Editorials

We encourage our readers to submit relevant articles of interest to be published on this web site. Students, members, and companies are invited to take advantage of this opportunity! Please send your editorial to: Dick Forrest, CPIM dforrest@charter.net

Ira Smolowitz, Ph.D. Professor of Finance and Dean, Bureau of Business Research and Program Development at the American International College, Springfield, MA.

Some of Ira's past articles of interest:

• A View of Education From Both Sides: An Assessment of the American Education System
• Ramifications of the 24/7 Economy
• Work-place Gossip: A Reassessment
• The Disappearance of Courtesy in America: Implications for Business
• The Outlook for American Competitiveness
• Consumer Marketing: A Flawed Strategy
• A Healthy Workforce: The Driver of Corporate Financial Performance
• The Use and Misuse of Forecasts
• Decline in Ethics: Decline in National Competitiveness
• Promoting Prudent Corporate Growth
• The Dynamic of Successful Marketing
• The Monty Hall Paradox: Lessons for Management
• Improving American Competitiveness
• Get to the Root Cause of Factory Failure: Ask the Five Ways
• The Halo Effect: Proceed with Caution
• Improving American Competitiveness
• The Conflict Between Symbolism and Substance
• Virtual Teams: Identifying The Benefits and Problems
• Assessing Potential Management Talent
• Identifying and Avoiding a Common Decision Trap
• Pricing Decisions: Valuable Lessons
• Circuit City: A Flawed Cost-Saving Idea
• Sound Strategic Planning: Avoid Exclusionary Thinking
• The Conflict Between Symbolism and Substance
• Creating a Meaningful Mission Statement - Mission Impossible?

A Diagnosis of the U.S. Automobile Industry

By Ira Smolowitz, Ph.D.

Shares of General Motors closed on Wednesday, July 2, 2008, at $9.98. “A session low of $9.96 was their lowest price since $9.92 on September 13, 1954, according to the Center for Research in Security Prices at the University of Chicago. The price is adjusted for splits and other changes.” ¹

“GM on Friday reported a $15.5 billion second-quarter loss, the third-worst quarterly performance in its nearly 100-year history. Through the first half of the year it used up more than $7 billion in cash, including $3.6 billion from April through June.” ²

Wharton management professor John Paul MacDuffie has an insightful observation concerning the cause of Detroit’s current problems. He states:

When gas prices spiked in 1980, the U.S. was making very big, gas-guzzling vehicles. So they were very vulnerable to competition from the Japanese and European manufacturers who were used to selling [fuel-efficient cars] in a market where gas prices were much higher. So you would think the U.S. automakers, having lived through that experience once, might be guarded about letting that happen again.

One reason they might have dropped their guard was the irresistible profit margin in light trucks. “The trucks and SUVs had fat profit margins. Even if [the automakers] saw it coming, it would have been hard to shift resources to build more hybrids. The U.S. auto industry has been struggling with a lot of problems for a long time, “ MacDuffie notes. “They felt that they could not move away from the SUVs and pickups because they needed the profits from those products to cope with the other difficulties they were having…Labor and benefits costs were one of the largest problems.” Those costs also meant that Detroit “was slow to make their factories flexible,” which in turn made it more difficult for them to shift quickly from one product to another, adds MacDuffie. So, when U.S. manufacturers decided to reduce inventories of, say pickup trucks, they generally close one or more of the factories that make them. In their European factories, Ford and GM both make fuel-efficient cars that are popular in that market. But the companies have said it would be impractical to ship those cars to the U.S. because of weakness of the dollar relative to the Euro. ³

In addition to bringing the wrong product to the market – Detroit, in my opinion, has to address an equally critical problem – improving its production efficiency. Consider the following flexible production parameters employed by Honda:

Shifting Between Auto Types

Within minutes, Honda can shift between different vehicles such as the Ridgeline pickup and the Civic compact.

Welding With Smart Robots

Honda uses 200-plus robots in a typical plant welding shop. With a flick of a switch, an operator can reprogram the robots to shift from one vehicle type to another.

Organizing the Assembly Line

Through training, Honda’s workers can handle similar elements for different vehicles to keep the line running smoothly. For example, employers learn to install the wheels on a Civic and CRV.

Keeping Suppliers Close By

Over half of Honda’s North American suppliers are based in the Midwest, where most of the company’s production takes place.⁴

Question: Is GM learning from it’s mistakes?
Answer: Apparently not.

Consider an observation offered by the business columnist Holman W. Jenkins Jr. concerning GM’s race to launch an electric car, the Chevy Volt:

GM’s leaders are not nuts, and yet to pour hundreds of millions into a race to launch an electric car, the Chevy Volt, guaranteed to lose money on every unit sold, begins to seem a peculiar strategy for a company in dire liquidity straits.

With each hectic advance in the development process, the expected sticker price to consumers has gone up. Reportedly, off-the-shelf electrical fixtures, such as headlights and taillights, won’t suffice because they draw too much power. At last leakage, GM is saying now the Volt may need a sticker price of $45,000.

At best, the Volt will be an affluent family’s third car. It will have to be plugged in for six hours a day – i.e., it will be a car for a suburbanite with a sizeable garage wired for power. It won’t be a car for a city dweller who parks on the street or in a public lot. It will travel 40 miles on a six-hour charge. After that, a small gas motor will kick in to recharge the battery while you drive. Some reports claim the Volt will get 50 mpg in this mode, but that’s hallucinatory. If using a gasoline engine to power an electric motor were so efficient, the streets would be full of such vehicles. (Our guess: The car will be lucky to get 15 mpg under gasoline power).⁵

To succeed Detroit must: (a) be flexible and anticipate the changes in customer orientation; (b) offer related products that are manufactured on a competitive, "cost-effective" basis.

References

1. USA Today – July 3, 2008, p. 4B.

2. Krisher, Tom and Durbin Dee-Ann “$15.5 billion quarterly loss is GM’s 3 rd worst” The Charlotte Observer August 3, 2008, p. 3D.

3. “Behind the Curve: Have U.S. Automakers Built the Wrong Cars at the Wrong Time –Again?” Published July 9, 2008, in Knowledge at Wharton downloaded 7/22/2008, p. 2.

4. Vlasic, Bill and Bunkley, Nick, “The Struggles of Detroit Ensnare Its Workers” The New York Times, July 3, 2008, p. C4.

5. Jenkins, Jr. Holman W. “What Is GM Thinking” The Wall Street Journal, July 2, 2008, p. A11.

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Articles printed with the permission of Dr. Ira Smolowitz, Professor of Finance and Dean, Bureau of Business Research and Program Development at American International College, Springfield, MA.