GLG News by Michael Kowalski, Ph.D.

Implications: Chrysler is pursuing two strategies to improve the fuel economy of its product offerings: focusing it limited resources on developing a flexible mid-sized platform capable of producing a large variety of vehicles and working with other manufacturers to badge engineer smaller sized automobiles. While these are smart strategies near term, there are risks to the company longer term.

Analysis:  It doesn’t take a rocket scientist to conclude that all of the automotive manufacturers are going to be driven to concentrate on the small vehicle end of the market. The new federal fuel economy standards surely will force the automakers to produce more fuel-efficient cars. There are a host of new and mostly very expensive technologies that can offer significant fuel economy benefits. It an open question whether large numbers of automotive customers will be willing or even able to purchase these high tech vehicles based on the expected large price increases. I am sure that most automotive manufacturers will choose to produce these new technology vehicles, but they may represent a small segment of the overall market. The only realistic avenue open to them is to concentrate on smaller vehicles. These smaller vehicles which by virtue of their size and reduced weight can provide superior fuel economy at a price that a large number of potential customers may be willing to pay. The current run up in gasoline and diesel fuel prices will just accelerate these pressures on the manufacturers.

Chrysler is in a somewhat unique position. It is the smallest of the Detroit automakers and competes primarily in the North American market. With its limited resources it probably will not be able to vie effectively in the new emerging and potential technologies. So I find it reasonable for them to focus on what will in all probability become the heart of the automotive market. Of course the other OEM’s will also be aggressively competing in this market segment as well. Thus Chryslers strategy seem to be two fold. First to develop a flexible "platform" that can be used to produce a variety of vehicles in the small and mid-sized market. This maximizes the efforts of the limited design and engineering resources and can also enable its assembly plants the option of building several vehicles at the same time and shifting volumes to reflect market conditions. Chrysler literally invented this strategy with the "K-car" platform that was its salvation in the Lee Iococca era. Other automotive manufacturers have and are utilizing this strategy as well. Chrysler’s second strategy is to market vehicles produced by other manufacturers. They have already started programs with Nissan and Chinese automaker Chery. This will allow Chrysler to quickly bring to market small high-fuel economy vehicles without utilizing large amounts of its limited resources. However while this may provide a near term advantage, in the long term Chrysler will lose some of its technical expertise in designing, engineering and assembling small vehicles. Both of their strategies involve risks to the company, but given current circumstances it is probably, in my opinion, the best that Chrysler can do.

Implications: General Motors has been exploring and developing alternative drivetrains for many years. These designs have not yet reached the stage of commercial viability for a variety of reasons. However recent events such as increased fuel prices, tougher fuel economy regulations, increased public concerns for the environment, concerns with dependence on foreign oil dependence have raised the level of these efforts. The introduction of the Volt concept car with its projected battery powered range, and backup gasoline engine "range extender" has fired up public enthusiasm. This could be a break through vehicle for GM if they can pull it off. It really depends on the viability of the lithium-ion battery pack.

Analysis:  For many years General Motors has had advance development programs exploring new technologies which could ultimately replace the current internal combustion engines in its products. These programs have explored possible diesel, hydrogen, fuel cell, and electric battery powered vehicles. While each of these alternatives has shown some level of technical feasibility, they have fallen far short of either economic or consumer expectations.

General Motors offered diesel powerplants in its products in response to the gas shortages of the 80’s. These were conversions of existing spark ignitions engines and they were met with customer dissatisfaction because of excessive noise and vibrations, hard starting in cold weather and smelly exhaust fumes. While current diesel technology and cleaner burning diesel fuels have resolved these negative aspects, the memories of those earlier failures have left a distaste in many customers for diesel powered General Motors vehicles. European automotive manufacturers have operated in a high fuel cost environment for a long time and their diesel-powered vehicles are widely accepted by their European customers, and interestingly enough are beginning to be purchased by American customers of premium vehicles. I expect that General Motors and other producers will introduce diesel powerplants in many of their products because of the increased fuel economy requirements imposed by the new federal standards. Diesels are attractive in this regard as they can improve miles per gallon performance by as much as 25%. However these powerplants come at a substantial cost penalty and many again fail to meet with customer acceptance for quite a different reason. In my locale the price of diesel fuel is about 30% higher than regular grades of gasoline. I expect that customer who have to pay a premium for diesel engines will be surprised to discover that the cost per mile ($/mi) to drive their new vehicle is higher than a gasoline powered automobile. Unless the higher relative cost of diesel fuel is eliminated, I see problems with high volume sales of diesel powered vehicles.

General Motors has looked at hydrogen powered vehicles for some time. This is a very attractive alternative as it eliminates dependence on imported oil and the product of its combustion is water. Hydrogen can be used in an internal combustion engine or in a fuel cell. There are technical problems with fuel storage, but the biggest hurdle is the lack of a hydrogen supply infrastructure. It would take a major national effort to create this needed supply network before hydrogen powered vehicles from General Motors, or anyone else, can be viable.
 
Battery powered automobiles were manufactured from the early days of the automotive industry. At the beginning of the 20th century electric vehicles competed with steam and gasoline powered vehicles. The limited range of these early vehicles sealed their fate. In recent years General Motors produced a test fleet on battery powered vehicles, the EV-1’s. Battery technology had not improved much over the intervening century any these contemporary electric vehicles failed to meet customer expectations for an acceptable range.

This brings us to the General Motors Chevrolet Volt. The concept is to extend the range of a battery powered vehicle with a small gasoline (could be diesel) engine to recharge the battery on the fly. Given the recent run up in gasoline prices, the new fuel economy standards, concerns for CO2 emissions, and increased public concern for the environment combined to generate a great deal excitement when the Volt concept show car was shown to the public. Perhaps more the General Motors anticipated. In any case, GM’s response has been to put the Volt program on the very fast tract and to commit to an introduction as a 2010 product. This involves no small amount of risk for GM, particularly considering the slow sales start of its dual mode hybrid drive system on its large trucks and SUV’s. My opinion is that the most of the technical issues raised in the article will be resolved in this timeframe except for the old bugaboo of batteries. The old EV-1 used nickel metal-hydride batteries. The plan for the Volt is to employ the new lithium-ion batteries, which are substantially smaller and lighter than then a comparable EV-1 like system. The reliability, durability and high volume production of lithium-ion batteries is yet to be proven. That is where all of the testing cited in the article is focused. General Motors must have a fairly high level of confidence in the program to allow such a open public look at its progress in the development of the Volt vehicles. It is always possible to accept a short battery-only range using the more commercial developed nickel metal-hydride batteries. Perhaps this fall back plan is what gives GM the confidence that it is displaying.

Implications: This interesting article by Jerry Flint, a respected automotive commentator, summarizes a number of recent events that taken together present a troubling problem for Toyota. As Mr. Flint points out, it not the end of the world, but it does indicate that the mighty Toyota company can stumble in its businesses just as other manufacturers. The quality image that has been so important to its rapid growth may be tarnished by these developments.

Analysis:  

The rapid growth and success of the Toyota Motor Car company in the North American market has been primarily based on its reputation for quality and more recently by the "green" image generated by its successful Prius Hybrid vehicle. However, as Mr. Flint points out that Toyota has stumbled several times in the past few years. The quality reputation enjoyed by Toyota took a long time to achieve, and will not be easily destroyed by these recent missteps. However these are indications that the rapid growth it has enjoyed has strained the limits of its management and has resulted in a number of problems. In my opinion, the sales shortfalls for Toyota in recent months reflect the overall automotive market rather than a particular Toyota problem. In reality, Toyota sales have faired substantially better than most of its competitors. The large numbers of Toyota vehicle recalled for safety defects in recent years is serious concern, reflecting either design or production problems. My opinion is that management has not been able to focus on all of the issues necessary as their business has grown in North America. The recent departure of three senior executives may only make this a more serious problem. Mr. Flint makes an interesting point on this matter noting that it is rare for a Japanese executive to leave the employ of his company to move to a competitor. This probably has resulted in suspicions of the remaining American nationals among the native Japanese managers. This may increase internal frictions and lead to more managerial problems in the operations of the business. Consumer Reports has recently turned critical of Toyota, an almost unheard of development. As this is an important source of customer information, this does not bode well for Toyota. Toyota needs to proceed with caution if it wants to preserve it vaulted quality reputation.

As noted above the second pillar of Toyota’s reputation is its green image. It is well deserved in that it has been extremely successful in marketing its Prius and other follow on hybrid vehicles. However the fuel economy performance of many of its products is inferior to its competition and high fuel prices are making many customers sensitive to this issue. The large fuel-efficient Hybrid vehicles currently being introduced by General Motors and others may leave Toyota behind in technology.

With both pillars of its marketing strength being challenged, Toyota is vulnerable. However it is a strong company and is capable of overcoming these hurdles. The question is can it react fast enough to avoid long term damage.

Implications: The decision by Bear Sterns to recommend Ford Motor Company over General Motors seems very misguided to me. Ford is literally just beginning its turn around efforts and they may not save the company. General Moors has already taken many steps of cost reduction and new product introductions and moreover is investing in many new powertrain technologies for coming years that Ford will find difficult if not impossible to duplicate. I expect GM to benefit and Ford to suffer as a result.

Analysis:  

I have not written many comments on the automotive industry lately, especially those based in Detroit because for the most part the press has got the story pretty much correct. However this position of Bear Sterns make no sense to me. General Motors has done much to reduce its costs in the past few years and the new labor contract with the United Autoworkers is another big step in this process. However in my opinion the most significant progress has been in designing vehicles and the manufacturing/assembly processes in an intelligent lean and nimble manner. The benefits to the company make it much more competitive with the transplants by substantially reducing the gap in its costs compared to their lower retirement and health care costs. Cost reduction by itself, of course does not guarantee business success. You need to offer products that are desirable to your customers. GM has certainly made a major effort in this area and many of its new products are receiving rave reviews and healthy sales. It has made significant progress in shoring up its faltering brands, especially Cadillac, and Chevrolet, and now Buick and Saturn. More importantly it is investing in new advanced technology in the powertrain area. Major new developments in low emission diesel engines, advance hybrid configurations, fuel cell and electric vehicle technologies will be entering the marketplace in coming years. GM has chosen to develop and has invested significant capital in a wide array of these new technologies. As a result it will be a formidable competitor in the global marketplace for a long time to come.

Ford Motor Company, on the other hand, is just beginning to get its hands around its problems. It is years behind GM in its fundamental vehicle platform and powertrain rationalization programs. It lacks the resources, both financial and technical, to develop the powertrain technology necessary to be competitive in the coming years. It is still in the process of selling off its unprofitable prestige vehicle lines and it domestic products, particularly Mercury is in trouble. Based on all this Bear Sterns advice makes no sense to me.

Implications: Volvo has shown a concept hybrid powertrain in a modified C30 vehicle, quite similar to the design that General Motors showed earlier this year at the North American Automotive show in Detroit. This technology when fully developed will be able to substantially improve fuel economy and drastically reduce vehicle emissions. However this appears to be a Volvo effort and is not part of a wider Ford Motor Car Company program.

Analysis:  

This article is a good news bad news story.

It good news that Volvo is developing a hybrid drive system for its vehicles. The market is swinging strongly to fuel efficient vehicles as well as environmentally friendly vehicles. Toyota has successfully capitalized on these market place trends with its popular Prius hybrid vehicles. However the term "hybrid" can and does encompass a wide range of possible powertrain configurations. In the Toyota design the engine is mechanically connected to the drive wheels. In normal operation the engine provides the power to the drive wheels. The battery supplements the gasoline engine if power demands exceed the capacity of the engine. When the power demands of the vehicle are less than the engine provides, the excess energy is stored in the batteries. From the scant details in the article, it appears that the Volvo hybrid system is very similar to the one General Motors is developing for the Chevrolet Volt program. The modified Volvo C30 shown at the Frankfort Auto show has a lithium ion battery pack that power the electric motors at the drive wheels. As with the General Motor’s design, there is no mechanical connection between the gasoline engine and the drive wheels. Electricity from the battery pack power the electric motors of the vehicle, for a claimed range of about 60 miles, almost exactly the same as the Chevrolet Volt. This battery pack is recharged when the vehicle is "plugged-in" while it is parked or by a gasoline engine while the vehicle is being driven beyond the range capacity of it battery system. Hence for daily commutes less than 60 miles, the gasoline engine is not operated and thus consumes no fuel. Thus the vehicle has the exceptional fuel economy and minimum CO2 emissions. That is a pretty good news story, but success for Volvo (and General Motors) heavily depends on battery capabilities and cost. This is the area in which technical improvements are needed and actively being sought by many manufacturers.

The bad news is that this hybrid drivetrain is a Volvo development program. Apparently it is not being done in cooperation with the parent company, Ford Motor Company. In spite of Ford’s announced plan to globalize its product lines, it apparently is not planning to incorporate the Volvo hybrid powertrain into its future vehicle lineup. As market pressures will surely drive Ford to eventually incorporate this advance technology, it is missing an opportunity to include this Volvo design into a broader product offering. Perhaps Ford has already made the decision to sell Volvo and is intentionally cutting its ties with that organization.

Implications: Quality of Chinese manufactured products is a hot topic these days.  The safety of pet food ingredients is just a recent example.  The Chinese seem able to avoid international standards for safety and quality, instead focusing on price and volumes.  Tire failures are just another example.  Radial tire manufacturing requires a skilled operator to build a good tire, assuming that good design and quality materials are used.  A deficiency in any of these three areas can lead to the tread separation failures reported.  Clearly the manufacturer of the vehicle experiencing a tire failure with these aftermarket replacement tires is not responsible for the problem.  However they make an easier target than Chinese manufactures, and litigation motivated lawyers will go after the automotive manufacturers as they have the deepest pockets.  Who can predict the outcome of the litigation that is sure to follow these tire failures?

Analysis:

Tire failure is a serious problem with dire consequences. Injuries and perhaps fatalities can result as a result of sudden loss of vehicle control. The recent history of the problems on Ford vehicles equipped with Firestone tires hints at the very high liability costs that are at stake. However in the Ford/Firestone case the tires were provided by Ford as original equipment on the vehicles they sold. As such the ultimate responsibility belonged to Ford, even though the quality problem occurred at Firestone.
It is my understanding that in this case the defective Chinese tires were sold in the replacement aftermarket. This is a very price sensitive business and low cost tires built in China would be an attractive product. As my fellow commentator, Jack Lifton has correctly pointed out , American manufacturers have given the Chinese a century's worth of technology development for automotive products to take advantage of their low labor costs. However quality standards and raw material shortcomings are resulting in flawed products.
Clearly liability for this problem rests with the tire manufacturer and the tire distributor. The manufacturer of the vehicles involve can not be responsible for replacement tires that they do not specify or recommend. In the case of General Motors, a Tire Performance Specification (TPC) number is created for each tire on its vehicles. The TPC number is molded into the side wall of each of the tires provided on its vehicles. When one of its customers replaces his tires, GM recommends that the replacement tires meet the specific TPC for that vehicle. However it is a customer decision, and cost often weighs heavy on that decision.

In any case, given the severity of the safety risk, there is sure to be litigation to assign blame and to collect damages. The distributor and tire manufacturer are squabbling about the issue, but my experience tells me that the OEM manufacturers of the vehicles will be dragged into the litigation as they probably have the deepest pockets. While tit is nonsensical to hold them responsible for the problem, who can say how the issue will be settled in our court system

Implications: The purchase of a majority stake in Chrysler by Cerbus Capital Management signals a chance of another Chrysler resurrection. This will require an accommodative new contract with the United Auto Workers union and massive changes to Chrysler’s business. The initial response from the union is constructive, however many difficult issues will be on the bargaining table this fall, not only at Chrysler but at Ford and General Motors as well.  

Analysis:  

This article points to today’s "big" news in the automotive industry and notes that it will have major impact not only at Chrysler but on the United auto workers union as well. The sale by Daimler Chrysler of its Detroit operations has been long expected, but the eventual buyer was subject to much speculation. Now that the other shoe has dropped, several developments may be expected to follow on soon. As the purchaser of 80 percent of the Chrysler assets (the remainder kept by Daimler), Cerberus Capital Management is in the drivers seat to make the changes necessary to either turn around the business into a profit making operation or to dispose of it piece by piece. Either way they seem confident about their prospects as they reportedly paid a generous $7.4 Billion to Daimler and assumed a $19 billion pension and health care burden as well. This acquisition must be viewed in context with other parts of the Cerberus empire. All that said, here are my expectations of developments to follow:

The United Automotive workers and their union had a lot at stake in the outcome of the Chrysler sale. The union had been very critical of potential buyers such as Cerberus Capital Management, and even made overtures to Magna International (an outfit not noted for its openness in working with unions). However their initial response to the pending sale has been surprisingly positive. Clearly the UAW is aware that it will have to make economic accommodations in the health care area similar to those already in place at Ford and GM. The bigger issue is the impact on the up-coming labor contract negotiations, later this year. I expect that work rules and job banks provisions of the current contract will be on the table as well as transferring increasing share of the cost of their health care benefits from the company to the workers. Also simplified outsourcing rules will probably be a hot topic as well. These same issues will be on table at Ford and GM as well, and the weakened position of the union should result to changes in all of these areas. In addition there may be a union concession for a two-tiered wage scale for assembly plant new hires going forward. The average seniority (and age) of current union workers has been increasing and retirements will begin to substantially reduce the ranks of higher paid workers in the coming decade, hence the auto companies would like to have a lower entry wage structure. All of these changes will be aggressively sought by each of the automakers as way to become more competitive with the Japanese and Korean manufacturers and the coming waves of low cost Chinese and Indian vehicles. The success of the UAW is tied to the success of their employers; thus significant contract changes are to be expected at the Detroit3. Perhaps the temperate response of the UAW to the Chrysler sale is recognition of that reality.

Cerberus is very likely to change Chrysler operations in important ways. Closing of both assembly and component plants is certainly to be expected. With the current and future customer pressure for fuel efficient and environmentally friendly vehicles, I expect that the Chrysler product line up will see remarkable changes. The partnership with Cherry in China to produce small passenger car vehicles will probably grow and likely will be expanded to include other off shore production of vehicles to be marketed as Chrysler vehicles. This means less manufacturing of Chrysler vehicles and their components in the US. The increased focus on passenger vehicles may be the major source for vehicles in Cerberus’s vehicle rental business (Alamo and National). Also Cererus’s ownership interest in Tower and other suppliers will result in realignment of Chrysler’s suppliers. All of these changes will have major impact on Chrysler's current suppliers.

I have read of speculation of combining Chrysler’s finance operation with Cerberus’s GMAC. This may make sense if redundant operations are eliminated. However if the intent is to market lower cost smaller passenger vehicles, the automotive financing business may not be as lucrative as in the past. There will be strong pressure to extend auto loans to less qualified purchasers and to entry-level buyers of Chrysler’s products to keep production volumes up.

The road ahead for Cerberus to make a success of the Chrysler operations will be challenging and success is far from assured, but there is hope. Chrysler has a long history of coming back from near death experiences.

Implications:

While the take over of Chrysler by Daimler was ill conceived and a poor business judgment, current issues in the market could provide a rationale for continuing joint operations to the benefit of both parts of the organization. However Daimler does not appear to have the tenacity to make the Chrysler operations a success and is anxious to unload them. Magna probably has the next best shot, but it is in competition with other bidders who would dismantle the company by selling off the parts. While the UAW may be willing to offer Magna concessions to save their jobs, it is still uncertain how this all will evolve.

Analysis:

It seems to me that there are only three possible resolutions of the problems at Daimler Chrysler's in Detroit. First Daimler could tough it out, make the difficult decisions, and suffer the financial burdens of turning around the Chrysler operations to hopefully achieve sustained profitability. This probably would take several years to accomplish and a sustained effort seems unlikely given the public positions taken by Dr. Z and his management board. In any case I believe that the joining of these two companies was a major error of business judgment at that time, as there were very little cost synergies available in the combined operations. The nature of the high volume mass market and high-end premium market limited the opportunities for shared components across the two types of product lines. It could only result in cost penalties for the Chrysler products and quality compromises for the Mercedes products. Similarly there were limited opportunities for shared manufacturing and assembly operations, dealer networks, or marketing campaigns. All that said, I believe that given today’s issues, it still may sense to keep the two organizations together. Chrysler could benefit from access to Daimler’s diesel engine technology while Daimler could benefit from the hybrid drivetrain technology from Chrysler. This could be particularly important in achieving increased fuel economy and reduced carbon emissions, some thing needed by both parts of the company. However as I noted, this would take time before reaping the benefits and patience at Daimler does not appear to be in the cards. Thus the remaining two alternatives involve the sale of the Chrysler assets (assuming that just discontinuing operations is not an option).

One possibility is the sale of the company to a consortium of financial specialists in troubled companies. Their approach would not be to try to restore the operations to health, but rather to sell off those parts that have value (maybe the parts are worth more than the whole) and shut down the remainders. The question is will Daimler willing to sell at a price attractive enough for these purchasers to make money in turn? The other alternative is the purchase by Magna and its partners who clearly have the capability of managing the business and could possible make a success of the Chrysler operations. The question than is a value based bid by the Magna consortium competitive with the other interested parties? The answer to this question may rest with the Daimler Chrysler pension and health care liabilities. How far is the UAW willing to go?

Implications: The fact that Toyota has outsold General Motors in the first quarter of 2007 is the result of difficult and different strategy decisions at the respective automakers. Toyota has decided that the sale of unprofitable hybrid vehicles is an important part of its global strategy to improve its public image as a "green" manufacturer. General Motors has decided to reduce its dependence on fleet sales to improve its profitability. Both strategies are important and have resulted in the change in sales leadership. The question is what is more important, profits or sales?

Analysis: The fact that Toyota worldwide vehicle sales exceeded General Motors in the first quarter of 2007 makes headlines in news reports just like the Dow Industrial Average passing over a thousand-point milestone. Nothing fundamental has changed with this "event", but it is symbolic of the problems facing General Motors (and the other Detroit Automakers). In reality GM still out sells Toyota in almost all of the major global markets with an important exception. General Motors has only a minuscule presence in the Japanese home market. This is of course not a market open to foreign competitors and GM is unable to take on Toyota and the other Japanese manufacturers in their home base as they have tried in the United States.
Even just looking at the numbers, GM had fewer fleet sales in this past quarter. This is an intentional strategy of theirs to improve used GM vehicle residual values and focus on more profitable retail sales. Without this intentional policy, the sales "race" would have been a dead heat. General Motors turn around strategy is focusing on cost reductions and new product introductions in all of the global markets. They are pursuing alternative drivetrains to address the environmental and political consequences of dependence on foreign oil. But they are working on systems that can be produced and sold without subsidy. This strategy is sound, in my opinion, and has been underway for several years. It is important for GM to keep a steady focus on its execution if it is to continue as a major global competitor and to return to sustained profitability.
My fellow commentator, Jack Lifton, points out that part of Toyota's sales volume is due to the sales of unprofitable hybrid vehicles. If that is true, and I don't question this fact, than winning in sales may mean losing in profits. Global profits are the real arena of competition among the major auto makers.

Implications:

The Chinese automotive market continues to grow rapidly, but local companies are taking a larger share of the market because of their lower costs. Thus they are reducing margins for off shore competitors. Even more disturbing for the major global automakers are the beginnings of a Chinese automotive export industry. If the Chinese (rather probably when) can develop a reputation for quality, they will have profound impact on the major global competitors.

Analysis: The Chinese automotive market is continuing its rapid growth, but it is also experiencing important changes which will have impact on the global market. First local manufacturers such as Chery are gaining an increasing share of this growing market, a disturbing trend for those companies trying to establish themselves in China. The trend is primarily based on price, with the local automakers enjoying a significant price advantage over the off shore competitors. This advantage is due not only to lower labor costs, but also because of direct access to other local tier two suppliers and raw materials. They have also avoided the high cost of designing, testing, and developing products by either reverse engineering the products of other manufacturers or just out right copying entire vehicle designs. This permits them to offer their products at substantially lower prices and the competition is reducing the margins on the off shore competitors. Maybe the party is over in China. However the news gets worse. Chery and other Chinese manufacturers are beginning to export these low cost vehicles to some surprising markets. Chery’s partnership with Daimler Chrysler for the North American market is an example. Historically the North American market has not accepted cheap low quality vehicles. Remember the Yugo? For those old enough to remember, products from Japan were once considered cheap and of inferior quality. Perhaps the Chinese manufacturers will follow the same path as the Japanese and put increased emphasis on quality. That story is still evolving. However the Chinese are jump starting the process by entering the European market with up scale products. Apparently the Brilliance will soon be marketed in the Netherlands and Germany. If they are successful there, the cache may accelerate North American marketing of these upscale products. Sounds like another Korean story. Any way you look at it the global automotive market is becoming increasing competitive.

Implications: xxxx

Analysis:

Detroit automotive companies have a long history of attempting to influence the political arena via their lobbying organizations and by participating in the resolution of technical issues of EPA and NHTSA rule making processes. However the political clout of these efforts has diminished over time as the domestic industry represents a smaller and smaller part of the national economy (perhaps also balanced by the increasing political clout of the Japanese and Korean manufacturers as they build more plants in various US States). This reduced influence was clearly demonstrated in the much-delayed meetings between President Bush and the leaders of the Detroit automotive manufacturers. Hence the increasingly proactive involvement with the rulemaking process to influence the bureaucratic side of government rulemaking. I think that the automotive companies are recognizing strong public pressure to address the issues of global warming and green house gas emissions. By actively engaging in the public policy discussions automakers achieve two benefits: a chance to get more realistic regulations and perhaps an improved public image. In fact all of the automotive companies are vying for a "green" public image. The big question is how ready is the public to shoulder the costs of as yet very expensive (and mostly unproven) technology needed to address these perceived environmental problems. If the public will not or can not afford these more expensive new vehicles, then will they continue to drive their older more polluting current vehicles thus compounding the environmental. Thus it is in the public interest for both the automotive companies and the government to work together. A failure to cooperate in producing laws and regulations will either drive the Detroit 3 closer to the edge of extinction or not result in an improvement to the environment, as the public is demanding.

Of the three Detroit automakers, General Motors is in the best position to influence the public debate and to produce the products compatible with well-conceived regulations. The array of future powertrain technologies that is trying to commercialize is impressive and with meaningful environmental regulations, both the country and General Motors can benefit. It goes back to what Charles Wilson said many years ago, "what is good for the country is good for General Motors".

Implications:

Importing off shore designed vehicles has proven to be a unsuccessful strategy for the Detroit’s automotive companies. Mr. Flint lists many of these failures in his commentary. He ends with a bit of optimism for General Motors, an opinion I share. His views are based on new products from General Motors, mine are based on the implementation of a broad and integrated global strategy for the company. This has been under development for several years and the fruit’s of this effort are beginning to pay off. Simply stated they are starting to act like one company, and it may work.

Analysis:

As I have commented several times in the past, Jerry Flint always has interesting insights into the automotive business. The Detroit 3 (no longer called the Big 3 in the press) are trying desperately to improve their bottom lines. Basically there are only two ways to accomplish this goal either reduce costs or increase sales (or employ some combination of the two). However recent history suggests that raising sales is a difficult proposition for Detroit automakers, and hence the recent big push to slash payrolls, close plants, reduce supplier prices, and to limit health care benefits for employees and retirees. All these are basic business 101 cost reduction approaches, and they are (and have been) the knee jerk reactions of the Detroit 3 when they are in financial difficulties, as they currently are. However in the automotive industry another cost reduction approach is possible. That strategy is to maximize the use of basic vehicle platforms by sharing these architectures across as many product lines as possible. In theory this strategy can reduce the costs of product development, maximize the utilization of manufacturing and assembly operations, and perhaps reduce the costs of purchased parts with yet higher volumes on shared parts. This is an alluring prospect and hence this approach to reduce costs is being taken, in one form or another, by each of the Detroit 3. This has been done with creating variants of existing domestic products and with the importation of vehicles designed and produced elsewhere.

The Detroit 3 companies have tried this approach many times in the past. Mr. Flint correctly points out that attempts to introduce vehicles designed and manufactured in other parts of the world in the North American market have generally been failures. In most of these cases it was almost an after thought to import or to manufacture these vehicles here. The principal reason for these failures is that these vehicles were not initially designed to meet the needs and desires of the American market. Costs were also incurred to reengineer these vehicles to comply with domestic safety and emission regulations. In those cases where they were assembled domestically, there were additional costs needed to modify an assembly plant to produce and to secure a new local supplier base. These issues added significant cost to such vehicles and thus reduced their profitability. Marketing of off shore designed vehicles have generally been unsuccessful for all of these reasons, as Mr. Flint correctly identified.

Mr. Flint ends his commentary with a bit of optimism about the way General Motors is approaching worldwide platform sharing this time. I concur, because (dare I say it) this time it is different! What is GM doing differently now? Actually they are doing several things, some of which have been in progress for several years. First for over a decade GM has tried to standardize its assembly plant operations, first domestically and more recently worldwide. This is not a simple endeavor. The use of common processes, common tooling, common gage points and quality measurement schemes, etc is made difficult by existing plant layouts, local work rules, and the degree of automation employed. Thus progress in this area has been achieved only with significant costs and as changeovers were made in various plants. This does not mean that any plant can build any vehicle, but there is enormous flexibility in allowing vehicles designed on the same architecture to be moved from plant to plant as dictated by sales without inordinate delays and huge expenses. Second GM has for several years sought out "global" suppliers. That is, they want a supplier who is capable of providing parts and components to its assembly plants worldwide. This simplifies the problems with adding a vehicle to another assembly plant. The third leg of the GM strategy is to globalize the design, engineering, testing, and development of its new vehicles. This is a radical departure from previous practice, and has caused some disruptions while the roles and responsibilities of all of the participants have been resolved. However once in place, this has enabled considerations and planning for the incorporation of all the requirements (customer, government regulations) of each of the proposed markets for a platform to be included from the beginning. This simplifies and eliminates the need to reengineer a European vehicle for the North American market. Finally, to bring all of the pieces together, General Motors has established a world wide vehicle architecture plan to capitalize on the global assemble, purchasing, and engineering strategies. This is what is meant by acting as one company.

This is the basis for my optimism for GM. For the strategy to work, however, the products that are produced must be appealing to customers is all of the global markets. Mr. Flint expresses some optimism in recent introductions of new GM products being competitive in the markets. If we are both correct in our assessments it is good news for General Motors.

Implications:

With the prospect of a sale by Daimler of its Chrysler assets a number of possibilities arise. In my previous analysis I focused on some possible alliances with other automotive manufacturing companies. The cited article introduces another possibility, Magna International Inc. While the article cautions that a Magna acquisition of Chrysler is a long shot, I think such a deal could result in revitalized operations at Chrysler, albeit with a quite different business model. If Magna were to take over Chrysler, I think, it could become a major vehicle supplier to other manufacturers, rather than trying to market their own (Chrysler) vehicles. The sales of no longer need operations like sales, service, and marketing could help Magna pay for the parts of the organization that it could use.

Analysis:

I had not considered Magna International Inc., the world's third-largest auto-parts maker, as a possible suitor for Chrysler. However I believe Magna could be a very strong candidate as they have the needed capital, resources and experience to make a success of the operations. But it would be a very different business. Magna has automotive experience on three levels. First they began as a supplier of parts to the automotive industry. Later they expanded their operations to produce subassemblies and "modules" to assembly plants, offering just in time and in production sequence capabilities. They have also undertaken the complete assembly of vehicles for other automotive manufacturers, notable for Jeeps and minivans for Chrysler.

However Magna is lacking in two important areas. They do not have any experience in the power plant drivetrain area. Generally this is a specialized area of expertise and requires enormous amount of capital as the technology changes (as it is currently doing). Second they have not been involved with the testing, validation, and certification of vehicle designs and have not engaged in service, retail sales or marketing of vehicles. My view is that Magna could take over the manufacturing and assembly operations of Chrysler and become a supplier to other automakers of complete vehicles. Such an operation may be attractive to other troubled automotive manufacturers, as this would remove much of the burden of producing low volume runs of specialty vehicles. Such a service by Magna would give its vehicle customers flexibility to quickly change their model line-ups or production volumes in response to changing market conditions. Most major automakers take pride in their power plant and drivetrains and probably would prefer to provide them to Magna for installation at its vehicle assembly plants. Magna would thus be relieved from the burden of developing and manufacturing these components. For this business model to work, Magna would have to transform the old Chrysler plants into very flexible and efficient operations, a task for which they have already demonstrated a strong competence within their existing plants.

Given this mode of operations. Magna could then sell Chrysler’s sales, service, and marketing operations. Several off shore automotive manufacturers are anxious to enter the North American automotive market, most notably the growing Chinese and Indian automakers. Selling these pieces would help Magna pay for the parts of the Chrysler it could use. Sound like a marriage made in heaven to me.

Implications: Three areas that are critical to General Motors continued success are new product introductions, resolution of the Delphi bankruptcy, and the settlement of the new labor contract with the United Auto workers later this year. The first is solely within GM's control, while the other two involve the UAW. The union is in a weakened position because of its rapidly declining membership (due to the downsizing of the Detroit companies) and it failure to organize Japanese and Korean plants. GM is beginning to indicate some of the issues, such a flexible work rules, and lower pay scales for non-assembly jobs, that will be part of the negotiations. This year will tell the story if GM's turnaround will take root.

Analysis:

In my opinion, three things are necessary to put the turn around at General Motors on a solid foundation. First the company needs to focus on producing high quality vehicles that are successful in the market place. This means a continuous introduction of new models to keep the line-up fresh and excite its customers. GM has been receiving quite a bit of attention with introductions of new and exciting vehicles at recent auto shows. Clearly they have very ambitious new vehicle plans for the coming years. It is incumbent on them to execute these plans effectively. Second GM must help negotiate an equitable resolution of the situation of the Delphi bankruptcy. GM carries the burden of potential liability for its former employees now at Delphi. Also any extended production interruption at Delphi would have a crippling impact on GM operations. This is a complicated issue, but economic pressures will ultimately lead to some form of resolution. The third area is the legacy problems of previous labor contracts with the UAW. The first issue is under the control of GM while the second and third issues involve negotiations with the United Auto Workers Union. Over the decades when General Motors and the other Detroit Auto makers owned the market they could settle on generous contracts with their hourly employees and pass along the cost to their customers. However the costs of these contracts have caught up with GM, and the others, as the burdens of health care costs have relentlessly risen and as the proportion of retired workers to active workers has increased.

The upcoming labor talks with the UAW this year are thus crucial for General Motors and the other Automakers. Historically the UAW has chosen a target company, one from whom they believe they can negotiate the best deal for themselves. Once an agreement had been made at the target company, the "pattern" was generally accepted at the others. The target company was chosen with the hope that a strike would not be necessary or would be effective if needed to reach agreement. Choosing a weakened company as the target may seem to be a good strategy, but I think that General Motors, perhaps the strongest of Detroit’s automakers, will be the target this year. The UAW does not want to drive the weaker companies to bankruptcy by striking them, so they will try to get the pattern agreement with GM first and then negotiate with the others.

The United Auto workers have seen dramatic reductions in the numbers of their members, particularly in the last couple of years as the Detroit car companies are downsizing their operations. This loss of membership and the failure of the union to organized workers at the new transplant operations of the Japanese and Korean has weakened its power to negotiate its demands. Like any institution, it is invested in its own survival, and may be forced to accept changes that would not even have been discussed in the past. Thus the comments from GM about work rule changes and pay scales for non assembly jobs are just the opening salvos in this years union contract negotiations. If General Motors does not achieve major concessions from the Union, then the turn around at GM may be short lived.

Implications: Mr. Alan Mulally the new CEO at Ford Motor Company has taken actions that are designed to provide a "way forward" for this troubled enterprise. These initiatives basically follow the strategies already implemented at General Motors Corporation some time ago. While these policies are good if effectively implemented (not a simple matter), they will require time before Ford realizes the benefits.

Analysis:

I

I have expressed some recent optimism for prospects at Ford Motor Company. This article lists some of the actions that its new CEO, Alan Mulally, has taken to find "a way forward" for the company. The situation is dire and the outcome is unknown but Mr. Mulally is beginning to have an impact on Ford’s operations. He is basically patterning his strategy after that which has been adopted at General Motors, its cross town rival. The actions at General Motors over the past couple of years are showing initially good results and its prospects have remarkably improved in recent months. GM’s has demonstrated a somewhat "successful strategy" and thus it is worthy of emulation at Ford. The question to be answered is will the game plan work at Ford. Success will require a strong and steady leader, and hopefully the Ford family will support Mr. Mulally in this painful process. Let’s take a look at Ford’s plan.

Ford has begun to reduce it dependence on sales rebates and other promotions to move its vehicles. This can increase the transaction prices and benefit Ford’s bottom line if its vehicles are perceived to be desirable and worth the selling prices in the retail market. This is a big if and hinges on the offering of high quality products and the freshness of its model line-up. These kinds of changes take a long time to occur. Reputations for quality take decades to create and can be quickly destroyed by a troubled product or quality lapse. The introduction of new and significantly updated vehicles takes several years and substantial quantities of capital and a capable technical workforce. Both are in short supply at Ford. Ford has also decided, ala GM to reduce it sales to fleet customers. This is a high volume - low profit business, but avoids the high cost of laying off UAW workers when sales a slow. The benefit to Ford is that its used vehicle prices tend to rise when fewer of its vehicle hit the used car market in large quantities when the fleets start to dispose of their vehicles. The improves residual values of used vehicles and can benefit the marketing of leased vehicles by make pricing on it lease vehicle programs more attractive to potential customers. Perhaps this can make up for the lost fleet sales volumes.

Mr. Mulally has appointed Derrick Kuzak to the new position of worldwide product development director. This is similar to the role the Bob Lutz plays at GM. It can be very helpful to have one person overall responsible for the corporate vehicle portfolio. Much development costs and purchasing saving can be incurred if the resulting sales volumes are high. Hopefully Mr Kuzak will be able to overcome some of the institutional in-fighting that has historically inhibited cooperation between the various units of the company. That said, it is still no small accomplishment to make one platform serve multiple international markets. Ford has made many unsuccessful attempts at importing its European vehicles (as had GM) for the North American market. Differing customer expectations and government regulation make creating a common world design very challenging. Again the process of developing such a worldwide platform requires a lot of money, technical resources, and time. All in short supply at Ford, as noted above. In any case this will require several years of work before the benefits become apparent.

As an intermediate step, Mr Mulally has decided to try importing European Ford vehicles to the US. . Rumored possibilities include the Transit commercial van. Chrysler, has had some success with the Dodge Srinter Van, basically a Mercedes vehicle, perhaps There is a market for a similar Ford vehicle. Also suggested are European vehicles to shore up the Mercury brand, like GM is doing with Opels for the Saturn Brand. Again without modifications to suit the domestic market, this has not proven to be a winning strategy.

Finally Ford has increased it involvement with the Asia arena by considering a new $1Billion assembly plant in Thailand. This plant would build small cars, similar to the South Korean-built Chevrolet Aveo, again copying GM strategy. The recent run up in fuel prices revealed Ford’s weaknesses in the small vehicle, high fuel economy market. Again this is an me-too approach that may take several years to bear fruit.

My opinion is that Ford is emulating strategies employed at GM that all have prospects for success. However GM has been implementing these for several years and it is just beginning to realize the benefits. Ford is way behind the game, and has little room for error in its approach.

Implications:

There are many possible automakers that may be interested in acquiring all or parts of Chrysler's operations. Perhaps even a couple of these may make sense and could succeed. However the more likely outcome is that the attractive parts of Chrysler will be sold off and the rest just discarded. A sad ending for a proud company.

Analysis:

It seems pretty clear that Daimler had only one intention in acquiring Chrysler. They saw it as a cash cow and milked it for everything they could get out of it. It enabled them to surmount their own financial difficulties in Europe. However they were very much concerned that the mass-market nature of Chrysler vehicles would dilute the premier cache of their own product lines. Now that Chrysler is in financial difficulties of its own, Daimler wants to drop it like a hot potato. Thus it appears that Chrysler is available to who ever wants it. Who would want it?

Nissan/Renault would seem to be a potential candidate. It has already expressed an interest in forming an alliance with a North American automotive company. It has had experience in turning around troubled enterprises, and may be the savior that Chrysler needs. Nissan/Renault has already identified the benefit to itself of cost reductions incurred by the purchasing power of a larger enterprise in their discussions with General Motors last year. In my opinion the product portfolios of the two companies are complementary and can offer interesting possibilities. Nissan/Renault is strong in the small car arena, particularly internationally where Chrysler is weak. Chrysler is strong in the light truck, minivan areas--places where Nissan need help. Moreover Chrysler has expertise in Hybrid drive trains (acquired with a partnership with GM and BMW), products for which Nissan currently depends on Toyota. It would seem that this could be a successful union, but I have not heard of any discussions proposing such a marriage.

Much publicity has focused on a potential interest in Chrysler by General Motors. Quite frankly I am flabbergasted by these reports. They make no sense to me. Chrysler has essentially all of the same problems as GM, perhaps even more extreme. There is a GM product corresponding to every offering from Chrysler so I see no synergism here. GM’s alliance discussions with Nissan/Renault indicated marginal cost reduction opportunities for itself with a larger scale purchasing clout. GM does not need Chrysler assembly or manufacturing plants, nor it dealer network. Perhaps GM might be interested in the Jeep vehicle line as a way to flesh out it Hummer brand. In any case I don’t expect GM to be a buyer of Chrysler.

Chrysler has recently come to an agreement with Chery, a Chinese manufacturer of small automobiles. The plan is to compliment Chrysler’s product portfolio with small high fuel economy cars. These Chinese cars are to be marketed through Chrysler’s dealer network, an avenue that Chery does not currently have. I find it unlikely that a Chinese manufacturer would have the resources to take on Chrysler unless they planned to sell off the parts that they do not need or want.

Chrysler is scheduled to manufacture a version of its mini van for Volkswagen and thus has had a little exposure with this German automaker. Volkswagen has had a checkered history of financial instability, however it may see an opportunity to re-enter the North American market by taking on Chrysler. It would perhaps open the door for international business for Chrysler’s products. There is not much overlap between their product line-ups and both organizations may benefit by combining resources. This could make Volkswagen a possible purchaser of Chrysler, although again I have not heard of any discussion underway in this direction.

Similarly, Chrysler has had a long-term relationship with Mitsubishi Motors. Perhaps they or one of the Korean automotive manufacturers such as Hyundai Motors may be interested in parts of Chrysler. I just saw a report that Russia's second-largest automotive company, OAO Gaz Group, is interested in acquiring Chrysler. Chrysler supplies four-cylinder engines for cars and mini-vans to the Russian carmaker and thus it has had an opportunity to assess Chrysler’s operations. I would view all of these as long shot possibilities.

The article cited identifies several investment groups that may be interested in acquiring Chrysler. I do not believe that they would be interested in investing in the company for the long haul and trying to turn the business around. They probably view the parts of Chrysler to be more valuable than the whole and would be interested in selling off the pieces. As noted above there are several parties that could be interested in various parts of Chrysler. In my opinion, this may be the most likely outcome.

Implications:

Mr. Alan Mulally, the new CEO at Ford Motor Company, is beginning to make his presence felt in his organization. He is making progress in ending the fiefdom culture that has defined Ford internal politics for decades. That combined with an aggressive restructuring of the product line up may be a real way forward for Ford Motor Company.

Analysis:

In my past commentaries I have expressed pessimism about the prospects for a turn around at Ford Motor Company. The seriousness of the problems at Ford remain, but it appear that Mr. Mullany is beginning to have an impact on the operations of the company.

Ford is essentially a family run company and historically had a well-deserved reputation for bitter in-fighting between the leadership of various segments of the company. These attitudes, of course, filtered down to the workers and inhibited the cooperation essential to the efficient operation of a complex organization. As a result many executives took a "safe" course to avoid failure and the result was decisions tailored to protect the executive, not necessarily for the benefit of the company. However, the company survived and at times even thrived as long as the automotive market was strong. However global competition is increasing, making it for difficult for Ford (and the other Detroit auto-makers). The recent high fuel price scare and the collapse of the light truck and SUV markets hit Ford very hard and uncovered the weakness of the fiefdom-ruled company.

It appears that Mr. Mulally is bringing his senior executives together on a regular (and frequent) basis to review progress and assess potential strategies. This is healthy and hopefully will lead to a more cooperative atmosphere with the company. It is hard to believe that in the past Ford only held such meetings on a semi-annual basis. More over, the company is recognizing that it cannot offer a full line of vehicles in each market segment. Exiting the mini-van market is just the beginning of this process, more difficult product decisions will need to follow. There are many examples of successful and profitable smaller automotive companies that offer a limited range of vehicles (e.g. BMW). By focusing its resources on selected market segments, perhaps Ford can create desirable and profitable vehicles. This can be a true way forward for Ford.

Implications:

The earth is going through a warming cycle that may or may be due to automotive emissions. Despite of the uncertainty, the Big 3 car companies (and the automotive industry as a whole) are under the gun to respond to the problem. This response is already well underway, however there is a difference between technical advancements at an automotive manufacturer and that automaker receiving the public recognition as a result (sales of improved vehicles). New regulations if poorly conceived may inhibit this progress.

Analysis:

The popular explanation for global warming is that it is primarily (and perhaps only) caused by vehicle exhaust emissions. Clearly the earth is going though a warming cycle and average global yearly temperatures are increasing. This sort of thing has happened many times in the past and certainly over the eons. But it takes an enormous leap of faith to claim that Americans use of automobiles is the cause of the increases in average temperature. Scientific evidence for this assertion is either non-existent or at best very circumstantial. If the cause of the current cycle of warming is not known, what makes anyone believe that they know what action (if any) that we can take that will influence the result. I know that this is extremely politically incorrect opinion, and contrary to what the largely uninformed public has been led to believe by an alarmist press, but it is never the less true. There I got that off my chest!

However the automotive industry is an easy target for politicians. They recognize an opportunity to demonstrate their "deep" concern for the environment by piling on this issue. Thus the car companies must be prepared to respond to this problem before painful (and perhaps unworkable) "solutions" are legislated on to them. Toyota has utilized its hybrid-powered vehicles to create a very positive public image. While these vehicles represent only a miniscule portion of the total Toyota automotive production, the company as a whole is perceived to be a socially concerned and responsible corporation with "green" products. The Detroit automakers have been slow to develop their own hybrid vehicles and thus have just the opposite public perception. In particular over the years, Bill Ford has made many promises to the environmental advocates to produce green vehicles. However Ford has also repeatedly failed to deliver on these promises. Similarly General Motors has suffered negative press for the cancelation of it all electric EV-1 vehicle program. Daimler Chrysler has been strangely silent on this issue. As a result the Detroit Big three are now under the gun to demonstrate dramatic progress on environmentally friendly vehicles. Are they up to the challenge in these deeply troubled financial times?

First all of the big three are committed to producing large number of flexible fueled vehicles. This is motivated by the way the government treats these vehicle in computing corporate average fuel consumption numbers. However given the very limited availability of alternative fuels, these vehicles currently have very little practical effect on the problem. Increased availability of alternative fuels may change that over time, but that depends on the actions of others, not the Big 3 Ford has had limited success in it hybrid vehicle offerings (fundamentally similar to the Honda and Toyota designs) on smaller vehicles. General Motors and Chrysler will be introducing hybrid vehicles that offer advantages over the Toyota system on its larger vehicles for a substantial fuel economy boost. However, thus far, these actions have not had much impact on the general public perception of these companies. General Motors has an opportunity to change this view if it can successfully commercialize the Chevrolet Volt concept car shown at the North American Automotive Show in Detroit. This plug in hybrid vehicle has a very different power train architecture and can operate in an all electric battery powered mode and after depleting the battery continue on with a gas powered engine generating the electric power needed. The vehicle is capably of fully recharging it batteries from a 110-volt electric outlet in about six hours and has a range in excess of 600 miles with a ten-gallon fuel tank. The design is a technical triumph even with limited battery capability. Can General Motors communicate the significance of this vehicle and turn around the negative perceptions? That is a big question.

Finally back to the question raised in the title to this commentary. I think the automotive industry is poised and already highly motivated to make the product changes that will reduce its impact on the environment in areas such as global warming, emissions, and recycling. Governmental regulations are not necessary to motivate this progress and could inhibit it if poorly conceived. Standardization of current regulations within our country and harmonization of them across the globe can increase the effectiveness of the improvements. Given all of that, the impact of the total elimination of automotive emission by itself may have only a small impact on reducing global warming. There are a host of other man made emissions and a large amount of natural carbon dioxide emissions that would remain. Society will have to focus on the areas it can control, but the impact on global warming is uncertain.

Implications:

So far the turn around at General Motors and the anticipated (perhaps hoped for is a better description) turn around at Ford Motor company has focused on cost reductions. This has reduced losses at General Motors and may have the same effect at Ford and perhaps at Daimler Chrysler as well. However increased sales is necessary for a return to profitability. And expanding sales and increased market share is necessary for a return to sustained profitability. The obvious approach is to focus on attractive vehicles that have high quality and good reliability. The truth is that these companies have been building vehicles every bit as good as the off shore competition but the public perception is lagging this significant improvement. A satisfactory turn around requires overcoming this hurdle as well. Can Detroit find a way?

Analysis:

General Motors and Ford have already taken many important actions to substantially reduce their costs. The effects of these efforts have already substantially reduced losses at General Motors and perhaps will at Ford as well. However cost reductions alone can not return these companies to sustained profitability if their products are not well accepted and they continue to lose market share. They are in the business of producing cars and trucks and only by increasing their sales can they achieve long-term success in their businesses. How can they do that?

The obvious answer is to produce quality vehicles that are appealing to consumers. However this article gathers together quite a few facts that indicates that this may not be enough.

Quality. In 2006 J. D. Powers & Associates Initial Quality Survey, the Chevrolet Impala surpassed the Toyota Camry. Consumer Reports just announced that the Ford Fusion and Mercury Milan scored higher that the Toyota Camry and Honda Accord. In fact the National Highway Traffic Safety Administration has reported that Toyota recalled more vehicles in 2006 than it sold that same year. Quality can slip when a company is in rapid expansion, a disease that is beginning to plague the vaulted Toyota.

Dependability. In the 2006 J. D. Powers & Associates Dependability Survey (problems per hundred vehicles), Mercury, Buick, and Cadillac were in 2nd, 3rd, and 4^th places after Lexus which was in 1^st all ahead of Toyota (less Lexus), Honda, Nissan, BMW, and all of the others. This is a trend that has been developing over the last decade.

Fuel Economy. This is clearly an area of importance to automotive consumers. However with the emphasis on more powerful engines and the recent demand for larger vehicles, corporate fuel economy averages of all automotive manufacturers has leveled off or declined in the past decade. In spite of these trends there have been some positive improvements. For example, the new Chevrolet Tahoe has better fuel economy that the Toyota Sequoia (and also high initial quality ratings).

These facts support the reality that many Detroit products are every bit as good as the off shore competition, and in certain instances perhaps even better. The general public perception is that the Japanese and Korean competitors have far superior offerings than the domestic automakers. The public perception is at odds with current reality. Detroit desperately needs to get these facts out into the public discourse to change these persistent perceptions before any turn around of their businesses can take root. What can Detroit do to change the continuing perceptions of American consumers? The answer to this question is the necessary requirement for a long term solution to the financial problems of Detroit. I believe the story is good, but can Detroit communicate it effectively to its potential customers?

Implications: Honda has announced a plans to introduce Diesel powered vehicles into its smaller vehicles starting in 2010. They are of the opinion that hybrids are better suited to larger vehicles and have consequently chosen to pursue diesel technology. This is about 180 degrees from the plans and actions of other automotive manufacturers. Given Hondas well-deserved reputation for power train engineering and manufacturing, it is to be expected that they will create a product with outstanding technical performance. The question to be answered is will they be able to market it to a consumer that has shown great reluctance to purchase diesel powered automobiles.

Analysis:

Honda has a well-deserved reputation for producing outstanding engines. The heart and soul of the company has been centered on power train design and manufacturing, not only for automobiles, but also for motorcycles, recreational vehicles, boats, lawn and garden equipment, generators, and soon for jet engines. Their engines excel for their efficiency (mpg), power (hp/Liter displacement) and remarkable for low emissions performance. On the face of it Honda's plans stand in quite stark contrast to announcements and actions of other automotive manufacturers. In my opinion this is a high-risk approach and will require both engineering expertise and marketing savvy to succeed..

First of all Honda asserts that Hybrid power train designs are better suited to smaller vehicles and become excessively expensive for larger cars and SUVs. This is a perhaps a slightly self-serving assertion, as Honda primarily markets smaller vehicles. It had an early entry into the hybrid market, the Insight coupe introduced in 1998. This vehicle was not well accepted in the market, primarily in my opinion, because of poor packaging. It is basically a two-seater with very limited storage capabilities and marginal utility. Honda’s further hybrid offerings on the Civic and Accord models have not met with much success either. These vehicles could be viewed as technical successes, but marketing failures. While there are certainly many technical issues yet to be resolved on hybrid vehicles (primarily centered on battery performance), Toyota has been very successful in creating a very positive image for its hybrid products, a marketing success. It is also noteworthy that other manufacturers are in the process of introducing hybrid power trains in larger vehicles such as pick-up trucks and SUVs (Ford, GM, and perhaps Toyota). These manufacturers have found hybrid power trains for these applications to be sound on the basis of technical and economic issues and hybrids offer marketable features in a fuel economy sensitive marketplace.

The Honda plan is to utilize Diesel engines to power its smaller vehicles. They are developing a four cylinder engine slated for 2010 to be followed a V6 version. Diesel engines have a fuel economy advantage over spark-ignition gasoline engines. It is this benefit that seems to be the root of the Honda plan. However that does not necessarily offer the consumer an advantage if Diesel fuel prices continue to substantially exceed that of gasoline (ultimately $/mile is the issue, not mpg). Never the less, the historical problems with diesel engines are difficulty starting, rough running, disturbing noises, and sooty exhausts. The poor experience of American customers in the 80’s has left a lasting negative attitude towards diesels. However the current popularity of these engines in Europe attest to the refinements in design in the past couple of decades that have mitigated these shortcomings. Other American automotive manufacturers have utilized diesel power plants in truck applications, where the high torque and fuel economies are attractive benefits. As I understand Honda design, they have eliminated the need for periodic service for the exhaust treatment system. This is a technical triumph and is a tribute to Honda’s power train engineering capabilities. The open question is will Honda be as successful in its marketing efforts for its diesel-powered vehicles. If it is successful in removing the stigma, expect other manufacturers to follow Hondas lead.