Saving The Car Industry By Tearing It To Pieces

The car industry in the US is no longer just under siege. It is irreparably broken. There are no longer circumstances under which costs can be cut enough to make the business viable if vehicles are built in the US and sold through dealers. Domestic car sales by American manufacturers are down 40%. Even when the economy recovers, Detroit will have less than 50% of its home market left, even when the economy recovers.

Too much has already been written about the legacy costs of the US auto labor force. The UAW workers who have retired place a terrible burden on the industry with their demand for benefits. That is before the cost of the current work force is factored in . Whether it is popular or not, the fact is that cars can be made for much less money in China. That nation already has the capacity for building millions of vehicles per year. The rate at which Chinese factories can put out cars could probably be increased quickly. As the Japanese found out two decades ago, quality control can be exported, at least to some extent. If sourcing manufacturing out of China works well for companies from Wal-Mart (WMT) to Hewlett-Packard (HPQ), why shouldn’t it work for Detroit?

At this point, the car companies are still working with Washington based on the false notion that autos can be built inexpensively enough in America so that American car companies can make money. The Congress and Administration hope that The Big Three can beat enough in wages and benefits out of the UAW that, along with concessions from creditors, the car industry in the US can return to normal. Getting concessions from creditors is a "one time" deal. It is a trick that the firms can repeat every year.

The manufacturing part of the car industry is only half of the problem. The other part is distribution. Car dealership networks are inefficient by their nature. Populations move, dealers sometimes don’t. Models which did well one year don’t do well the next. Many dealers still only sell one or two brands of cars. If those brands hit a bad patch, the economic incentive for being in business to sell the brand disappears.

The other problem with car dealers is that, in hard times, they go out of business quickly. If a dealer in an area which is important to the manufacturer, say downtown LA, disappears, where do customers in that part of the country go to get a car? Dealer networks impede auto sales when dealers disappear. And, dealers can be wiped out when the brands they sell are no longer popular.

While studies about how people do research to make  buying decisions are notoriously worthless, most estimates are that 80% of people buying a new car do their shopping on line. Test driving a car is an anachronism.

The two most important things that should happen in a restructuring of Detroit are the relocation of manufacturing and the movement of all consumer shopping and buying of cars to the internet. If someone needs to drive a car before buying one, the centers that will have to be available to service cars sold by the auto companies can serve that purpose. For dealers who want to stay in the auto industry, service is usually a more profitable business than selling new cars anyway.

The powerful argument against moving manufacturing outside of the US is that hundreds of thousands of jobs will be lost. That is true. But if the jobs are not lost now, they will be lost soon–within the next few years. In the meantime Detroit will lose tens of billions of more dollars that will have to come from the federal government.

If there is any chance for the American car industry to survive, getting it back on its feet is going to be excruciatingly painful. Waiting is not going to make that any better.

Douglas A. McIntyre