Sad State of Affairs for Detroit's Big Three

With the recent financial woes of the Big Three automakers, the question that bears answering is "how did we get to this point?" How did these companies fall into such financial crisis so quickly? Several thousand recently laid off or bought out blue and white collar workers are asking the same questions. The answers to these questions are simple but politically incorrect. Here is my personal analysis of the downfall of the Big Three --

Poorly Designed Products -- Conservative vehicle designs coupled with lackluster reception by the American public are the main reason that these automakers have stumbled badly. Large gas gulping SUV's and bland mid-size sedans were a Big Three staple during the 2002-2008 time period. Having been privy to research done by these automakers, they knew that these vehicles would fall flat before launch but launched them anyway. Apparently, market researchers failed to convince senior executives of the failings of these products. The product czars at most of the American automakers have very strong personalities and don't like to be told that their products are not on target.

Overpriced Labor -- About a decade too late, the Big Three is rapidly downsizing its' blue collar payroll and hiring new lower priced labor to build its products in the U.S. Due to severe pressure from the domestic automakers, the UAW has complied with their requests for a two-tier wage system to save jobs and protect their older workers. The next battleground will undoubtedly be retiree pension and medical benefits. According to some sources, in the U.S. we have 3 retired UAW members (drawing a pension and getting medical benefits) for every active UAW member. Long term, this current situation is untenable. The fate of white collar workers is even darker. Without the protection of any union, the ranks of white collar employees are quickly dwindling.

Long term, I think Chrysler will find a partner in Hyundai, Renault-Nissan or another major automaker to save what's left of the company. General Motors will likely emerge from this current situation as a much leaner and aggressive organization, with a strong emphasis on new products geared towards the American populace. Surprisingly, Ford seems the most reluctant to change and seems to be stubbornly sticking with its current product lineup and is intent to keeping Mercury alive despite poor sales and a lackluster product lineup.

Here's hoping that they all pull out of the current maelstrom and survive to fight another day.

Dead Brand Walking

In recent statements to the press, Tracinda's Jerry York quipped on "what he would do" if he were running Ford Motor Company, namely sell off or axe Volvo and Mercury. Tracinda is looking to invest heavily into Ford after failed forays at Chrysler and GM. After some thought, he may be onto something here but these two brands are in different situations. Since my time at Ford in the late 1980's (and even before that), Mercury was always the red-headed stepchild -- product-starved, little advertising or marketing and a revolving door of brand managers passing through the Ford executive training program. Everyone had to do a stint at Mercury, ask Bill Ford. The Mercury situation is little improved twenty years later. So why does Ford keep them around? That's easy -- they don't want to piss off their dealers (no rocket science there). It has little to do with loyal Mercury customers or orphaned product lines. It has everything to do with potential lawsuits, bad press and massive dealer buyouts. GM went through this organizational trauma when it shutdown the ancient Oldsmobile brand earlier this decade -- it was a painful and very expensive bullet to bite.

Volvo is another breed of brand. Volvo has a distinct and loyal fan base, quirky but fun vehicle designs and a premium European cache. For full disclosure, I have to say I am a Volvo owner wannabe -- so I own a Saab instead -- and have been wanting to buy an XC90 for the last four years to no avail. Volvo dealers are also a different set of dealers. Often nestled in tony suburbs of major metro areas, these dealers have pockets of repeat buyers and a cool product to sell. As an organization, Ford has abused Volvo just slightly less than Mercury. In the 1980's and 1990's, Volvo was headquartered in the affluent suburbs of NYC (Northern NJ) before joining their Premium Automotive Group brethren in Irvine, California for a few years. Now Ford is moving Volvo back to NJ to be near its largest buyer base in the Northeast US. Volvo has also been on the low end of the totem pole with marketing and advertising dollars for the past few years.

So what would I do if I were Mr. Mullaly? Shutdown Mercury ASAP, it's been a dead brand walking for twenty years. Keep Volvo but give them some space. Let them design their own vehicles, market and sell to their core base and basically let them be.

Detroit Paralysis Cure

With all of the major announcements coming from Detroit on union deals, new marketing campaigns and exciting new product introductions, you have to look inside each domestic car maker to examine whether their ultra-conservative DNA has truly changed.

During my discussions with mid-level OEM insiders, the fear of change combined with pervasive job insecurity has resulted in a severe mid-management paralysis. With all of the auto CEO's claiming a new direction/path, it will only work if everyone in the organization is on-board and pulling in the same direction, this includes mid-management.

Stepping out into a new direction -- cutting-edge designs, innovative advertising campaigns or advanced consumer research -- is politely discussed and then discarded as being too risky. This risk aversion has 100-years of roots and is deep seeded into the corporate culture of these companies.

Former GM top executive Ron Zarella was chided by old-school automotive industry veterans for his treatment of cars and trucks as household brands that required professional brand management. He brought several great minds to GM from the consumer products and consumer packaged goods industries only to meet mediocre success. Why did this new initiative fail? The conservative mid-management has hampered its full implementation.

Is the tide turning? A little. The domestic auto makers rarely change their advertising agencies due to this risk aversion. Very few exceptions occur but one notable one is GM's turning to funky Modernista http://www.modernista.com/ for their Hummer and Cadillac division's advertising. With Lutz-inspired designs, GM is also turning the corner on the design front.

With Ford, true change has been challenging. Using the same advertising and market research agencies since....well....forever and continual bland designs, Ford's market share has been slipping over the past fifteen years. Having worked at Ford many years ago (1989-1991), I can tell you very little has changed in terms of risk aversion.

When I worked in NAAO prototype purchasing during those years, I saw some striking prototypes and concept cars. One of the more notable ones that I saw was a Mark VIII with funky Coral or Forest Green interiors, new LED lighting and extensive chrome interior accents. Of course, these features and color schemes never made it to production. Unfortunately, the toning down of great, new ideas is legendary.

Some radical suggestions for conservative car makers....

* Replace the existing vehicle designers with the best "product" designers in the world. Make sure they do not have restrictions in terms of their creativity or expression of new designs. Hire people from Apple, Rolex and the best fashion houses in the world. Ban design reviews with mid-level executives and let the product communicate to the market directly without being watered down.

* Replace your advertising and market research agencies with small, funky boutique agencies. Prohibit these supplier companies from hiring active or retired employees from within their company. Burn all paper surveys, old studies and bar focus groups, send your researchers on the road to listen to real live American consumers. Researchers don't need to sit in cubicles under fluorescent lights, they need to assimilate themselves into the market and truly understand their brand's core audience.

If your market share has been slipping, radical change is the only cure. The status quo ain't working folks!

Dealerships -- Key to Industry Change

According to several research studies that I have seen over the years, people love going to car dealers and haggling for the "best" deal. Quite frankly, I don't know who these studies were surveying but it wasn't anybody I know. Dealership visits can be very stressful and leave many consumers wondering "did I really get a good deal or did I get ripped off?" Women often complain of being ill-treated during dealer visits.

Some of the better dealerships that I have visited have sales consultants that receive no commission on selling vehicles but are salaried employees of the dealership. This takes away the "game" aspect of price negotiation.

Another pet peeve of mine is local dealership advertising. A local Jeep dealer here in Rochester, NY openly states that "our products are German engineered and American-made, the best of both worlds." An untrue statement given that Jeep's have always been engineered in the U.S. and do not share common designs with their former Mercedes product siblings. I wonder what this dealer is going to say now that Chrysler/Jeep is now independent of Mercedes/Daimler?

Yet another dealer (Fuccillo Hyundai) in Upstate NY, has the absolute worst TV and radio commercials that I have seen in 20+ years in the automotive industry. Click here to see an example: http://www.youtube.com/watch?v=pQO0v_HEGU0. It is very apparent that this guy likes to hear himself talk and see himself on TV, meanwhile insulting and alienating every possible car buyer in a 50 mile radius.

ugh.....

GM Pulls a Fast One

After digesting all of the articles written on the new agreement and listening to talking heads talking about the deal for the past 24 hours, I come away with the real impression that GM has pulled a fast one on the UAW. Healthcare has been a real albatross around GM's neck during the past decade and the UAW has steadfastly fought to maintain full benefits for its rank & file workers and retirees.

In a way, GM used a bit of reverse psychology and gave the union the right to manage its own healthcare costs for its members through a VEBA (voluntary employees' beneficiary association) that GM will contribute $0.70 on the dollar to cover these obligations. With spiraling healthcare costs, people living a lot longer and union membership shrinking, the UAW may have taken on this huge burden without thinking through the "real" long-term cost implications. Not to mention setting the Canadian Auto Workers (CAW) up for failure in next years negotiations. With Canada's national healthcare program, GM does not have the healthcare burden it did in the U.S. and the CAW has managed to negotiate higher wage levels due to this fact. Kiss those higher wages goodbye.

The UAW also agreed to a two-tier wage system that is sure to come back to haunt them in 5-10 years. With GM "strongly encouraging" older union members to retire, only to be replaced with cheaper alternatives, the UAW has retained control over these new hires albeit at 40-50% less wages that current members.

In effect the UAW has made its current members more secure (with small signing bonuses to boot) while sacrificing future member's earning power. Then again, they did save the mystical jobs-bank. Who said paying workers not to work was bad fiscal policy?

UAW vs. GM = No Winners

I am visiting several clients in Detroit this week as the United Auto Workers strike against General Motors. The local news coverage is very pro-UAW and shows video clips of workers picketing local assembly plants and railing against the proposed healthcare concessions that GM is demanding at the negotiation table. So who is to blame in this clash of union vs. management?

If you ask me, both the company and the UAW share an equal share of the blame. UAW workers are among the hardest working workforce in the world. They are also among the highest paid. GM has only recently understood the impact of its enormous legacy healthcare and retirement costs. About twenty years too late.

The stark reality is that GM must fundamentally change its cost structure including vehicle assembly costs in order to be competitive with Japanese, Korean and soon-to-come China-made cars. It isn't a negotiation bluff by GM. With healthcare and benefit costs, GM pays its UAW workers an average of $35-40 per hour. Toyota, Honda and Nissan pay its non-union workers $12-17 per hour including benefits. Continuing with the status quo or even half of the status quo isn't an option.

Obviously, the UAW disagrees with these assumptions. Providing job security and continuation of current compensation levels are paramount to their position. Unfortunately, current market conditions are forcing GM to dig in hard and challenge the UAW on the percentage of healthcare obligations that they are willing to cover. I predict that the strike will come to an end in the coming weeks as both sides would be severely damaged by a prolonged labor strike.

Personally, I have several close relatives that are lifelong UAW members. They work extremely hard and strongly believe that management should shoulder their fair share of these increasing costs. Large white collar bonuses and salaries, company cars and other executive perks don't go over very well with these blue collar men and women. That being said, they are very frustrated with the UAW itself. Its protection of non-productive workers, drug addicts and alcoholics has dampened their rock-solid pro-union stance.

Twenty years ago, I was a union member and walked the picket line for two weeks as a 19-year old grocery store clerk (United Food & Commercial Workers Local 876). I paid $8.06 a week in union dues. Did I mention that I made $3.35 per hour? So it took me 2 1/2 hours of working part-time just to pay my dues each week. At the conclusion of our strike, a two-tier wage system was adopted -- full-time workers got $15/hour and part-time workers capped out at $8/hour. In hindsight, it was necessary for the grocery store chain to survive but as a 19-year old employee, I was not pleased and angry with the result.

Makes you wonder if this situation will eventually go the direction of a two-tier wage system.