The Big Three's Problems

And here we stand on the brink of oblivion, if you believe what the executives of Ford, Chrysler and GM had to say to the U.S. Congress this week.

And if you read this very well-written article at The Globe & Mail, it could very well happen. Personally, I think we all need a reality check on how we got here and the many players that have played parts in the problems that Ford, Chrysler and GM are having right now.

1) Ford, Chrylser & GM – For many years now, Detroit has succeeded in creating reputations for themselves of putting out unreliable products and pairing them with expensive and poor service. Clearly I’m generalizing, but it’s necessary in order to avoid a very long explanation of what products and services don’t fall into this trap. If you walk up to almost anyone on the street and ask them how long a Ford engine will last compared to a Toyota engine, I’m willing to be a significant amount of money that the majority of those surveyed will tell you that a Toyota engine will last roughly twice as long. When I tell people that my Chevrolet Aveo has gone 187,000km without any issues they are amazed. Unfortunately the Aveo is a poor example since it’s built in South Korea.

To address the service issue – the dealership where I bought my vehicle routinely tries to screw me out of $600 to $700 worth of repairs pretty well everytime I bring it in. When I take it to “my” mechanic, the problem is fixed after only $100 or $200. Either the mechanics at the dealership are poorly trainined at their jobs or they have been trained by GM to try and extract as much money as possible from someone that they think knows nothing about cars. My father has repeatedly said he will never buy another GM car after suffering through owning his 2000 Oldsmobile Alero and 1999 Chevrolet Venture. They have caused nothing but headaches since just after the warranties expired (how convenient!) on both vehicles and my parents treat their vehicles very, very well.

Not to mention ridiculous ideas like the entire Hummer brand, huge SUVs that no one truly needs and still very fuel inefficient vehicles. I test drove a Ford Edge – it told me I was getting 13mpg on the highway. That’s ludicrous! The Ford Flex is no better and is hardly a crossover. Sorry Ford, but it’s true.

2) The UAW & CAW – The unions are one of the biggest problems plaguing North American automakers. This is clearly seen when you see in the G&M article that GM spends an average of $71 per employee per hour compared to Toyota spending $47. The UAW & CAW have demonstrated time and time again that they care about nothing more than getting more money out of the automakers. The result? Massive layoffs, huge inefficiences and oversupply on the market. The company my father works for has treated him very well for the past 25 years, and indeed I have worked for said company two separate times, however all but one of it’s contracts are to supply Ford, Chrysler and GM. The company has consequently suffered massive losses over the past few years and things are looking grim.

The real problem here is that everyone expects automotive-related jobs to pay well. And yet the automakers constantly want the parts their buying from companies like Magna, Meridian and Wescast to be less expensive, meanwhile the manufacturers are expected to increase pay every year. The formula doesn’t really work out in the long run unless you increase productivity and yield in return for the decrease in price – and in my experience, that simply cannot be sustained.

And things are worse at unionized plants. The union goes in, gouges the automakers for better wages and benefits and then gets irate when an automaker has to cut jobs. I can support the idea of a union, but the CAW and UAW, among others, really do nothing but cause American and Canadian-based manufacturing jobs to be less and less viable. Corporations have a legal mandate to increase shareholder value which means doing everything they can to iron out inefficiencies, increase productivity and decrease costs. A few years ago, in St. Thomas, that meant shutting down a truck-building plant and moving the work to Mexico.

Congratulations CAW! You are so good and making sure Ontario remains a competitive and viable area for companies to assemble their products here!

I know, I’m oozing with sarcasm right now. But really, the CAW and UAW need to realize what’s going on here. They look after themselves more than making sure that doing business in Canada or the US even makes sense for a company, and in the end they ended up biting the hand that feeds them… several times. The unions are a humongous part of the problem and they are only making the situation worse.

3) The executives – Wow they take home a lot of money, don’t they? Even when the companies they run are losing money, they take home millions! Why?! I remember a few years ago reading a story about one of the North American automaker’s CEO’s taking home a several million dollar bonus after the company he ran lost several million dollars that year. How does that make any sense? And then, just this week, they all flew in private jets to Washington, D.C. in order to plead for emergency loans. Whose bright idea was that?! Heaven forbid they fly with the rest of us on normally scheduled flights!

Ford has 8 private jets, GM currently has 7 but is getting rid of 2 because they aren’t being used enough. Boo hoo! Did I mention that GM CEO Rick Wagoner took him $15.7 million last year? Oh, but wait, he voluntarily reduced his salary by 50% this year, allowing himself to take home a paltry $7.85 million in 2008. The poor thing, he must be resorting to food stamps in order to get by!

Amazingly, Chrysler CEO Robert Nardelli’s salary, to my knowledge, is $1 a year. However, he has other means of compenstation that Chrysler no longer has to disclose since they’re a private company now.

Ford CEO Alan Mullaly took home $22 million last year. How does he sleep at night?! Isn’t $1 million enough? The U.S. President makes $400,000 a year and his decisions affect over 300 million people directly. Our Prime Minister takes home roughly $280,000 a year for running a country of roughly 32 million people. You do the math.

4) Old, stupid laws – The G&M article has some information on this, but apparently there are many states in the U.S. that have laws prohibiting the automakers from selling their vehicles directly to the public.

The king is GM, with more than 6,700 dealers, or nearly five times as many as Toyota. And the average Toyota dealer outsells his GM rival by a factor of three-to-one vehicles a year. All told, the Detroit Three have more than two-thirds of all dealers, but their cars account for less than half the market.

That situation does not make for an efficient supply chain – another problem for the North American automakers. I know plenty of people who gladly drive to a different city to buy a new car if need be.

5) Letting Toyota & Honda take over – Really, that’s what happened. Toyota’s been producing good cars for a long time now, so has Honda. Every year they evolve their vehicles in order to make the more attractive, more fuel efficient and more reliable. And for years Ford, Chrysler and GM let them catch up and eventually overtake them. Even Hyundai has made decent in-roads in North America, and I know a few people who would like a Mitsubishi to be their next vehicle. I don’t know anyone clamouring over the Ford Fusion or Dodge Caliber to be their next vehicle.

The big 3 fell behind and now they’re struggling to play catch up. GM is hoping the Volt helps propel them ahead of the competition again, and I don’t know what Ford or Chrysler are doing in order to truly stay competitive. Sync, available on a few Ford models, is nice and all but it doesn’t help change Ford’s image. I can’t remember the last time I saw a Mercury vehicle with Ontario plates on it.

The bottomline is that the big 3 have dug themselves a huge hole and there’s a chance that none of them will survive. The good news is that Toyota, Honda, Hyundai and Volkswagen will benefit almost immediately and there will still be the need to increase production in North American by those companies. That will also make it easier for some of the European automakers, Fiat especially, to come back to North America and possibly use some of the then abandoned factories to produce their parts and vehicles for this market. So how dire is the situation? Very. Possibly not as bad as Wagoner, Mullaly and Nardelli would have you believe, but there would certainly be plenty of short-term pain.