Solving the Auto
As a “free market”
capitalist, this issue has been one of the most difficult for me
in an attempt to find solutions.
The standard solution
would be to allow the market to correct, a company that has
following a poor business model, by allowing the company to
A bankruptcy levels the playing
field and allows a “fresh start” in concept, and other
businesses will fill the void and provide the products of the
In this case, the
“standard solution” does not work due to: (1) national security
concerns; (2) the public policy needs concerning the
environment; and (3) potential economic hardship to companies
and workers associated with the industry.
First, stating the issues necessary to solve
of the Businesses:
The problem is that automakers are producing a product
that is not economically viable factoring in (a) oil prices ;
(b) global warming and environmental concerns of consumers; (c)
reliability and performance.
Consumers do not want to purchase vehicles at the present
time because of the price of operating the vehicle (primarily
gasoline), because of the economic damage the vehicle does to
the environment (primarily global warming and pollution), and
because of concerns or reliability and performance when compared
to other products on the market.
The decline of the American automobile business started in the
automotive industry culture has not produced a solution to stem
the tide of loss of market share resulting in an over-capacity
problem uncommon to other industries.
Management has opposed safety standards, emissions
standards, gas mileage standards, overwhelming evidence of
reliability issues (when compared to competitors), and evidence
of climate change caused by the product (global warming).
After 40 years of
opportunity to address these problems, management does not have
any solutions, nor appear to have changed the company
objectives, on either the social, or the production issues.
Capacity: Automakers have the ability to produce vehicles that
are not demanded by consumers.
The costs of maintaining the excess capacity are too
great for the business model to be profitable.
If the facts are that automobile makers need to sell 15M
cars per year to be profitable, with 10M cars the inelastic
baseline of sales, a reasonable analyses of what the demand for
the product should be conducted to determine how much capacity
While the expenditure on labor is low in comparison to the other
costs of the business, labor costs are higher than those for
competing automobile manufacturers.
Issues Compounding Problem:
Size: Due to
the size of the businesses, I do not believe that a buyer would
emerge at a bankruptcy proceeding that has the capability to
solve the problems.
Without such a buyer, the question becomes whether or not
national security and public policy compel the government to act
in some manner to manage the company either by retaining current
management or nationalizing the companies.
security: The prospect of having the manufacturing industry for
transportation conducted by a foreign company (Toyota or
Volkswagen?) is not acceptable should production be required for
policy: To lessen the effects of global warming, and the
lessening of dependence on oil consumption, are both important
of a national energy
policy that clearly defines governmental expectations
for automobile manufactures regarding global warming.
A board of engineers and policy makers that would set the
type of standards for vehicles that would “qualify” as meeting
the public policy expectations.
incentives: due to the higher cost of manufacturing vehicles to
meet these governmental standards, a
tax incentive to
purchase qualifying vehicles to make them competitive
with non qualifying vehicles that do not meet governmental
Development: The creation of an “automobile university” for the
purpose of studying
research into energy related matters such as alternative
types of fuels for cars, new types of batteries, or other
grants: cash incentive grants to businesses that develop technologies
outside the “automobile university” described above that solve
energy or automobile issues.
nationalization of the auto companies for the purpose of
As part of restructuring, the new management should address
changes in capacity of production, sales techniques, labor
restructuring of contracts, quality of product, supply contracts
and any other issues of the business.
is a measure of last resort, and my least favorite business
model, there is little choice if national security concerns are
Making loans to the current private
companies would be an alternative if current management showed
the ability to change the model of the business.
Unfortunately, in the last forty
years, or during the previous few years, management has shown
both unwillingness, and the inability to direct their companies
toward a product that consumers are willing to purchase (cost
effective and reliable), and that meet public policy objectives
(global warming , oil dependant, and safety).
Tax incentives to
change a marketplace should be used only during instances of
In this case, tax incentives are
necessary to make the pricing of “qualifying” automobiles
competitive with vehicles that do not meet the public policy
By providing these tax incentives to
consumers, all automobile manufacturers (foreign or domestic)
will be motivated to produce competitive vehicles that meet the
Currently, all of the
automobile companies have research and development engineers
that are working on the various problems discussed herein.
I have no doubt that if they were
given clear standards by way of the national energy policy
board, and told these are the standards that must be used, that
the engineers have the ability to design a product to meet those
It is unknown what standards the
engineers have been given by management currently, but a primary
reason to avoid bankruptcy as an alternative is to keep this
intellectual pool together because they have a head start toward
solving the problems.
The creation of an “automotive
university” is designed to allow the persons working on these
problems to share information, and to avoid being “misdirected”
by management that has other policy goals.
The creation of a
national energy policy is broader than just the automobile
industry, and is a way of looking at all forms of alternative
The “standards” should be flexible
based on new technology and ideas that are discovered that may
be incorporated into practice.
However, government should send a
clear message to business on what standards are necessary to
meet public policy objectives.
Certain changes seem
necessary for the business model to work efficiently.
The current sales model for the
automobile industry is different than that of any other industry
for consumer goods (such as computer, clothing, electronics,
groceries, etc) in the amount of advertising and inventory that
Instead of a system of dealerships
carrying large inventories, a better business model would be to
sell the product directly to consumers using set pricing, and
limited showrooms, backed by centralized distribution centers.
This business model is currently
used by almost every other industry from Walmart, to Dell
Computer as a means of distribution.
I do not understand why automobiles
need middle men (car dealers), excessive advertising, and price
bartering to sell vehicles when other industries do not.
The passing of costs to consumers
(dealership middlemen and advertising) is large and unnecessary.
Policy Board issues clear standards based on reports from the
“automobile university” engineers detailing what standards are
required for a tax incentive “qualified vehicle.”
A tax incentive purchase amount is
determined in an amount to make the purchase of the “qualified
vehicle” competitive with “unqualified vehicles.”
All automobile manufacturers compete
in the marketplace to sell their products.
Consumers go online,
or to display shops, to determine the model and features of
their purchase, based on a fixed price model.
Once selected, customers have the
option of having the vehicle delivered to them or of going to
centralized distribution centers to test drive or pickup the
Manufacturing is done
at plants with a reasonable capacity to meet the demand rather
than the excess capacity currently available.
Normal business practices are put
into effect to determine the amount of production based upon