The US Auto Crisis

American auto manufacturers are in a world of hurt. I am talking about a beating of epic proportions. Is this the result of a sluggish economy and awful fuel prices? Well, yes of course it is; but only to a point. Let's face it, American manufacturers have been in a free fall since May of 2000, long before our current fuel crisis. Although Chrysler has been at the forefront of design (how can you not love the '09 Challenger?) it just hasn't been able to keep one foot out of the grave. Having worked for Chrysler and GM (GM) during last 15 years I can tell you that Chrysler in particular is probably a walking corpse.

American companies are their own worst enemy and just plain guilty of "too little too late" tactics to rejuvenate their bottom lines. Yes, they have made great strides in initial design quality over the last 10 years but the area in which they continue to fail is long term mechanical reliability (oh the horror stories I could tell you) which is the most important criteria to their most important customer base; women, women, and women.

Women make up somewhere in the area of 65% of all car buying decisions. Reliability is everything to this category of buyer. Everything. Any husband who has gotten the call from his wife that her car has broken down on the highway while driving the kids to school will tell you: Hell will follow like a plague of ravenous locusts. In this day and age, public perception is that Toyota (TM) and Honda (HMC) are the most reliable vehicles. Even if it isn't true. That is correct. Not true.

Please do not mis-understand me here. There really is no particular manufacturer that has a superior product. Toyotas and Hondas break down with every bit as much frequency as Fords (F), GMs, and Chryslers. Every manufacturer from the elite down to the sub-compact tin box has its own quality issues. After all, how many parts manufacturers do you really think there are in the world? Ask any Honda technician about Accord transmission failure rates. Or a Toyota technician about truck ball joint issues or your beloved Camry's steering knock and engine stalling issue. It is all built with parts manufactured by the lowest bidder so we can buy our tin coffins for less money.

The difference in the stock price is what the public perceives is quality and what is does not. There is a reason why you will never see a new Mercedes behind a tow truck and it is not because they are God's gift to quality. It is because Mercedes mandates that all vehicles are to be towed to the dealer under a covered transport to avoid the unsavory sight of such a high class vehicle being dragged behind a tow truck. Which, by the way, is usually a GM or Ford. Oh the irony of politics. Perception my friends, it is all about perception over reality.

I am sure there will be many scathing comments from my readers about how their Hondas are the greatest cars in the world and that they have never had a problem in the one million miles they have been driven. They have had nothing but problems with their former American cars which is why they switched, and blah blah blah. 

You are wrong wrong wrong. You are simply one of the lucky car owners that has had little issues. There are equal amounts of American car owners who have had nothing but trouble from their previous foreign cars and are thankful for their GMs or Fords. I have heard the same story form both foreign and domestic owners so please spare me any comments about this issue. They will fall on deaf ears.

Though, I will say that Chrysler takes the cake with poor quality during the last 20 years. The mini-van 604 transmission was a catastrophic failure, costing an average of $1500 to $2000 to repair, right around the time the warranty expired. If it failed after 50k miles you were out of luck with any factory assistance. The Intrepid / Concord 2.7L engines sludged up after 40k miles at a cost of $5000 with zero factory assistance of any kind. Was there a recall? No way. The other problem was that the re-sale value of a one year old Intrepid or Concord was 50% of the retail price. Now you have a repair bill that is 50% of the value of the car. The Dodge Neon head gasket blew if you breathed on it and truck differentials simply grew noisier with each mile.

With Ford, GM, and Chrysler, the reality has been mostly about poor decisions. They have always been the Johnny come lately in doing what is necessary to thrive in a current market. During the fuel crisis of the 1970's they kept churning out land yachts when the public was turning to more economical compacts from Toyota and Datsun. By the time they realized their mistake they were so far behind the curve that they made twice as much work for themselves. In the 80's and 90's when the foreign market really exploded because people started to realize that a car could go more than 100k miles without the transmission blowing up, American manufacturers thought it might be prudent to follow along. Again, they scrambled too late and lost.

But I digress.

So now we are in another fuel crisis. Replace the 70s land yachts with today's SUVs and we are still dancing under the same disco ball. Of course it is not all bad. The program that gave the Chevy Malibu new life was brilliant. Perform a part by part comparison to the Toyota Camry and manufacture it at a considerable cost savings to the consumer. I love it.

Unfortunately there are not enough good ideas to outweigh the bad. GM's lame attempt to make a Hybrid SUV is just tragic. I would love to meet the people responsible for designing a Hybrid vehicle that gets 20 MPG fuel economy so I could punch them in the mouth. The fact that it was ever allowed to be released is so ludicrous that I thought I was dreaming at first. They are scrambling and losing once again... and again.. and again. To GM's credit, it has really started to take care of its current customers with any issues they may have. It is to be congratulated for that. But it still is not enough to stabilize a dark and uncertain future that is currently ruled by Exxon (XOM) and BP (BP).

American manufacturers need to produce more cars like the up-coming Chevy Volt concept very soon because the likes of Nissan will be cranking out its own versions within the next two years. They need to drop this E-85 flex fuel nonsense and concentrate on electric now, but more importantly the potential of compressed air and solar power for the future because the next crisis after oil will be electric energy shortages. When that happens, how will we be expected to charge our electric vehicles cheaply? By Natural Gas generators? Are you starting to understand the proverbial urinating into the wind concept? It won't matter what the energy source will be because as long as we dictate that automobiles be fueled with energy reliant on natural resources, there will always be another fuel crisis down the road.

Final fact: With or without American auto makers, alternative energy vehicles will be here in a 100 foot tidal wave in five to seven years. Do not doubt it for a second.

American manufactures have this one rare opportunity to emerge the heroes of a new energy revolution as long as they can get out of their own way and give the masses what they want, when they want it. Which is right now.

Stock Position: None.

Comments

[Skynet91]

Finally! An analysis of the auto industry that doesn't extol the Japanese companies as the end-all, be-all. All of the auto companies have had quality problems and I commend the author for pointing that out. I do, however, disagree that the US makers haven't been giving the consumer what they want. After all, SUVs were in great demand and were high-margin products. Similarly, truck demand was spurred by the housing bubble when every Tom, Dick and Harry became a check-book builder. In addition, I wouldn't discount ethanol. Unlike electricity, it has been tried and proven on a large scale. Brazil runs a nation on it. It can be done here if the speculators can be kept at bay long enough for sorghum to replace corn.

[Mister Jimmy]

Lots of truth in this article. Had lots of big $$$ mechanical and electrical problems with my two Chrysler mini-vans, in spite of regular mainenance, but my 2004 Toyota Sienna was a JOKE: $3,000 in repairs before 70K miles. It came with Toyota's exclusive "if it broke down, you did it" attitude. Such arrogance, and misplaced public perception.

[ex GM emp]

Man, talk about hitting the nail on the head. I worked for GM for 22 years. The first day on the job an older GM engineer told me that GM was never in the forefront of anything, risk averse, always a follower. Let Ford and Chrysler perfect it and then copy them was the mantra. After 22 years, I found he was on the money time after time. In the assembly plant I worked, we had an automatic door installer that failed continuously and stopped production. After five years and many lost units, it was removed in favor of manual installation, the same amount of manpower it took to maintain it. I could name literally hundreds of fiascos that took YEARS to correct, some never corrected until another model was built. They ARE their own worst enemies, hidebound in their culture, history and perceived entitlement to buyers.

[BKR]

I loved your comment on the 20mpg hybrid! Shear marketing genius. And why are so many cars being promoted by how much horsepower they have? Is it because they can't say anything about thier fuel economy? The auto companies would be well served to join the rest of here in reality.

[Jeff B.]

You are so wrong about reliability of domestics versus Japanese rivals that I wonder how you are actually qualified to write an article on Seeking Alpha. Obviously, the owners of this Website are still seeking. Your anedotal allegations about the reliability rates of Japanese versus domestics are unsupported by the facts. Even a twelve-year old can read Consumer Reports and tell that a Chevy Cobalt is a bad bet for longterm value & relaibility compared to a Civic or Corolla. Maybe you should get a job working as a Bush administration "science" advisor? Those guys are just as convincing as you are.

[Rich S.]

Too many contradictions to take this author very seriously. I'm as patriotic as the next guy, but I don't appreciate disinformation to boost the image of the US auto industry. He states that US manufactures continue to fail in improving long term reliability, then he claims there is no difference between Japanese and domestic cars in this regard, THEN he tells that buyers migrated to Japanese makes because "people started to realize that a car could go more than 100k miles without the transmission blowing up". The reliability of Japanese cars is considerably (and measurably) higher than US makes, as a previous commenter pointed out. American buyers continue move away from domestic manufacturers based on their own experiences with reliability, even if it costs them more upfront.
I agree that a 20MPG hybrid sounds unimpressive, but considering that many of these behemoth SUVs are driven around town by soccer moms, it represents a 40% improvement over their normal city-cycle fuel economy. The key is to convince people that they really don't need a vehicle like that in the first place. If only minivans looked cooler...

[Gino Lattarulo]

I apologize for the lack of clarification and perceived contradiction. Yes, back in the early days the likes of Toyota were superior in quality, hence the comment about transmission issues. This is not the case now.

[Joey]

Well written analysis by the author. Women do represent 65% of new car buying decisions yet GM's management is over 90% men. GM should have started to change its employee makeup to accomodate for targeting their new buyer to the industry - women (this should have occurred 20+ years ago). I remember in 2006, GM took its advertising contractors and fired and demoted almost every women in the advertising field and replaced them with men. GM's men wanted to work with male advertising executives. The result, GM's sales for the brands affected by the switch dropped by more than 40%. So why are these men who made this terrible business decision still there? Is this fair to GM stockholders, especially since so many women who own GM stock? If getting rid of women decreases sales, what would getting rid of the men and adding women to GM do for sales? Would GM finally see a positively changing sales track? Would GM's stock that dropped so much so quickly finally turn around because their target market is being taken care of and their needs met?

[fam62c]

The US auto industry has never really been interested in small cars because they tend to be low profit margin vehicles for them. When fuel prices go up they make a half-hearted attempt to develop decent small cars but they are spring-loaded to return to big vehicles as soon as fuel comes down. I also don't believe that they are committed to future alternative technologies. They may talk about it and make a couple concept cars like the Volt (which I bet will never go into production) but they aren't real believers. To my knowledge even their hybrid drive systems were developed by others and are used under license. They realize that their cost structures will never allow them to be profitable unless they are selling a high percentage of high margin large trucks and cars. The US industry has been lucky that gas has been as amazingly cheap as it has been for as long as it has.

The Japs have, for the most part, stuck with what they are good at and sold large volumes of high quality small cars and trucks. They know that's what the rest of the world buys and they know that there is a large segment of the US market that buys these cars as well. They also know that fuel prices will always go up again eventually. I think that Toyota has learned a valuable lesson here by starting to get into the large pickup truck market that they had avoided in the past. They strayed from what had worked in the past and they got burned as gas prices went up. They are now converting a lot of the truck production capacity back to cars.

If you want to read a great book that talks about how things got this way read "The Reckoning" by David Halberstam. It was written in 1986 but it traces the roots of US and Japanese auto industries and compares the two. It's just as valid a book today as it was in 1986 and it's truly a great story filled with interesting characters. It essentially points out a fundamental difference in that the US auto industry got taken over by finance and accounting people after WW II (the Whiz Kids) while the Japanese auto industry management was more attuned to design, engineering, production and customer service interests.

[paulk8756]

Well done post and solid comments. Thanks, fellas.

Speaking of which, I wonder why greater numbers of WOMEN don't post and comment here...? Although they own the majority of stocks, they must not make as many buying decisions as we think they do.

Nor in cars, either!

[paulk8756]

Let's see...

If you were a woman being polled, you'd say you were in charge of the buying decisions. And if you were a man, and your wife and/or girlfriend was in earshot, you'd say the same thing, wouldn't you?

My former wife and present girlfriend don't know where to check the oil in a vehicle, much less make a sensible decision on which to buy or how to finance one.

I rest my case.

[User 229703]

Regarding Joey's comment, I heard that it was the Regional Directors of Marketing Management that wanted men when a change in the field advertising took place in May of 2006. The RDMM's wanted to go golfing and to the gentleman clubs with men. Sales took a big drop right after the switch and has been on a downward spiral ever since. As far as women buying cars, this information can easily found on POLK.

[User 229703]

Here is the buyer demographics found on google.
Vehicle Type: 5-passenger SUV-type vehicle (EPA classification:
station wagon)
Buyer Demographics: Young married couples (30-35), median family
income $60,000, over 50% female buyers and/or decision makers.

Vehicle Type: 4-passenger, front-wheel drive, 2-door coupe
Buyer Demographics: The coupe is targeted for the unmarried buyer and
young couples without children. The median age is 32, with an annual
income of $42,000. Sixty percent of the buyers are expected to be
female, and 38 percent will be college graduates.

Coupe and Sedan Buyer Demographics
Median age: 18–24 Years
Median household income: $50,000
Purchaser (male/female): 35%/65%
Married: 25%
College graduates: 40%

Sedan:
Buyer Demographics:
Median age: 30—40 Years
Median household income: $35,000—$50,000
Purchaser (male/female): 35%/65%
Married: 55%
Children in household: 40%—60%
College graduates: 35%—50%

[paulk8756]

Gee, this must mean there are only 1/3 men in the U.S. population, or they have only 1/3 the money (...the latter is a possibility, however, after their exes are finished with them). Now there's a REAL front page news story for you!

[coeus89]

thank you for that fantastic article. too many people are bias against the US auto quality. my grandma just bought a camry and is very disappointed. as for the ignorant ppl who dont believe that the US auto quality is the same as the japs. JD power survey proved that ford is on par in quality with honda and toyota.

[paulk8756]

How about trucks and the large SUV's that can tow boats, etc., which until this year were the majority sellers?

P.S. I feel sorry for you guys who agree with these supposed car buying demographics!

[paulk8756]

Coeus,

Nice post. I agree with your grandma... I wouldn't own a Toyota on a bet! The domestics DO have away to go, however, but at least they're REALLY responding to their wake up call this time.

[Ace2]

I have owned and driven cars and trucks made in both Japan and the USA (and one made in Germany) for over 40 years; and I have had both good and bad vehicles. As alluded to by Rich S., I have and I continue to love and support America with my money, and in the past with my military service. But, to deny the overall better quality of Japan's vehicles is to deny the obvious. I share the views expressed by Rich S. and Jeff B., for those veiws are based on fact, not fancy.

[Retriever5280]

My Camry was 14 years old when it was broadsided by an idiot and totalled. It had been previously stolen, hit, hailed on, and vandalized. IT NEVER FAILED AND I WAS NEVER STRANDED!!! It still had the original alternator when it was totaled. My prior Corolla, same story except the alternator went out in year 12. I changed the oil myself and I think I know more about cars than a lot of men these days. Problems are a part of life and certainly occur with cars. HOWEVER, it's how the company deals with issues that makes me come back time and again to Toyota. Toyota just backed an issue on my car even though the warranty was long up. If you approach Toyota in a civil manner, you will get a civil response. There are shady dealerships, I'm sure. Fortunately, I am not dealing with one. Toyota has delivered years and years of reliable service and has not hidden issues. Twice master techs have broken parts on my car when it was in for service AND twice the techs came to me and told me. Do you honestly think in today's corporate culture I believe the same situation would have occurred with Ford or GM? Most dealerships would have told me, "lady, we found a broken part of your car" and left me paying for it. Another facet to my buying Toyotas is that this company does not pay its executives multi million dollar bonuses. I'm sick and tired of companies paying a few has-been men multi millions for running a company into the ground. Perhaps such should be the "shame" factor here that it is in Japan. Toyota plans long-range; the domestics need to do the same. We knew with the oil embargo of 1974 that a small, fuel-efficient vehicle was needed. No one at that time except Toyota and Datsun (Nissan) offered such. Toyota got a lot of people hooked on their product starting then. It was a solid marketing plan, start with small cars, then introduce the Camry and Avalon to keep your customers as they age and can afford to scale up. Common sense.

[Joey]

Good post Retriever5280. I do not think GM knows how to take care of women. That's why women try to find whatever man they can to come with them into the dealership. It is like walking through a construction site with the men whistling. It is an awkward feeling that you do not feel safe. That the men at the dealership are about to take advantage of you. Studies show that both men and women prefer to buy their cars from women. Yet GM has only 3% of their dealerships owned by men. Another fact, those dealerships that are owned by women far outpace, on average, the average male dealership in terms of sales.

[bmoore]

In replying to the first post here - corn based Ethanol as we know it in the states is a scam that drives up corn prices and uses more energy to produce than what is created. I believe the folks in Brazil are using sugar cane to produce their ethanol and actually leading the world in cars running on compressed air.

As far as reliability of Asian cars versus domestic, there are peaks and valleys on both sides. The cars that are the most reliable are those who share the most common parts, Honda does this the best. An alternator for a 2006 Honda Accord fits the Civic, CRV, Element, Acura CSX & TSX and is used over a variety of model years. I think this is why Honda is the most reliable brand across all models according to Consumer Reports. Its also why Honda is one of the most desirable brands for Auto Recyclers aka salvage yards and car thieves.

GM has been known to have different parts even for its twin models and changes parts frequently year to year. Its amazing that a basic axiom, like build one good part and use it across the entire line still has not stuck in Detroit. Then again VW does the same thing as Honda and their quality is bottom of the barrel.

[Maximo]

Gino, can you say frequency of repair statistics?

[Calvin C.]

20mpg is considered a hybrid?

[BioInvestor]

Joey, your argument lacks logic. People don't buy cars based on the management team!

I don't buy your argument that getting rid of women has had an adverse affect on sales. In fact, I don't believe what you wrote about GM firing women.

Finally, the problems at GM aren't related to gender, they're more related to fenders. GM doesn't make cars that people want to buy. It doesn't matter who is in management, on the board, on the production line, or in sales in market: GM doesn't have a product that people want to buy.


On July 21, Joey wrote:

Well written analysis by the author. Women do represent 65% of new car buying decisions yet GM's management is over 90% men. GM should have started to change its employee makeup to accomodate for targeting their new buyer to the industry - women (this should have occurred 20+ years ago). I remember in 2006, GM took its advertising contractors and fired and demoted almost every women in the advertising field and replaced them with men. GM's men wanted to work with male advertising executives. The result, GM's sales for the brands affected by the switch dropped by more than 40%. So why are these men who made this terrible business decision still there? Is this fair to GM stockholders, especially since so many women who own GM stock? If getting rid of women decreases sales, what would getting rid of the men and adding women to GM do for sales? Would GM finally see a positively changing sales track? Would GM's stock that dropped so much so quickly finally turn around because their target market is being taken care of and their needs met?

[BioInvestor]

paulk8756, a lot more than your case seems to be resting--or not functioning.

Your comments don't reflect women, they reflect who you are and what you attract.


On July 21, paulk8756 wrote:

Let's see...

If you were a woman being polled, you'd say you were in charge of the buying decisions. And if you were a man, and your wife and/or girlfriend was in earshot, you'd say the same thing, wouldn't you?

My former wife and present girlfriend don't know where to check the oil in a vehicle, much less make a sensible decision on which to buy or how to finance one.

I rest my case.

[BioInvestor]

Gino Lattarulo, I am not sure why you wrote the article. It has, at best, only moderate benefit to investors.

The article also contains serious factual errors. The failure rates among different brands--and consumer preferences--are well documented. Companies like Honda and Toyota have consistently manufactured cars that perform better. You actually talk about the quality problems in US cars in your article; I don't see how you can conclude that there is no difference in quality among the different brands.

[Gino Lattarulo]

BIO INVESTOR

[Gino Lattarulo]

Bio Investor, "Factual Documented Information" as released by the media is just that. I am giving you information based on 15 years of working inside these companies. Take from it what you do or do not wish to believe. In any case, I applaud your convictions.

[Joey]

BioInvester, women were fired. Check your records. It was several contractors in the advertising field across the country that were fired or demoted. The RDMMs made the recommendations. Also, if women do not make a difference, then why did you have the engineers at GM be forced to dress up in women's dresses to experience the Acadia from a woman's point of view?

[BioInvestor]

Not really a valid argument. Women are fired in all companies; that's not news. Men are too--no news then.

As for the discussion about people in women's dresses, what a minimalist argument to make. State something substantive; something meaningful; something relevant! Please. This is a site for investors.


On Jul 24 11:09 PM Joey wrote:

> BioInvester, women were fired. Check your records. It was several
> contractors in the advertising field across the country that were
> fired or demoted. The RDMMs made the recommendations. Also, if women
> do not make a difference, then why did you have the engineers at
> GM be forced to dress up in women's dresses to experience the Acadia
> from a woman's point of view?

[BioInvestor]

Thanks for the post, but I'd respectively discount the article as personal opinion.


On Jul 24 12:32 PM Gino Lattarulo wrote:

> Bio Investor, "Factual Documented Information" as released by the
> media is just that. I am giving you information based on 15 years
> of working inside these companies. Take from it what you do or do
> not wish to believe. In any case, I applaud your convictions.

[xbnbx]

I'm glad a domestic car maker is trying to bring out an electric car (Volt). However, I still see a major flaw in it's marketing. To me the car body still appeals to a very limited segment of buyers. The body style is not very practical. Build an electric car that is functional, reliable, not loaded with garbage accessories, provides good visability without having to install rear cameras so the driver can actually see what's behind the car. Forget the dvd crap and all the bells and whistles, Who needs Microsoft to run in it? Get back to basics.
Electrics will not survive the American market because most people have been spoiled with electric windows, dvd players, power steering, power this, power that. The cars of today have to be built like tanks because of the huge SUVs and overgrown pickup trucks with irresponsilble drivers smash into each other while on cell phones, eating their fast food and texting to each other.
Do you really need those huge tires and wheels? What a waste!
As was mentioned in the article, Too little, Too late. I have had both imports and domestics. I couldn't get rid of the domestic fast enough. Sure they feel good for the first year, but don't park in the sun or the paint peels, plastic starts crumbling, headliners come loose, etc, etc.
Also, why buy a car that uses only premium fuel? BMW should have have their heads examined for requiring premium in their cars. What good is a little Mini if it requires premium? Where's the economy?
Current technology may be limited in how far an electric car can run, but with gas prices as such, who is going to long distances in their gas hogs?
I'm glad that gas prices have shaken people, it's time that carmakers wake up to the fact that oil is running out. With the world population all wanting a piece of the oil pie, yes it is going to be a never ending chase to find the fuel that will satisfy everybody's needs. There will be no easy answer.
What I find interesting about the oil industry is that while it is raking in money hand over fist, it is not building itself up with a better infrastructure. It seems it knows it is going out of business and is just collecting the money for dispursal to its execs when the oil peaks and there is no more. Do you see more refineries? No! Are current ones being rebuilt? No! Why tear down the old store and remodel when you're scheduling a going "Out of Business" sale?

Oh well, it's not going change, so why rant...