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Auto Industry: Taxpayers will not support Existing Management

By Byron A. Ellis-December 12.08.08

Congress and the administration are contemplating using taxpayers’ money to permit inefficient auto executives to continue managing the American auto industry. However, the American taxpayers know that the existing automobile executives are not efficient or innovative and are unlikely to manage more efficiently in the future.

Therefore, the expectation of taxpayers is that Congress and the administration should not bail out the auto industry, except if there is management reorganization and a viable plan to achieve technological and managerial efficiencies.

In the 90s, financial analyst hailed the downsizing of General Motors (GM) as if it involved technological progress or more managerial acumen; at the time, they speculated that a smaller GM would be more profitable. Ellis, however, wrote that the euphoria was troublesome and unfounded. Furthermore, he indicated that contrary to Wall Street, a smaller GM would not become more profitable.

Today, US automakers are continuing to apply the same old strategic model: becoming smaller is more efficient. They believe that reducing models and dealership will improve their profitability. Thus, they fail to realize that it is their product that many American, and foreign, consumers perceive as inferior and hence are unwilling to purchase at the current offer prices.

In the early 90s, Ellis noted that sufficiently low prices would increase consumption of American made cars, not because consumers believe that quality and aesthetics have improved, but rather solely on the basis of price. Hyundai penetrated the American market by providing attractive pricing for their vehicles.

The American auto industry has been unable to penetrate the Latin American market. Latin Americans believe that their prices are too high and their quality is low. Unstructured interviews with Costa Ricans indicated that American cars are more expensive and more unreliable than their Asian counterparts. Thus, like many U.S. potential buyers, Costa Ricans too view American made cars as inferior products.

However, the American auto executives testified to Congress that the American auto quality is equal to Asian made cars. Apparently they forgot to canvass potential buyers, who are the ultimate judge of quality.

In essence, U.S auto executives appeared to be impervious to customers’ perception. And, they believe that the perception of the executive, rather than the customer should prevail. Their worldview sheds light as to why the American auto industry is in dire shape.

The Asian manufacturers have carved out market shares by introducing inexpensive and fuel-efficient vehicles to potential customers as well as surveying customers’ for feedback and preferences.

Yesterday, I traveled from West Virginia to New York and for every ten vehicles on the road more than seven were foreign made. Why?

Demand is a function of income and prices. And, Asian made auto prices embody the perception of reliability.

The introduction of inexpensive Asian cars allowed Asian manufacturers to capture market shares. Once they captured market share, they used customers’ feedback to add value and extract consumer surplus.

It is paramount for the U.S. to have manufacturing capability. Thus, Congress and the administration must ensure the survival of the auto industry. However, survival requires the introduction of new management. The focus of a new management should be on fuel-efficient vehicles and not on dinosaur sport utility vehicles.

Two third of the American auto industry vehicles should be fuel-efficient vehicles. Moreover, the number of models should be reduced, and like their Asian counterpart they should use the same assembly line to produce multiple vehicles; same body, different interior and different price.

If the existing auto executives remain in place there should be no taxpayer support.

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