Monday, December 1, 2008

Auto Industry Bailout a Good Idea?

I have very mixed feelings about the bailout of the U.S. automakers. Besides knowing many Detroiters and automotive professionals personally, I have a lot of sympathy for the thousands of people who will lose their jobs if some sort of bailout does not occur (not to mention the retirees who will lose their pensions and benefits). Many people who work for the Detroit 3 (and its suppliers) really love the auto industry, and they (along with their parents and grandparents) have worked in the industry for so long that they can’t imagine doing anything else. Also, automobiles have been such a vital part of Detroit’s culture for so many years that losing the automotive industry could result in the city losing its identity – the effects could be devastating.

On the other hand, using government money to bail out companies that have suffered from bad management does not make me a happy taxpayer. We are already bailing out banks and investment firms for bad management practices and now homebuilders and automakers want to be bailed out as well. It’s been awhile since my college days, but I really don’t remember learning in any of my economics classes that a free market economy includes bailing out companies that have been mismanaged by their executives and boards of directors.

A bailout of the Detroit 3 should not even be considered without several stipulations, including a change at the executive and board levels, and a clear and concise plan for a fundamental change in their cultures to enable focus on continual improvements in product offering, quality, productivity, and costs. Without these types of changes, there is no guarantee that these companies won’t waste the billions given to them just as they have wasted billions of their own cash reserves over the last 10 years. And the last thing we need is to be debate this issue again 1-3 years from now . . . most likely for a whole lot more than $25 billion.

Are Legacy Costs the Problem?

All three of Detroit’s automakers are affected by the legacy costs to their retirees, and GM’s Rick Wagoner never misses an opportunity to note this as a major competitive disadvantage for the company. One thing that Wagoner never mentions, though, is the more than $1.4 billion in contractual pension obligations that GM has for its executives. I’ll have a little more sympathy for Mr. Wagoner as soon as I hear him complain about these obligations as well.

Although Toyota and Honda have the advantages of operating nonunionized plants, and having much lower legacy costs, these are not the reasons for their success. They produce great cars that people want to buy; and they do it quicker, better and at a lower cost than anyone else. Also, the people at Toyota and Honda love their jobs and their companies, and directly contribute to improving the work that they do.

Anyone who has studied business – and especially manufacturing – knows that there are huge differences in how Toyota approaches business as compared to Ford or GM. One of the most glowing differences is that they take care of their people and do not fire them whenever revenues fall. They have also been continually working to perfect their system of production for the last 60 years.

Taiichi Ohno, former Toyota executive and father of Lean Manufacturing wrote in his book, The Toyota Production System: Beyond Large-Scale Production, “hiring employees when business is good and production is high, just to lay them off, or recruiting early retirees when recession hits are bad practices.” Ohno wrote this over 30 years ago when few thought that Toyota had any chance of surpassing the Big 3 in sales. Obviously, executives at Ford, GM and Chrysler have chosen to follow a different approach and continue to undervalue the people who design and build their cars.

Funding the Business for the Long-Term

Much has been written about the profits made by Ford and GM from their SUVs and pick-up trucks over the last 10-15 years. Unfortunately, the executives chose to sit back and enjoy their success instead of thinking about the future health of the companies they were supposed to lead. Unlike Toyota and Honda, they did little to develop small, fuel-efficient models and instead chose to continue to focus on gas-guzzling, but highly profitable automobiles, all the while handing out millions in bonuses. Anyone who lived during the initial oil crisis back in the 1970s might be experiencing some very painful déjà vu from this situation.

While Toyota and Honda also did what they could to maximize profits from hot-selling SUVs and pickup trucks, they invested billions into developing hybrids and more fuel-efficient models for the future, as well as continuing to focus on updating and improving their factories.

A further important distinction with Toyota is their philosophy of building cash during the good times in order to help the company withstand the bad times. They use profits as a way to invest in the future and make sure that there is a future. At present, they are one of the few companies that have the ability to finance purchases for their customers. Any company that does not build its cash during the good times to keep it operating during the bad times is doing all of its stakeholders a disservice.

I also wonder why we are considering giving Chrysler money when their strategy seems to be to sell themselves to GM (who, according to all indications, plans to shut them down). The company announced recently that it is cutting back on product development to save money. This does not sound like a company that plans to be around for the long-term and, from my perspective, makes it a bad investment for taxpayer money.

GM is predicting that, without the bailout, a massive number of people will lose their jobs and suppliers will close down. This is a strange concern for a company that has history of massive layoffs and a reputation for apathy towards its suppliers. Why do they now care about putting people out of work and suppliers out of business when they didn’t for so many years?

Remembering When Quality Was Job 1

One of the real shames in this situation is that Ford was actually on the right path back in the 1980s when Donald Peterson was CEO. Peterson was an avid follower of W. Edwards Deming (one of the people credited with teaching Toyota how to compete), and began making progress on shifting the culture at Ford toward quality and continual improvement. Unfortunately Peterson had a very short tenure as CEO and the company quickly changed direction after he retired in 1989. One has to wonder where Ford would be today if the company continued implementing Deming’s teachings.

Maybe the answer to all of this is for the Detroit 3 to reorganize as banks. They would then have access to the $700 billion financial system bailout without the headache of developing and presenting plans to show that they intend to change.

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