A plan to fix the U.S. auto industry
Posted
Nov 19 2008, 05:30 AM
by
Andrew Horowitz
Rating:
General Motors and Ford have their backs against the wall as they wait for a government handout. But without proper strings and a plan that will help awaken management to the need for a material change, more zombie companies will be on life support funded by taxpayer money.
For decades, it was obvious that Asian auto manufacturers were stealing a significant portion of domestic sales right under the noses of management who apparently did not think it a problem. Maybe it was the long lunches, fat salaries or bloated benefit packages that obscured their outlook and now has them begging.
Even if $25, $50 or $100 billion is approved by Congress, the massive legacy costs for multiple layers of expenses including the high cost for employee benefits, retirement plan obligations and the incremental expense for unions doesn’t help or encourage investor optimism. They need something more than a simple cash infusion. Here’s my ideas to help fix this industry:
1) The delusion that floor planning makes any sense in its current form needs to be totally eradicated. Showrooms that have inventories with excessive capacity should no longer be allowed to exist since carrying costs for both the dealer and the company cut into profits. To be sure, the industry will have you believe that the only way to sell cars is to have them available immediately for buyers to take off the lot once the contract is signed. But if they begin to move towards a just-in-time manufacturing process, as opposed to guessing at inventory requirements, a dramatic decrease in wasteful spending may occur.
2) In order to accomplish this monumental task, the costs for retooling current manufacturing facilities will be significant. Some of that may be able to be offset by the long-term financial benefits of utilizing showrooms with kiosk-like ordering stations, which allow for customers to assemble their next car through a virtualization system. This will allow for better inventory management and allow for real-time access to current trends to can help manufacturing change direction on the fly.
3) The costs for re-tooling the factories can be partially offset by a change in the manufacturing process and new model cycle. Why do we have to have a new car design every year anyway? New cars which are designed with the idea that consumers want to buy a car simply because of a new design needs to be exchanged for the new reality of substance over style. Let's face it, cars are no longer bought for the simple reason of a redesign. Management must make a monumental shift to their paradigm and realize it is 2008, not 1958.
4) Advertising teams need to change the message. Automobiles are a commodity and are now a standard requirement of everyday living. We don’t see new product introductions by most basic-living products. Once again, an update to decade-old paradigms are in order and management's fetish with creating new car designs across their entire line of products, each and every year, needs to end. Has anyone notices that over the years the new car model year has crept up to August?
The annual cost savings to factories by spreading out the new design cycle along with inventory reductions will ultimately allow a much greater level of design innovation. The idea is to allow companies to create a much greater buzz around finely crafted products rather rushing to change for the sake of change.
Grow or die. Change or be changed. It is now clear that as management continued with the status quo, they lost the game. These are times that require new ideas and a brave new management that will embrace a global marketing theater.
5) Even with all of these ideas, a major shift needs to occur in order for the automobile industry to understand that they can no longer produce a product that is inferior to their global competition. They also need to realize that consumers are looking for ways to conserve energy and reduce the costs associated with the upkeep of their car. The fact that Ford re-opened their F-150 plant as soon as gas prices came down is reason enough to send management their walking papers.
As we now know, one of the biggest problems weighing on profits for these companies is the unfortunate situation that has been developing within the retirement and benefit package for employees. This is nothing new as we’ve known for a long time that many of these companies have greater payment obligations to former employees that they do to their current workforce. Clearly no one wants to take any money out of a retiree’s pocket but something has to change.To be sure, retirees are not desirous of changing anything that they believe is due to them, yet a splash of reality is long overdue. Simply, the idea that “something’s got to give” needs to be addressed if everyone involved believes that the current situation will never be resolved by itself. (See - Andrew on Fox Business, Union Busting)
If anyone believes that in the worst-case scenario, the government of the U.S. will be successful in bailing out the auto companies and guaranteeing benefits, think again. We can recall what happened to another transportation company with problems of a similar magnitude. If we need reminding, look back to the airline industry of the 1980s and in particular, the Eastern Airlines closure in 1989. That was not fun either.
Related reading
Why a bailout won't save Detroit
Auto Industry: Adapt or Die!
Aid prospects darken for desperate US carmakers
Some ideas how to bail out GM
Disclosure: Horowitz & Company managed account clients do not hold positions in securities mentioned as of the publish date.
Andrew Horowitz is a money manager and the founder of Horowitz & Company. He is also the author of the bestselling book, The Disciplined Investor . Check out his latest investment idea or listen in as he hosts, The Disciplined Investor Podcast.
