concentrated our search on high-quality, low-maintenance, well-built, compact models. That meant that we concentrated mostly on selected Honda, Toyota, Hyundai and Saturn models.
At one dealership, the salesman talked us into taking a non-Saturn, American model for a test drive. Okay, it was used, but it was less than a year old. The dashboard was cracked in several places. The seats were uncomfortable. Several of the little plastic screw covers were missing. The brakes were mushy. The steering was imprecise and unresponsive. The car was noisy, even at low speeds. The fuel economy on this model was much worse than on its Japanese and Korean competitors. And the Consumer Reports maintenance rating on this model was Very Bad.
I think that he was being a typical used car salesman, simply trying to push a lemon off his lot. But the experience reinforced our opinions about American cars. It's the latest in a long line of experiences that make me not feel guilty about not buying American.
For over 20 years, American automakers have ignored all of their former customers who have abandoned American cars for Japanese and German cars. If they had been wise and just a teensy bit humble, they could have asked us why we were buying Accords and Avalons instead of Aspires and Aspens, Camrys and Civics instead of Cavaliers, and then they could have redirected their engineering efforts to create cars that competed directly, point for point, with those Japanese models. Instead, they chose three different responses:
1) Ignoring or belittling the foreign car builders and their customers.
2) Blindly insisting that the Aspires and Cavaliers were competitive, continuing to build them with doors so heavy that they sagged after a couple of years, interior trim that rattled at high speed from Day One, and suspensions that transmitted all high-speed road noise right into the center of the occupants' skulls -- not to mention mechanical assemblies with known design defects and a propensity to break down frequently and in expensive ways.
3) Changing the focus by convincing the American consumer (and doing a frighteningly good job of it) that he really didn't want a small car, what he wanted was a large SUV or pickup truck, and the larger the better.
This is what they've been doing for 20 years. Hey, the writing was on the wall 20 -- no, 27 years ago. The Honda Accord started taking over its market segment in 1981. The Toyota Camry joined it a couple of years later, and Detroit followed the three strategies I described above in responding to the challenge posed by these two Japanese success stories.
It's gotten worse since then. The Big Three had two radical successes in the intervening years, but in typical Detroit style they fumbled both successes.
One was Geo, a joint operation between GM and Toyota. At one point, the Geo Prizm, Chevy Nova and Toyota Corolla were all the same car, with minor styling and badging differences. They were good cars. We bought a 1990 Geo Prizm when it was 9 years old, and it's still running today. I think it's been in the shop twice in all those years. You can't buy a new Geo anymore, and the Chevy Nova has been discontinued.
The other was Saturn. Saturn started as an autonomous division of GM, with a mandate to do things their own way, and to do them in a new and different way. The early Saturn vehicles had radical (but appealing) styling, and their construction quality was top-notch. Their cars got consistently high ratings from Consumer Reports. At one time our extended famly owned four or five Saturns. Then GM killed the goose that laid the golden egg. They took away the division's autonomy, put in too many old-time GMers to run things the old GM way, and destroyed the mark's reputation for inventive styling and for quality. Today, Consumer Reports rates Saturn quality as just as bad as any other American car.
Similar stories could be told about Ford and Chrysler, who each had a turn at the top of the heap and blew it, Chrysler with their minivans, and Ford with, um, their minivans! And the T-bird and Mustang revivals. (In 2007, Toyota sold more Priuses than Ford sold Mustangs. Ford didn't take the hint.)
In the past five years, all auto makers have realized the awesome profit margins that could be realized by building and selling pickup trucks and SUVs (and their bastard offspring, crossover SUVs). SUVs got bigger and bigger, and more expensive, culminating in the Hummer H2, Cadillac Escalade, and Ford Excursion. I'm still trying to figure out how they fooled the American public into rushing to buy these gas-guzzling monstrosities, but they did. Their marketing campaigns were basically, "Forget the small cars. Buy one of these instead." Those marketing campaigns were so successful that the Big Three turned off the small-car spigot. They converted engineering groups, assembly lines and entire factories from small cars to trucks and SUVs. In parts of Colorado, 5 out of 6 vehicles on the road were pickup trucks or SUVs.
The Big Three marketing departments expressed their contempt for the urban truck/SUV owner in the term they used to describe these vehicles. While comedians called them "urban assault vehicles," Detroit called them "air haulers."
A lot of people still wanted to buy the small cars, though. Too bad Detroit didn't have any to sell. I walked through local Chevy, Ford and Chrysler showrooms several times in the last few years, inquiring about small cars. The showrooms and the front rows of the lots were full of "air haulers." If you didn't want an "air hauler," then the second and third rows held Camaros, Mustangs, Sebrings and other macho muscle-car wannabes. The small cars, the only things that could answer to the Accord, Civic, Camry, or Corolla, were way in the back. The dealer had only invested in five or six of them, and since the profit margin on them was so much lower, he didn't push them at all.
Okay, back to this year. This summer, crude oil prices skyrocketed, and gasoline prices jumped accordingly. Suddenly it was expensive to drive an "air hauler," and they magically started disappearing from the roads. Consumers were selling their SUVs, or at least putting them in the garage, and buying economical cars to replace them. And what cars did they have to choose from? That's right! The Japanese ones! Detroit had ignored that market segment for so long that the American consumers in that market segment were now ignoring Detroit.
(I don't really mean to ignore European models here. It's just that the European cars are not even a force in the market anymore. In 2007, Toyota not only sold more Priuses in the U.S. than Ford sold Mustangs; Toyota sold more Priuses in the U.S. than Volkswagen sold cars, period.)
Some of you may respond by giving me the model names of Detroit's contributions to the small-car market. And it's true, I've even seen some of them on the road. But they're more of an oddity, an American exception bobbing up and down in the sea of Japan. And once again, go driving past a Big Three dealership, and see how many of those small cars are in the front rows on the lot or featured in the showroom -- that's right, not very many.
Finally, I need to point out that you don't need to fall for the "buy American" guilt tactic, either. "Buy American" doesn't mean "Buy Detroit." All of the Hondas, and most of the Toyotas, on the road are really American cars -- that is, they're made in Ohio, Kentucky, California, or Tennessee, and many of the parts inside them are made in the U.S.A., in the same factories that (used to) make parts for Detroit. That means that when you buy a Honda Accord, you're supporting that parts supplier after all, the one who used to make parts for the Ford F-150.
The first comment to this posting will be a letter I sent to my incumbent and newly-elected Senators and Representatives, and to the Speaker of the House of Representatives.
If you reread the article, you'll see that it's a thinly veiled attempt to make you feel guilty about not buying a Ford F-150 pickup truck, "the top-selling vehicle in the United States this year." Now there's a new strategy from the automakers: guilt as a selling tactic. Here's what they're really saying: "If you don't buy our truck, we'll go out of business before Christmas, and so will our suppliers, and it will all be your fault."
Do you feel guilty about not buying an American-made car? Let me tell you: earlier this year, we went shopping for a new car for my daughter. (For the record, we ended up buying American. We bought a used Saturn, built back in the days when Saturn still built high-quality vehicles.) We concentrated our search on high-quality, low-maintenance, well-built, compact models. That meant that we concentrated mostly on selected Honda, Toyota, Hyundai and Saturn models.
At one dealership, the salesman talked us into taking a non-Saturn, American model for a test drive. Okay, it was used, but it was less than a year old. The dashboard was cracked in several places. The seats were uncomfortable. Several of the little plastic screw covers were missing. The brakes were mushy. The steering was imprecise and unresponsive. The car was noisy, even at low speeds. The fuel economy on this model was much worse than on its Japanese and Korean competitors. And the Consumer Reports maintenance rating on this model was Very Bad.
I think that he was being a typical used car salesman, simply trying to push a lemon off his lot. But the experience reinforced our opinions about American cars. It's the latest in a long line of experiences that make me not feel guilty about not buying American.
For over 20 years, American automakers have ignored all of their former customers who have abandoned American cars for Japanese and German cars. If they had been wise and just a teensy bit humble, they could have asked us why we were buying Accords and Avalons instead of Aspires and Aspens, Camrys and Civics instead of Cavaliers, and then they could have redirected their engineering efforts to create cars that competed directly, point for point, with those Japanese models. Instead, they chose three different responses:
1) Ignoring or belittling the foreign car builders and their customers.
2) Blindly insisting that the Aspires and Cavaliers were competitive, continuing to build them with doors so heavy that they sagged after a couple of years, interior trim that rattled at high speed from Day One, and suspensions that transmitted all high-speed road noise right into the center of the occupants' skulls -- not to mention mechanical assemblies with known design defects and a propensity to break down frequently and in expensive ways.
3) Changing the focus by convincing the American consumer (and doing a frighteningly good job of it) that he really didn't want a small car, what he wanted was a large SUV or pickup truck, and the larger the better.
This is what they've been doing for 20 years. Hey, the writing was on the wall 20 -- no, 27 years ago. The Honda Accord started taking over its market segment in 1981. The Toyota Camry joined it a couple of years later, and Detroit followed the three strategies I described above in responding to the challenge posed by these two Japanese success stories.
It's gotten worse since then. The Big Three had two radical successes in the intervening years, but in typical Detroit style they fumbled both successes.
One was Geo, a joint operation between GM and Toyota. At one point, the Geo Prizm, Chevy Nova and Toyota Corolla were all the same car, with minor styling and badging differences. They were good cars. We bought a 1990 Geo Prizm when it was 9 years old, and it's still running today. I think it's been in the shop twice in all those years. You can't buy a new Geo anymore, and the Chevy Nova has been discontinued.
The other was Saturn. Saturn started as an autonomous division of GM, with a mandate to do things their own way, and to do them in a new and different way. The early Saturn vehicles had radical (but appealing) styling, and their construction quality was top-notch. Their cars got consistently high ratings from Consumer Reports. At one time our extended famly owned four or five Saturns. Then GM killed the goose that laid the golden egg. They took away the division's autonomy, put in too many old-time GMers to run things the old GM way, and destroyed the mark's reputation for inventive styling and for quality. Today, Consumer Reports rates Saturn quality as just as bad as any other American car.
Similar stories could be told about Ford and Chrysler, who each had a turn at the top of the heap and blew it, Chrysler with their minivans, and Ford with, um, their minivans! And the T-bird and Mustang revivals. (In 2007, Toyota sold more Priuses than Ford sold Mustangs. Ford didn't take the hint.)
In the past five years, all auto makers have realized the awesome profit margins that could be realized by building and selling pickup trucks and SUVs (and their bastard offspring, crossover SUVs). SUVs got bigger and bigger, and more expensive, culminating in the Hummer H2, Cadillac Escalade, and Ford Excursion. I'm still trying to figure out how they fooled the American public into rushing to buy these gas-guzzling monstrosities, but they did. Their marketing campaigns were basically, "Forget the small cars. Buy one of these instead." Those marketing campaigns were so successful that the Big Three turned off the small-car spigot. They converted engineering groups, assembly lines and entire factories from small cars to trucks and SUVs. In parts of Colorado, 5 out of 6 vehicles on the road were pickup trucks or SUVs.
The Big Three marketing departments expressed their contempt for the urban truck/SUV owner in the term they used to describe these vehicles. While comedians called them "urban assault vehicles," Detroit called them "air haulers."
A lot of people still wanted to buy the small cars, though. Too bad Detroit didn't have any to sell. I walked through local Chevy, Ford and Chrysler showrooms several times in the last few years, inquiring about small cars. The showrooms and the front rows of the lots were full of "air haulers." If you didn't want an "air hauler," then the second and third rows held Camaros, Mustangs, Sebrings and other macho muscle-car wannabes. The small cars, the only things that could answer to the Accord, Civic, Camry, or Corolla, were way in the back. The dealer had only invested in five or six of them, and since the profit margin on them was so much lower, he didn't push them at all.
Okay, back to this year. This summer, crude oil prices skyrocketed, and gasoline prices jumped accordingly. Suddenly it was expensive to drive an "air hauler," and they magically started disappearing from the roads. Consumers were selling their SUVs, or at least putting them in the garage, and buying economical cars to replace them. And what cars did they have to choose from? That's right! The Japanese ones! Detroit had ignored that market segment for so long that the American consumers in that market segment were now ignoring Detroit.
(I don't really mean to ignore European models here. It's just that the European cars are not even a force in the market anymore. In 2007, Toyota not only sold more Priuses in the U.S. than Ford sold Mustangs; Toyota sold more Priuses in the U.S. than Volkswagen sold cars, period.)
Some of you may respond by giving me the model names of Detroit's contributions to the small-car market. And it's true, I've even seen some of them on the road. But they're more of an oddity, an American exception bobbing up and down in the sea of Japan. And once again, go driving past a Big Three dealership, and see how many of those small cars are in the front rows on the lot or featured in the showroom -- that's right, not very many.
Finally, I need to point out that you don't need to fall for the "buy American" guilt tactic, either. "Buy American" doesn't mean "Buy Detroit." All of the Hondas, and most of the Toyotas, on the road are really American cars -- that is, they're made in Ohio, Kentucky, California, or Tennessee, and many of the parts inside them are made in the U.S.A., in the same factories that (used to) make parts for Detroit. That means that when you buy a Honda Accord, you're supporting that parts supplier after all, the one who used to make parts for the Ford F-150.
The first comment to this posting will be a letter I sent to my incumbent and newly-elected Senators and Representatives, and to the Speaker of the House of Representatives.
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