Posts Tagged ‘Auto Industry’
Thursday, January 28th, 2010
“In a stunning and unprecedented move, Toyota Motor Corp. on Tuesday halted sales of most of its popular models in the U.S. in response to growing concerns that possible defects may cause the vehicles to accelerate unintentionally,” The Wall Street Journal reports. The paper is also questioning whether the world’s No. 1 automaker “has sacrificed quality in its quest to capture global market share.”
Smeal’s Dennis Gioia, chair of the college’s Department of Management and Organization, weighs in below on the recall and its possible effect on Toyota’s reputation for safety. Prior to joining Smeal, in the 1970s, Gioia served as corporate recall coordinator for Ford Motor Co. and was initially in charge of the infamous Ford Pinto fires case, which resulted in a recall of the vehicles because of exploding gas tanks during rear-end collisions and an eventual indictment of Ford in 1980 on charges of reckless homicide.
Here’s Gioia’s take on the Toyota recall up to this point:
It seems like Toyota is making a good move in halting production. The problem is bad enough to justify it and Toyota seems to have been caught in the uncomfortable position of having a huge number of vehicles with similar, dangerous problems (floor mats trapping gas pedals open and now gas pedals that stick open). It seems apparent that this latest one is the more serious engineering problem. The most embarrassing part of this whole thing is that Toyota didn’t initiate the recall of their own volition. The U.S government forced the issue, which makes Toyota look even worse.
Of course, these days, any crisis manager will tell you that the prudent course of action is to “get out in front of the problem,” but it’s a little late for that now; so the company needs not only to fix the problem, but also appear to be dealing with it in an extraordinary fashion. Toyota leadership must know it’s serious and wide-ranging because you don’t shut down production lines solely for PR reasons. Shutting down lines does convey the sense of responsibility, however, and also gives them time to stop producing flawed vehicles that are going to cost a small fortune to fix once they are in the field. Not doing so would only magnify their problem.
Will this mess hurt? Oh,yes, financially and reputationally. Will it cause long-term damage? Maybe. Toyota finally has serious competition in the international market (Hyundai—see the latest Fortune magazine), so they can see the future from here and it looks much more problematic than the past. In addition, you can bet that other manufacturers are going to make hay with this one. Of even greater consequence is the perception that Toyota is the poster boy for Japanese quality, more generally, so when Toyota suffers, other Japanese companies could suffer, as well. Furthermore, many observers seem to think that this problem is a consequence of Toyota’s ambition to be No. 1 in vehicle sales, and that to achieve that goal they sacrificed quality for volume. That’s not a desirable perception for potential customers to have.
What’s really ironic is that Toyota has enjoyed a reputation as a very quality-oriented, safety-conscious, and responsive company. I remember them recalling cars in the early ’70s because one customer (one customer!) had a Coke bottle fall off of an under-dash tray and lodge behind the gas pedal—a true freak occurrence, but Toyota responded by recalling all affected cars and won big points in the public eye. Now their eyes are blackened a bit and they are trying to avoid adding to an increasing reputation for arrogance, ambition, and imperiousness because they have had such profitability that they can ignore complaints. Not this one. This one will hurt at a time when they can least afford it.
Friday, August 28th, 2009
With the U.S. government serving as a majority stakeholder in General Motors and the House of Representatives passing bills that forbid federal agencies from buying cars not made by Detroit, foreign automakers are becoming concerned over a Washington bias in favor of Chrysler, Ford, and GM.
Smeal’s Terrence Guay comments:
Despite rhetoric to the contrary, there is a tendency for all governments to protect strategic industries, although the definition of “strategic” can differ across countries. The automobile industry is considered strategic by most countries that have one (like the United States, Europe, and Japan) or are trying to create one (like China and India). The U.S. automobile industry, including its supplier network, still makes up a sizable part of the U.S. economy, although it has declined over the past two decades. So it should come as no surprise that the U.S. government is trying to support it in various ways.
While foreign companies may complain, these policies probably will have little effect on the U.S. industry if it is defined as GM and Ford. Chrsyler is now owned by Italy’s Fiat, and European, Japanese, and South Korean companies now have strong U.S. roots. Two-thirds of all “foreign imports” are built in the United States. CSM Worldwide, an automotive market forecasting group, predicted earlier this year that foreign-based car makers will build more vehicles in the U.S. than the “Big 3″ by 2010—and this was prior to the Fiat-Chrysler merger.
The point is, foreign automakers will increase their presence in the United State in terms of sales and production regardless of what Washington does to protect the remnants of indigenous companies. As this happens, the lobbying clout of foreign companies soon may drown out the voices of GM, Ford, and their protectors.
Thursday, June 11th, 2009
With Michigan’s unemployment rate growing right alongside the constricting U.S. auto industry, the state is looking to reinvent its economy in industries other than auto manufacturing. The state is wooing Hollywood film crews and venturing into wind and solar energy manufacturing. In fact, a new report from the Pew Charitable Trusts finds that Michigan gained 23,000 jobs in clean energy between 1998 and 2007.
Smeal’s Gerald Susman, associate dean for research and director of Center for the Management of Technological and Organizational Change, studies the economic impact of the clean energy industry and says that Michigan is well suited to excel in the green economy:
Michigan already has some very good alternative energy companies that are growing rapidly. One is Hemlock Semiconductor Corp. (HSC), a Dow Corning joint venture that makes polysilicon for use by solar cell manufacturers. Also, Dow Corning Corp. is building a facility to manufacture monosilane gas next to HSC. This specialty gas is used in making thin-film solar cells. Another company is United Solar Ovonic, which manufactures solar cells. These examples suggest that Michigan has a good base upon which the solar industry can grow. Growth may not be dramatic, however, as a typical expansion creates 500 to 600 permanent jobs (excluding construction jobs) and Michigan’s unemployment rate is the highest in the nation.
Another area that could result in job growth is solar energy installation. Although more service than manufacturing, the solar installation business is labor intensive and market entry into it is easy. Job growth prospects may be higher here than in manufacturing.
Additionally, Michigan is well placed to transfer existing technology and skills in metal fabrication from the auto industry to the wind industry. Gear boxes and generators used in wind turbines are similar to those used to make auto transmissions, for example.
One problem is that most of the major turbine manufacturers are foreign owned (mostly European) and have developed their supply chain relationships with European suppliers, especially for high-value added components. Currently, they would rather source from Europe, even with high transportation costs, than develop new relationships with American suppliers. The exceptions are for low-value added items like engine mounts or nacelles. These products contain little intellectual property and low risk of IP leakage to new and untested vendors. Also, towers and blades are too large and bulky to import so they tend to be manufactured close to where they will be installed.
One prominent study estimates that every 1,000 MW of additional installed capacity would create 3,000 manufacturing jobs, 700 installation jobs, and 600 operations and maintenance jobs. More than 8,500 MW of wind capacity was added last year, which should have created about 36,500 new jobs. Before 2008, this rate of job growth would have been considered highly optimistic. However, recent data from the American Wind Energy Association suggest that such projections are becoming realistic. A recently released study by the Pew Charitable Trusts indicates that California, Texas, Pennsylvania, Ohio, New York, and Florida (in that order) created the highest number of green jobs from all renewable energy sources in 2007. Michigan should look to those states as examples of how to grow its green energy sector.
Tuesday, June 2nd, 2009
President Obama announced yesterday that General Motors has filed for bankruptcy as part of a restructuring plan that will give Washington a 60 percent stake in the automaker while it closes 14 more plants and cuts up to 21,000 more jobs.
“After the factory closings, which will leave 12 in Michigan, GM will have fewer than 40,000 workers building cars in the United States—one-tenth of a work force that in the 1970s numbered 395,000 people,” according to The New York Times.
So what went wrong? Smeal’s Terrence Guay has some answers:
GM’s problems go back at least three decades. First, the company became complacent in terms of products and customers, assuming that American car-buyers would choose GM vehicles (or at least those produced by GM, Ford, or Chrysler). They didn’t take the Japanese threat seriously, and consequently steadily lost market share to Toyota, Honda, Nissan, and other imports. Quality dropped and though it has improved internally, few GM products are as reliable and as highly rated as foreign vehicles.
Second, GM faced a heavy cost structure. Since the United States does not have a national health care system, many private sector companies began offering health insurance coverage to their workers in the 1950s. GM provided high-level coverage to their workers as well as to retirees and their surviving spouses. The company’s future obligations for retiree health care are estimated at $47 billion. This does not include health coverage for current workers. In 2007, the company reached an agreement with the United Auto Workers (UAW) to pass on the cost of paying retired workers’ pensions to the union. As a result of these and other labor-related costs, GM has not been able to compete well with foreign auto companies that do not have similar health and pension obligations in their home countries, or have chosen to operate factories in lower cost and union-unfriendly U.S. states.
Third, GM maintained too many brands (Buick, Cadillac, Saturn, etc.) that overlapped each other and allowed the company to lose focus on those that really mattered.
Fourth, the company by the late 1990s had focused on higher-margin sport utility vehicles and trucks. When oil and gasoline prices rose a few years ago, GM was unprepared for the rapid switch by consumers to more fuel-efficient vehicles. The company had few products available or in the pipeline to meet the current demand for increased fuel efficiency or green vehicles. It is scrambling to do so now, but it will be difficult to persuade many car-buyers that the company is a leader in such technologies.
Fifth, the company’s management, for the reasons described above, is partly to blame. It took them a long time to realize just how bad the situation at GM really was.
GM could have done many things differently, including trimming brands, relying less on SUVs and large vehicles, built more reliable vehicles, and reduced costs through greater production abroad. The company is successful in some markets today, especially China. But its main market is still the United States, and it is languishing here. I’m not sure an alliance with Renault, Nissan, or any other foreign company would have changed the company’s fortunes. Virtually all of its mistakes and problems were internal to the company.
Wednesday, May 20th, 2009
President Obama yesterday unveiled new fuel economy standards for the auto industry calling for the nationwide vehicle fleet to average 35.5 miles per gallon by 2016. The new standard complicates the business model for the country’s struggling auto industry as it will add about $1,300 to the cost of each new vehicle. And, at the moment, with gas prices much lower than last summer, there just isn’t much demand for these smaller, fuel-efficient vehicles. To raise demand for these types of cars, many economists are calling for a gas tax.
Smeal’s Anthony Warren agrees, arguing that the Obama administration should institute a tax that fixes the price of gasoline at around $4.00 per gallon for the next four years:
The $4.00 price will include the wholesale market price of the gasoline, the retail markup, and a variable tax levy of the difference, which is captured at every purchase. State taxes will be added on to the $4.00 base price and clearly indicated at the pump and on the receipt. Retailers can continue to compete with each other by trimming their own per-gallon markup by a few cents per gallon while maintaining per-gallon tax levels. The final result will be gas prices hovering around $4.00 depending on the retail markup and state taxes.
Under this plan, when market prices are less than $4.00, the federal government has an immediate source of new revenue. And if market prices go above $4.00, which is improbable as demand will likely decline, the government will subsidize the price.
The federal government will immediately raise revenues that can be directed to infrastructure rebuilding and job creation. At the same time, consumers will know the price that they will have to pay for fuel now and for the next four years. We saw last summer that at $4.00 per gallon, consumers learned to deal with the increased price, and indeed reduced consumption, which in turn brought the price per barrel down. Under this new gas-pricing plan, the more demand is reduced, the greater the tax revenue. This provides the federal government with more flexibility to adjust income taxes as the gas tax levy plays out. Under the current gas tax structure, the government’s only incentive is to encourage gasoline sales to raise tax revenues without any regard to long-term national harm in the form of carbon emissions, energy dependence, and myriad other issues that come with the overuse of oil.
This new scheme will encourage consumers to make more rational decisions regarding gasoline usage, including which models of cars to buy, sending clear messages to Detroit about auto demand. The automotive companies will finally have market incentives to make rational development plans for new vehicles based on the long-term cost of energy. The burgeoning alternative energy sector will now have a stable benchmark against which to be judged. And young entrepreneurial companies in this field and others, which are so important for our future, will be able to attract the venture capital they so desperately need.
At the same time, with demand leveling out as a result of the steady price at the pump, oil companies will be able to plan their production schedules based on stable market demand.
If the new administration is serious in its promise of change, boldness, independence from lobbyists, and a willingness to look at truly innovative solutions, then $4.00-per-gallon gasoline presents the president with a chance to solve many immediate and long-term problems in one bold move.
Monday, March 30th, 2009
In exchange for further assistance from taxpayer-funded federal loans, the White House is forcing Rick Wagoner to resign from his post as chairman and CEO of General Motors. The Wall Street Journal calls the move “one of the most dramatic government interventions in private industry since the economic crisis began,” and Smeal’s Terrence Guay agrees. But, Guay says, “It is perfectly acceptable.”
More from Guay:
Financiers—be they commercial banks, the IMF, or private equity groups—always attach strings, or more accurately “conditions,” to their loans. It should be no different for the U.S. government. If taxpayer money is being loaned to a private company, the government should have every right to attach conditions to it, including changing GM’s management team.
Wagoner’s almost nine-year tenure as CEO has done little to improve the fortunes of the company, and has arguably made them worse. Unfortunately, this transition comes too late in the game to have much of an effect in creating a successful restructuring plan for the company.
The Obama administration has learned a lesson from the government initiatives over the past year to support the ailing financial sector. Public opinion simply will not support bailouts without conditions. In effect, while banks received incentives or “carrots” to change their ways, the government is trying the “stick” approach with the auto industry. What the government may find out is that, regardless of the tactic, it is very difficult to discipline companies as the U.S. political economy is currently structured.
Thursday, March 5th, 2009
General Motors’ auditors said today in a report filed with the SEC that there is “substantial doubt” about the company’s financial viability and its ability to continue operating. The news may increase pressure on Washington to grant GM the $30 billion in federal loans it seeks to stem bankruptcy.
However untenable that option may seem, offering further government loans is better than standing by as GM goes bankrupt, according to Smeal’s Fariborz Ghadar, director of the Center for Global Business Studies. He says that the company and the economy have little to gain in bankruptcy.
“Under the current arrangement with the government, everything that takes place in a bankruptcy is happening now,” Ghadar says. “GM is already negotiating its contracts with labor, lenders, and suppliers. A bankruptcy filing will only make recovery more difficult and add another financial burden by scaring off consumers who are weary about warranties from a bankrupt company.”
Ghadar says that, for now, the government should do what it takes to keep automakers afloat:
When sales were numbering 15 to 17 million cars a year, there was plenty of room for all of these car companies. As sales dropped to about 10 to 11 million per year, we saw the companies start to struggle. And now, at about 9.5 million cars per year, they are really hurting. But these are not normal economic times, and that number cannot be sustained. We’re destroying about 12.5 million cars per year right now. Sooner or later these cars will need to be replaced and demand will pick back up. We need to see our automakers through to that point.
If we can keep them afloat for a year or so, demand will rebound, and then consumers can choose the types of cars they want and the market can determine what companies will stay in business. At that point, if an automaker can’t survive, it should be allowed to go bankrupt.
Friday, February 27th, 2009
Just as General Motors announced that it lost a staggering $9.6 billion in the fourth quarter of 2008, the company’s top brass was at the White House yesterday asking President Obama’s newly formed auto task force for as much as $16.6 billion more in federal aid. In a case of bad timing for GM, a Gallup poll also out yesterday showed that 72 percent of Americans oppose giving more taxpayer dollars to Detroit automakers.
Whether Washington will give in to public sentiment or offer further assistance to GM remains to be seen, but, if history is any indicator, the politics of job loss and reelection concerns will likely weigh more heavily in the decision than hard economic data. In his 2005 paper “Saving Chrysler: The Use and Nonuse of Accounting Information by the U.S. Congress,” Smeal’s Mark Dirsmith examined the 1979 Chrysler bailout and found that accounting evidence in that decision was mostly used politically as rationale for a decision or as ammunition for an argument.
In the end, despite the huge economic risk, Congress agreed to the bailout and saved Chrysler from bankruptcy. Dirsmith and his coauthor Timothy Fogarty speculate that had more of the accounting analysis been considered, however, Congress may have been dissuaded from making such a leap-of-faith decision.
The worst possible scenario that was not faced was a bailout that did not work. If Chrysler was given loan guarantees yet failed despite them, a large transfer of public money to private parties would have had to occur. In addition, all the adversity the government sought to prevent, would have been visited upon the economy. Despite a substantial possibility that this downside could materialize, very little attention to it was commanded in the debate. Much depended upon that which could not be known at the time. Perhaps the accounting information that was used, or that could have been used, would have not sustained such a leap of faith. That might be why we have politics.