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Solving the Auto Companies Problem

 

 

 

 

Solving the Auto Companies Problems

 

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 fail.  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 failed company.

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 the problem.

 Issues of the Businesses:

1.       Product:  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.

2.       Management: The decline of the American automobile business started in the 1970s.  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.

3.       Demand and 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 is needed.

4.        Labor: 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:

a.       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. 

b.       National 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 wartime vehicles.

c.       Public policy: To lessen the effects of global warming, and the lessening of dependence on oil consumption, are both important national interests.

Solutions:

1.        Creation 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.

2.       Tax 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 standards.

3.       Research and 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 technologies.

4.       Incentive grants: cash incentive grants to businesses that develop technologies outside the “automobile university” described above that solve energy or automobile issues.

5.       Temporary nationalization of the auto companies for the purpose of changing management.  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.

 

Discussion:

While nationalization is a measure of last resort, and my least favorite business model, there is little choice if national security concerns are present.  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 necessity.  In this case, tax incentives are necessary to make the pricing of “qualifying” automobiles competitive with vehicles that do not meet the public policy objectives.  By providing these tax incentives to consumers, all automobile manufacturers (foreign or domestic) will be motivated to produce competitive vehicles that meet the policy objectives.

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 standards.  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 energy.  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 are carried.  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.

 

The Future:

The National  Energy 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 vehicle. 

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 demand.

 

12/14/08