Sunday, November 9, 2008

American Auto Industry

Edited this post to add more content at the bottom.
Reading about these dramatic headlines, GM reports $2.5B 3Q loss, says it's running out of cash - San Jose Mercury News, , GM, Ford Post Losses as Liquidity Worsens -, GM: Huge loss leaves it almost out of cash - Nov. 7, 2008, and several more, it struck me that I do not really know of any good, comprehensive, and well written books on the American auto industry. There are several books on niche topics I am sure, like on the American fascination with muscle cars, or the cultural impact of the car, or even lots of books on the personalities that shaped the auto industry, especially Henry Ford. Then there are scores of books on the Toyota way, of the Japanese way of building cars, of incorporating feedback from everyone on the shop floor, and a miasma of books detailing management fads. But what I am looking for is more an analysis on when and where the American auto industry started to go wrong. I remember having a conversation with a colleague in Milwaukee in 1998. We were talking about Japanese and German cars, and how my American friend was stating that the Japanese just did not know how to build trucks, or that the minivan had been invented by the American industry, and that there would always be innovations that would happen that would keep the industry ahead of the imports. And my response was, that the American industry had retreated from one segment after another, and what was to prevent the Japanese or others from encroaching into more and more segments till there was nowhere left to hide. The Japanese started with small cars, the hatchbacks, and became good at making them. Detroit - GM, Ford, Chrysler - left that segment since it was too low margin, not profitable enough, and Honda and Toyota and Datsun were free to make these toy cars anyway. Every American would anyway buy a car made by Detroit eventually when they grew up. Then the Japanese entered the sedan market, till they were good at making these cars. Then the minivans (Odyssey, Sienna), the SUVs (Lexus RX, RAV4, Passport, CRV, etc...), the luxury cars (Lexus, Infinity, Acura), the trucks - till imports were everywhere, and beating Detroit on almost every parameter that counted: resale value, quality, reliability, comfort, drive quality, safety.

What is also evident, or at least should be, is that Detroit could not have NOT seen this coming. To be sure, you read about Saturn and GM's attempt to redefine the market in terms of how autos were sold. That was successful, for some time, but never on a scale that could make a tangible difference, nor successful enough to attract more followers. Issues of quality are easy enough to spot, and one could argue that quality is a matter of process and discipline. Quality is not about technology - almost everyone has access to the same technology. It is the processes that define how you go about quality, and with how much discipline that determines who builds the better car. Yet Detroit continued to lag behind imports on initial build quality metrics.

When it came to attacking international markets, it is illustrative to look at the Indian market. When the Indian market was opened up, while the Koreans came to India with new models, and with cars built for the Indian market, which were small, fuel efficient, Detroit chose to come with large, outdated models. The result is that Detroit has a minuscule share of the market, with no realistic expectations of any improvement there.

Even on designs, Detroit cars were seen as sometimes downright ugly, as with some Pontiac models, or just not good looking, as with the Ford Taurus that came out in 1995-96. They were either too huge, or simply not aesthetic looking. Design is of course a very subjective matter, but German designs were seen as consistently better (the Audi A4 for example), the Japanese imports as boring but never ugly.

Even when Detroit was losing market share, consistently, year after year, to imports, analysts and the industry was incredibly sanguine about it, looking at the financing arms of these companies that were hugely profitable on the back of the huge interest in leasing among consumers.

Anyway - looking for books on the American auto industry, that in particular looks at the last thirty odd years, leading upto the death spiral that it seems to be struggling with in 2008.

Search for books on the American automobile industry on

Adding a couple of more thoughts after publishing this post.
Firstly, also consider what Toyota did to compete even better with Detroit. They opened plants in the US. They spent hundreds of millions of dollars, even billions, to build plants in the US. They trained American workers to work in these plants. States were eager to court Toyota because these plants represented an investment as well as jobs for hundreds of manufacturing jobs. These were blue collar jobs at a time when manufacturing had been on the wane for years and decades in the US, the shift towards a services oriented economy, outsourcing, and the move towards lower cost countries had laid low the manufacturing sector in the US. The point of this point is that Toyota was showing, and even proving that it was possible to build cars, in the US, with US workers, that were better than what Detroit had been able to come up with. Toyota also had other considerations to be sure; making a point to the Americans was not what they had at the top of their minds for sure. To hedge against and to protect against a strengthening yen (an expensive yen meant that cars exported to the US would be costlier, and therefore less competitive), and to help ward off the political fallout. Toyota creating jobs in the US would always make good copy in advertisements, which it did.

Secondly, consider the issue of fuel efficiency - Detroit had an attitude towards fuel efficiency that basically equated it with a lack of masculinity, of acting like a sissy if you even talked about fuel efficiency. Yes - oil in 1998 was close to $10 a barrel, and it never looked like it would touch even $20, let alone $140, as it did this summer in 2008. So you had Ford come out with an SUV named Excursion in 1999, which was much, much bigger than the Ford Expedition, which in turn was much bigger than the Ford Explorer, which itself was much bigger than any car you would reasonably expect to need. This behemoth weighed more than 8500 pounds, and even though Ford did not have to specify fuel economy for the monster, it gave no more than 10 miles to a gallon - about 4kms to a liter. When gas prices started to rise, well, guess what - these cars were simply too costly to run. Even with thousands of dollars in rebates, Ford just could not get them moving. Production finally stopped in 2005. The same story was to be repeated when Toyota and Honda started to work on making hybrid and electric cars; Detroit's response was one of denial, ignorance, arrogance. Till oil hit $100 a barrel, and then $110, $120, and more. Even though oil is today back to $60, people recognize that it is more because of the slowing economy and the global financial crisis. Once the US and world economy picks up, so will demand, and countries like India and China, ever hungry for oil to fuel their industries and factories, will likely push prices of oil to near $200. At that price, one can well imagine that most of the world's cars will be uneconomical.

Thirdly, it has been documented, but not received as much publicity as one would have liked. The US auto industry paid local governments to dismantle city rail transport networks so that people would have no choice but to buy cars. It worked - there is more than one car per person, man, woman, and child, in the US today. In other words, there are more cars than people in the country.

A book that covers all these topics and more with authority, depth, and intelligence, would be greatly useful.