The Fix for Michigan

You don't want to hear it, and please don't tune out, but the fix is $4 per gallon gas. The State of Michigan is currently in a budget crisis. Expenses are up and revenues are declining with no sign of improvement in sight. Our legislators are looking for things to cut, but cuts hurt, we have record unemployment, tremendous need for state services and a crumbling infrastructure. What Michigan needs is a bold thinking, not just more belt tightening leading us to a state of emaciation.

How about Michigan leading the nation once again, not with the motor age, but with an age of environmental action? Our governor intends to lead Michigan to prosperity with green tech jobs. But let's do more and lead by example, being proactive about reducing fuel consumption, green house gas emissions, and changing the types of cars the nation drives. Should our automotive designers and engineers hear about the new automotive landscape happening in California and Europe, or live it here in Michigan? Nothing changed the automotive purchasing habits and transportation modes of U.S. consumers more than $4 gasoline.

Michigan citizens buy about 4.6 billions gallons of gasoline a year (numbers from FY2006-07). We currently have a $0.19 state excise tax and a 6% sales tax on gas, generating around $1.5 billion in revenue a year. If the current excise tax was adjusted to $2 , making gasoline over $4 per gallon, we'd generate $9 billion. Yes, demand for gas would drop immediately, but not proportionately. To relieve the burden of this increase tax on gasoline, the state could drop the 6% sales tax on goods. Michigan earned $6.5 billion in revenue from sales tax in FY2006-07, so the drastic increase in gas tax would more than make up for the sales tax loss. Depending on how the tax rate is manipulated and the amount of tax relief given to those with low incomes, the gas tax could easily generate an additional $1 billion. Of course this excise tax rate would need to be adjusted as crude oil prices shift and as demand decreases over time, but the guiding principle is to eliminate the thirst for cheap gas.

Michigan being a peninsula-state makes the gas tax workable. Except on our southern borders, we would not lose gasoline sales to neighboring states. But even in these southern regions, we would gain shoppers coming to Michigan for our tax free goods. Michigan would also avert the problem of losing in-state sales to internet shoppers looking to avoid state sales tax. Dropping the sales tax would be great for Michigan business owners and consumers.

The higher gas prices would also immediately stimulate our auto industry as Michiganders would seek to purchase more fuel efficient vehicles. Being in the heart of an environmentally progressive state would also boost the credibility of our manufacturers nationwide and worldwide.

We need to give up our fix for cheap gas, and get down to the business of fixing Michigan.

The Cars America Wants to Pay For?

Detroit is on the ropes, Toyota posts first loss in 70 years, GM is idling plants for weeks.  We've all heard of the bad news.  But how did we get here?  Consumer confidence is gone and no one is buying cars.  And how do we get out?  America and its government is pinning its hopes on new green-energy solutions and new technology.  America will support its car industry with bailouts, but they're going to have make the kinds of cars that America needs to be energy independent. The directive is to build energy efficient cars, hybrids, plug-ins, electric powered, hydrogen fueled, E85 compatibles.  These are all noble goals, but someone must bear the cost of bringing these new technologies to market.  You don't get the equivalent of an Apollo Program for free.  Not only are we talking about pure invention and discovery that must occur to deliver cars that are affordable and meet the needs of consumers, but the entire fueling infrastructure must be reinvented and redeveloped.  The money that the government is now spending to bailout Detroit is paying salaries and suppliers.  Its not going to research and development.  So how do we expect it to happen, when these companies are struggling to make the monthly payroll?

A large government backed initiative on alternate fuels, batteries, fuel cells, light weight structures and electronic powertrains is critical to success.  There was a feeble attempt at this in the 1990's, the Partnership for a New Generation of Vehicles (PNGV), but it was severely underfunded and as a result overly ambitious.  Next, in 2003 the Bush administration created the much criticized FreedomCar program that seemed to push these goals out to a future we'd never see.  What we need now is a real "space program" for cars, massive investment and real near-term goals.  China is doing it, and if we don't, we'll be left behind.

You might think that companies like Fisker and Tesla are doing it on their own, so why a government initiative to help Detroit?  The fact is these companies are not making the transition to high volume affordable cars without government help.  Tesla is waiting to receive government bailout dollars before developing their high-volume Model S sedan.  Fisker, while not seeking money directly, is relying on powertrains developed by General Motors.

But even before a serious space-effort type program, the most important thing to do is actually create demand for these vehicles through market driven methods.  Small cars with huge development costs that lose money on every sale are not going to get the job done.  As long as gasoline is cheap, demand will be largely skewed toward large, inefficient vehicles.  We must as a nation accept a huge tax increase on gasoline.  But we must not only accept it, we must ask for it.  Most of our politicians regard a tax on gas as political suicide and until they hear that we want it, it won't happen.  The unfair-burden-on-the-poor arguments against a gas tax can easily be overcome with tax credits.  The only way to create a disincentive to driving inefficient vehicles is high prices at the gas pump everyday.

So what kinds of cars do Americans want to pay for?  Its up to you to decide.

Ford's Success is in the Showrooms

Ford is currently seen as the best bet for success of the Detroit Three.  Ford has avoided taking government bailout money because it secured enough loans to keep it going prior to the financial collapse.  But this money wasn't borrowed to make the payroll, it was intended to restructure the company and invest in new products.  Ford understands that survival in today's automotive climate demands product leadership.  But when it comes down to it, Ford is afraid to lead.

There are hints of leadership in the refreshing of existing products, the F150, and the class leading but certainly-not-a-new-idea Fusion hybrid.  But these are examples of Ford doing the only thing it has the guts to do: follow the trends and hope to get a product out the door that is marginally better than the competition.

The evidence of the failing of Ford is in its new products.  Take the new Ford Flex.  My father walked into a large Ford dealership in Virginia a month or so ago, showing interest in this new Vehicle. He asked the salesman what "Flex" meant, and the salesman just shrugged his shoulders and said "I don't know."  My father walked away without a test drive.  This shows a company unable to execute; unable to create a product and craft a consistent message throughout its development and marketing and deliver it to the customer.  I cringe to even call the Flex by its name, because that name signifies how entirely out of touch Ford is with its own products, its own creativity, its own product leadership.

The Flex is a product that has the potential to be the next big thing.  Its the holy grail that all product planners look for, the people hauler that isn't a smells-like-diapers minivan, that isn't a been-there-done-that SUV.  Its a product that oozes sophistication, luxury, practicality, functionality and smartness all at once.  And what does Ford do?  Gives it a name that anyone I can think of would be embarrassed to utter at a dinner party.  A name that fades into the background, signifies yet another attempt to market yet another cross-over SUV.  What is a cross over, a cross between a sedan and an SUV.  The flex is neither of these.  The Flex is a great American station wagon, reinvented for the 21st century.  Let it be real, authentic and proud, not hiding behind the latest quickly fading marketing trend.

The name and marketing campaign attached to the Flex is Ford refusing to take risks. Refusing to be first. Refusing to take a gamble, create something new and stand behind it.  Ford is afraid that consumers won't get what the best and brightest at the company are creating.  Afraid to believe in itself.

There are many more examples of the stumbling of Ford.  There is the Ford Five Hundred that should have been called Taurus from the get go.  The Five Hundred was an innovative car (granted, with bland styling) with an interior perfect for aging boomers, bigger and more usable than you'd expect for your next Taurus.  Ford attempted to sell it an alternative to the low and swanky Chrysler 300.  The Five Hundred is now years later called the Taurus, a leadership opportunity lost.  Then there is the Lincoln Zephyr that becomes the Mark Z, now restyled for the second time.  Lincoln's tagline "American Luxury" becomes "Travel Well" and now "Reach Higher."  Higher indeed.  Ford is currently bringing the small European commercial hauler TransitConnect to the US market.  They are hinting at selling it as a family hauler.  If they don't jump into this head first, another opportunity will be lost.

Ford needs to believe in itself.  It has the talent, it has the products.  It needs to empower those in the company that have the vision, and make the rest of the company march to their orders.  Ford needs to streamline its operations, cut out the politics, and make sure the left hand knows what the right hand is doing.  Ford's success is sitting in its showrooms, but they don't even know it.

Wall Street Mentality Poisons Detroit

Certainly the mess on Wall Street is causing the current crisis for Detroit.  As banks failed, credit dried up, consumer confidence plummeted, and people stopped buying cars.  But the Wall Street influence on Detroit has been bringing it down for years.  Ford and Chrysler in particular have tried to become Wall Street Darlings.  In the years of the dot com boom, these companies tried to become light and fast moving.  The auto CEO's tried to transform their business into the model so loved by investors; five guys sitting around a rented, converted-loft office space on Aeron chairs, making a website that sold goods designed by someone else, manufactured by a third party, and packed and shipped by a fourth.  Brick and mortar was dead.  And what were the car guys to do?   They were, and are, the definition of brick and mortar.  The idea of transforming nearly 100 year old vertically integrated companies into fly-by-night, change direction on a dime businesses was absurd.  But they tried. 

Ford made a finance man, Jac Nasser its CEO in 1999. He sold off or spun off every piece of the company he could.  Plastics molding, transmission manufacturing, all of the small components that make up a car.  He probably would have sold the vehicle assembly plants if he could have.  The idea was Ford as a brand, not a manufacturer.  He expanded that notion of the brand, creating a brand portfolio by adding Volvo, Land Rover, Aston Martin and the likes to the Ford line-up.  Imagine the website, with all of those brands tabbed across the top.  Just make your pick and order one up online.   It wouldn't have been so bad had Ford not lost their focus on the product.  I used to shake my head listening to Nasser's motivational speeches to the company.  He would never use the words like car, vehicle, automobile;  the actual product was never mentioned.  It was all share holder value, profit, loss, earnings and business initiatives.

This attempt at transformation didn't work for Ford.  Trying to run a company to please the quarterly report analysts on Wall Street just doesn't work for a company with three year product development cycles and product lives of 10 or more years. Not to mention infrastructure, capital investments, union contracts, and hundreds of thousands of employees.  Jac was ousted in 2001, Bill Ford Jr. put in charge, indicating that Ford, the company, wanted to get back to the values of Ford, the family.  The damage had been done, and it's taking a real product guy and engineer, current CEO Alan Mulally,  to get Ford back on track.

Chrysler took a different path, falling victim to Wall Street's merger mania.  They trimmed the company down, propped it up , made it enticing as possible and in 1998 sold it off to Daimler-Benz.  The "merger of equals" as is was called was no merger, the Germans were in control, and Chrysler, at least as an American car company, one of the Big Three, ceased to exist.  Still suffering from its role as a merger tool, Chrysler's current owner, private equity investment firm Cerberus, had hoped to turn them for a profit, and now just wants to get out of the car business.

In trying to please Wall Street, Detroit took its focus off the product.  It was more concerned with quarterly financial improvements, share holder value, stock price and P/E ratios than the cars in its showrooms.   It forgot that its reason for being is designing, building and selling cars.  The passion was for results on Wall Street, not for rubber and steel.

Why the Coasts Hate Detroit

The east and west coasts were represented yesterday (3/30/09) in a discussion of the auto industry on NPR's Talk of the Nation.  Dan Neil, automotive critic from the L.A. Times was there, as was Micheline Maynard, senior business correspondent from the New York Times.  I was a little shocked when she said that "People in Detroit simply don't get why people outside Detroit hate the industry and resent them so much."  Hate is what its come to?  And is Detroit supposed to get it?  Is Detroit supposed to accept that its hated?

Is hate driving the decisions of the Obama administration?  It certainly appears that decisions made regarding GM's future are being made to please the "people outside Detroit", and not necessarily in the best interest of the corporation.  Threatening bankruptcy decreases consumer confidence in the company.  Ousting the CEO creates chaos within an organization already struggling to sort itself out.  It also reinforces the belief in eyes of  the american public that the leaders of these Detroit companies are incompetent.

So why the hatred?  Detroit represents the past.  The rust belt.  Manufacturing.  Unions.  Fat and lazy.  What's not to hate?  America wants to look forward, wants the latest greatest thing, optimism, growth, potential.   Detroit is like a big anchor left dragging behind the Goodship America.  Detroit let the american car buyer down in the 70's and 80's with poor quality, lack of innovation, and bad experiences.  And they haven't forgotten.  Well, actually they have.  A lot of car buyers don't even consider a domestic brand when shopping.  To them, the Detroit companies are irrelevant.  So they reason, why should my tax dollars go to prop up a company who's car I'll never even consider buying?  Cut the rope, anchors away!

Blame the CEOs?

Heads have rolled at GM.  The Obama administration has required GM CEO Rick Wagoner to quit his job in order for GM to receive additional government funds.  Is this the best move for the future viability of GM or for the short term stability of the company?  I don't know the answer to the first question, but its definitely going to cause a lot of turmoil in the short term.  I've experienced several changes in leadership in my automotive career and it always leads to months of uncertainty, lost productivity and  a lot of political maneuvering.  Typical of any large, bureaucratic organization, but certainly not the state GM needs to be in at this moment in time.

Was this done in the best interest of GM, probably not.  Was it done to placate the American public's feeling that "Detroit" doesn't deserve help (click Auto Industry), definitely.     

They All Need Help

There's a common notion that "Detroit" needs bailout money from the US government because they have been so bad at running their businesses.  That they somehow deserve to be taken down by the financial crisis striking the entire world.  Sure, they haven't been the best run companies and they have been up against the ropes for years.   But the reason they need help at this point in time is that sales of new cars have dropped more than 30%.  For all manufacturers.  No company can sustain that type of drastic, unexpected drop in revenue, especially when the cause has nothing to do with the way you run your business.   The car business is extremely competitive, resulting in an extremely low margins.  The best car companies in the world make 3 -5 % return on investment.    You'd be better of putting your money in a savings account at your local bank than trying to make money running a car company.

People are not buying cars because they've lost confidence in the economy, they don't know if they'll have a job in the near future, and the  banks are not lending money as freely as they once were.  It has nothing to do with whether that car is a Chevrolet or a Toyota.

"Detroit" is asking for help from the government, but so are a lot of the other so called successful car companies.  Toyota has asked for a $2 Billion dollar loan from a Japanese government-backed bank.  Nissan and Mitsubishi are following suit. Mazda, and Honda are rumored to also be working on  assistance from the Japanese government.  The French government is providing about $8 billion in loans to Renault and Peugeot-Citroen. The German government has committed nearly $2 billion dollars to scrapping bonuses, paying people to trade in their old cars and buy new ones.  And they are in the process of committing more money.

Its not just "Detroit" that needs some assistance to survive, its pretty much everyone in the business.  All of these companies don't deserve to fail, and neither does "Detroit."

Take a Look in the Mirror

As this is the introductory post to this blog, let me start with a quick discussion of the tone for this blog.  I'm trying present an even view of the american auto industry.  I was an industry insider, always a skeptic, and am now an outsider looking in.  I've seen the best and the worst of "Detroit."  I'm not trying to blame one group or the other, I'm not making a stand for any particular company or political group.   This is messy business, and the path that got the car business to this point is not a straight one, and the answers to the problems are not easy.

So lets look at ourselves in the mirror first.

Over and over you read and hear the comment that "Detroit" doesn't build the types of cars (and by cars I mean cars, truck, SUVs, etc) that Americans want to buy.    But in truth, Detroit responded to the consumer demand.  People wanted bigger, taller, faster, roomier, perceivably safer vehicles, and Detroit delivered.   The counter argument is that the Japanese were giving Americans what they wanted, smaller cars, and people flocked to them.  But what the Japanese were really giving was quality and the idea that you as a consumer were making a smart choice.  The reason their cars were small, is that these same cars were sold all over the world, including the home Japanese market, and these countries demanded, and in some cases require by law, smaller cars.  Small is what they built, so small is what the Americans got.  But for as long as the Japanese have been selling cars in America, their cars have been growing bigger, taller, faster, roomier and perceivably safer.  Just like "Detroit" cars.   Toyota now makes the largest pickup truck sold in America and is proud of it.  

Don't blame Detroit for giving consumers the choice to buy a large SUV.  The reason they built so many is that that was where demand was (and still is) and with demand comes the profit margin.  All companies, American, Japanese, German, are in the business of making money, and they are all chasing the most profitable markets.

If in the past consumers had put a high value on efficiency, meaning they were willing to pay a premium price for high gas mileage, all the car companies, "Detroit" included, would have been chasing that market.  But instead consumers demanded space, comfort, speed and luxury.   MPG was not a priority for the large majority of car buyers.  And who could blame them, living in a country with cheap gas.