Survival stategy for the auto industry

2/13/09 How do we rescue the domestic automotive industry?
The domestic automotive industry is the single largest private sector employer in the United States if you consider the direct employment at GM, Ford Motor Company and Chrysler LLC, the Tier 1, 2 and 3 suppliers and the dealer network. It goes without saying that these companies are critical to the economic survival of our country and cannot be allowed to go bankrupt.
The critical steps needed to ensure the survival and the future health of these companies require painful adjustment for both the shareholders, the dealer network, and the employees of these companies. I would recommend the following steps to be taken as soon as possible:
1. Drastically reduce the size of the companies to fit the realities of the market. It makes no sense for GM, Ford, and Chrysler to continue costly rebate programs to maintain an unrealistic share of a shrinking market. Reduce their product offerings by eliminating brands that are marginal at best. There is no reason for GM to offer identical models under the Chevrolet, Buick, GMC, Pontiac and Cadillac labels nor for Ford to have a Mercury and Ford brand. This would also sharply reduce the number of dealers in the US and improve the profitability of the dealers.
2. Eliminate all parts manufacturing operations at these companies and focus on the design, assembly and marketing of their products. The design and assembly would still include engine and/or some components of the powertrain manufacturing as this should be viewed as the differentiator between the Big 3 and the New Domestics. There is a large supply base of Tier 1, 2, and 3 suppliers who can partner with the Big 3 in the design of critical elements of their products.
3. Enter into a new paradigm in their relationships with their suppliers. Recognize that the industry is truly a global industry and partner with those suppliers in a position to support their efforts worldwide. Collaborate in the design of critical components with these suppliers and give them long term contracts. This will be painful for the supply base as it will lead to a consolidation of the suppliers but this in turn will lead to healthier companies. Fewer companies and increasing dependence on them will lead to higher prices but this could be mitigated by economies of scale for these suppliers. It would also enable the drastic reduction needed in the staffing of the Big 3 companies.
4. Enter into a new relationship with the UAW. These companies as well as their supplier base, will face critical shortages of skilled workers in the very near future as the working population age and retire. We need to make the factory floor an attractive place to work and encourage young people to pursue jobs in engineering and manufacturing. The UAW could partner with other stakeholder representatives such as the HTMA, NAM, SME and the AMT – The Association for Manufacturing Technology to encourage, educate, and facilitate the entry of new blood into this industry. I believe that existing labor agreements have resulted in near parity between wages at the Big 3 and the New Domestics but the current wage scales are meaningless when compared to the age differential between the workers at their different facilities.
5. Ask for government assistance in transferring the legacy obligations of these companies to their retirees from their balance sheets to the government’s balance sheet. Legacy costs resulting from contracts entered into in better years have left an unrealistic burden on these companies that do not contribute anything to their mission of designing and building products that meet the future needs of the market. New contracts with the UAW should reflect the realities of the market and include provisions for participation in health care and retirement planning by the employees as well as the employers.

Other than the last item, these actions could be done without substantial government intervention. Most of the savings would come from the downsizing of these companies and the sale of some assets such as discrete manufacturing plants. Elimination of brands and focusing on a more realistic share of the market would lead to increased profitability. Shifting of some design and manufacturing of components to a smaller supplier base will improve the profitability of the suppliers as well.
Finally, we should all stop bad mouthing the industry for the sins of the past! Nobody can undo the mistakes of the past but we should focus on the advances made in the last few years. The US is the most affordable market for cars and trucks in the world and this has been accomplished by significant productivity gains made at these companies. The employees of these companies have made significant advances in the design of new powertrain components resulting in improved fuel efficiency across the board. We are blessed with talented people that can take these companies forward to meet the demands of the future. Let them do their job and let the market decide if they have been successful.

Ron Schildge
2/13/09