Another Slip Down the Slope

So now we have the Federal Government about to give GM more money, in exchange for which they apparently want CEO Rick Waggoner's head. Clearly GM (and US automakers generally) has made a lot of mistakes, foremost among which was repeatedly caving into the unions over the years and thus saddling themselves with mountains of "legacy" debt. To me this, along with the industry's historic focus on quarterly profits (and they're related), is the problem that underlies all. Sure, you can cite non-competitive cars, and that was certainly a valid criticism in the late 1970's thru the late 1980's or so, when they had the ability (ie, money) to address it, but were too fat, dumb, and happy to do anything about it. But not so much now. That's a covert photo of the post-bailout Cadillac above.


To counter the idea that sales are hurt by the prospect of GM or Chrysler going out of business and not honoring their warranties, Obama has promised that the Federal Government will stand behind them. I have a question: who is going to perform the repair work? If GM and Chrysler went under, does anyone think their dealers are still going to be just sitting there waiting for the cars to break? They'll be gone. At the very least, we're going to have another massive government bureaucracy (The Bureau of Automotive Repair?) to reimburse repair shops for all this warranty work. And most independent repair shops work on older cars; they don't have the equipment necessary to work on current ones. Ask your doctor how he likes reimbursement by the Feds for Medicare patients. Typically, more time is spent on paperwork than on the patient.


Now, I know this is Obama happy talk, hoping that it will alleviate fears and help sales, thus avoiding the whole issue. I sure hope it works, because it doesn't stand up to even the most elemental scrutiny.


But here we go with another couple of cannons on the Vasa: each cannon seems logical at the time, but the total of them sinks the ship (see "A Brief History of Panic" on this Blog). The first cannon is the Feds giving (loaning?) GM money to keep it afloat, to avoid the admittedly dire consequences of its failure. Now that we've poured all that money into GM and are therefore a stakeholder in it, we need to do everything possible to ensure that our investment is not lost . . . so the Feds begin using the cash as leverage to tell GM how to run the company. And, just to make sure the public understands, let's throw another cannon on there and fire the CEO, Admiral Kimmel . . . oh wait, Rick Waggoner. To get the public to understand that Waggoner inherited the bulk of GM's problems and is actually a very competent guy, is just way too arcane an argument to make. GM is in trouble on his watch. By that logic, Obama should soon step down.


The point, as explained further in A Brief History of Panic, is that each of these steps seems emminently logical and necessary, and the focus on solving the immediate problem completely overrides any consideration of the long-term consequences . . . which are that the government is now in the car business. Just like the Russian government was and many European governments are. This is socialism, pure and simple. If that's what we want, fine.


I'm sure everyone understands that the next big public scandal will be the serverance package that Waggoner gets upon departure. I have heard a whisper of this in the media, but I can practically guarantee that the perception will be that a portion of the "bail-out money" went to aggrandize the outgoing CEO.


The focus on short-term profits, necessitated by having to keep investors/stockholders happy, causes all sorts of undesirable long-term consequences: 1) Unions threatening to strike? Just give them what they want or our profits (and stock price) will tank; 2) The tendency to save money by designing the cars for convenience of production, with apparently no thought to what it would cost to maintain or work on them later -- I've always wondered if the tendency of cars in Michigan to rust out after a few years abetted this policy, along with creating a desire on the part of the owner to just buy a new one; 3) The excessive focus on marketing. Detroit has a habit of coming out with a high-end car which it markets as "Limited Production" or whatever only, within a year or two, to cash in on whatever small value the brand has accrued by demoting it to the standard model and come out with a new "Limited" model. It's all marketing -- there is almost never anything substantive to set the new top of the line apart. There are countless examples of this over the years, especially at Ford.


At GM, the latest example is Saturn: originally "a different kind of car company", freestanding from GM, no unions, gimmick-free marketing, designed from a clean sheet of paper, showing that US automakers could make a car competitive with the Japanese, yadda, yadda. The temptation on the part of the huge mother company to bastardize Saturn must have been overwhelming from the start. After all, the profits from such a small division were a drop in the bucket. I can see some bean-counter at his desk at 2 am: "Hey, the car has 4 wheels and an engine -- and look, the wheelbase is about what a Chevy Cavalier (or whatever) is. Let's just build the Saturn on the Cavalier platform and save all that duplication cost! Why didn't anyone think of this before?" Completely lost in this is the original concept. The wonder is that the original idea lasted as long as it did.


By this process, the automakers have mortgaged the future to make the present more palatable, and have thus created the situation that now exists. Well, the future is here. The perception in much of the public mind is that Detroit products are inferior to many foreign ones, even tho the quality has been very good for the last few years. Once that hole has been dug, it takes longer to remedy than a focus short-term profits will ever allow. The history of US automakers who have failed shows what a competitive disadvantage is created when the company becomes cash-starved, whatever the cause: the lack of cash, after meeting expenses, to design, test, and build new products results in cosmetic facelifts of the old ones, and the company slips further behind the competition. When word of this gets out, the public is loathe to buy them because a) it's really last year's model, and b) the company may not be around to honor the warranty. I do think that much of the criticism of Detroit during the past 10 or so years fails to take this into account.


So it will be interesting to see if meddling by politicians in the auto industry will yield a better result than has been obtained by those who have spent their careers in it.