Wednesday, February 14, 2007

We'll Have to Wait a Little Longer for the Chinese to Take Over the U.S.

Chinese automaker Chery will not be exporting vehicles to the American market, citing a lack of confidence in their ability to meet No. American consumer standards:

Yugo mastermind Malcolm Bricklin, through his Visionary Vehicles, originally planned to [import] a low-priced, high-quality, Chinese-built car [to] the US. [...]

When Bricklin first rolled out his idea for importing Chinese cars, many snickered. [...] After all, the conventional wisdom was that “high-quality Chinese car” was right up there with “honest used car salesman” in the world of automotive oxymorons. [...]

[Bricklin's team] hope to move forward with an as-yet-unnamed Chinese partner or partners to build cars that will be designed and engineered in the US.

POSSIBLY RELEVANT ADDENDUM:

Dusting Off The Taurus
By Joann Muller
Forbes

DETROIT - Ford Motor is about to dust off the once-proud Taurus nameplate and put it on the slow-selling Five Hundred sedan, proving that a change at the top doesn’t necessarily lead to clearer thinking.

Ford has suffered plenty of self-inflicted wounds in recent years. And Alan Mulally, Ford's new chief executive, has made it clear he thinks killing off the Taurus last year was one of the doozies. But Mulally's first major product-related decision since taking over in October is exactly the kind of shortsighted thinking that got Ford in trouble in the first place.

Mulally's right about one thing: It's a crime that Ford allowed what was once America's best-selling car to wither on the vine. The company should have been reinvesting to keep the Taurus ahead of the Toyota Camry and Honda Accord. Even so, the Taurus managed to retain a loyal following, even after it was relegated to rental car status in recent years. [...]

There's some logic to the name change. In today's hypercompetitive market, the explosion of new models makes it difficult to build awareness for new nameplates. Ford sold 6 million copies of the Taurus during its 21-year run, and 3 million of them are still on the road today. Consumer awareness of the Taurus nameplate is almost 90%--twice the level of the Five Hundred. That makes marketing easier, and less expensive.

Despite its lackluster sales, [...] the Five Hundred is a decent car. It's recommended by Consumer Reports and the Insurance Institute for Highway Safety. [...]

But whether it's called Five Hundred or Taurus, the car still doesn't have the appeal of [its rivals]. And that's what’s wrong with Mulally's reincarnation plan.

The original Taurus [...] sold well for a decade. Subsequent generations, however, failed to stay competitive with midsized Japanese rivals. Demand slid, yet Ford didn't cut production accordingly. Instead, it continued to pump out nearly 400,000 Tauruses a year, at two plants.

To offset the softer demand, the company offered heavy discounts and sold many Tauruses to rental companies. By the end of its life, 80% of all Tauruses were sold to rental fleets. Margins eroded, and so did the Taurus' brand image. By 2004, the damage was so extensive that Ford decided to replace the Taurus with the Five Hundred and a smaller sedan, the Fusion. Production finally ended in 2006...

18 Comments:

Blogger Harry Eagar said...

Where is the American Corolla?

It's been the best-selling car in the world for over 30 years. You'd think Detroit would have gotten around to going head to head with something customers like so well.

Idiots.

February 14, 2007 8:24 AM  
Blogger Oroborous said...

I agree completely. I don't understand at all why they don't just copy what works.

February 14, 2007 2:19 PM  
Blogger Harry Eagar said...

My physics adviser, who spent a few years as a strategic planner in the auto parts industry, says it's because they can make more profit per unit on Detroit Iron.

Evidently, they never figured out that the profit on an unsold car is zero.

Less than zero, if, like GM in the late '80s, you build cars you have no intention of selling.

February 14, 2007 4:13 PM  
Blogger Duck said...

"Yugo mastermind Malcolm Bricklin"

That's rich!

Ford had the American Corolla, it was called the Taurus. They just refused to defend the model, and they finally just canceled it. The fruits of nepotism.

The sooner that the big 3 go under, the sooner we can rebuild the American auto industry from scratch without unions, and the sooner we can dominate the market once again.

February 14, 2007 5:45 PM  
Blogger EVadvocate said...

The future is in electric cars. More efficient than gas and zero emissions. The only chance Detroit has is to pull its head out of the sand and take the lead in EV development. Honda already has a head start but the technology is still evolving and American automakers can quickly overtake Japan if they adopt a progressive attitude.

February 15, 2007 7:00 AM  
Blogger David said...

This must be the "Everyone in Detroit is an idiot" thread. I have to say that that theory has zero explanatory power. There is simply no explanation for why a particular industry would be managed by idiots for 30 or 40 years. That's especially true if the idiots don't have to invent anything but have successful competitors they could simply copy.

Moreover, the "idiots" theory is even harder to accept given the success of foreign car plants in America. Clearly, the foreigners are hiring non-idiot Americans.

My leading candidate for the real explanation of why there's no "American Corolla" is union costs. This is not particularly the cost of pensions and retiree health care, but the costs of Union work rules (electricians can't assemble, assemblers can't weld, welders can't paint, etc.) and the rules requiring that laid off workers be paid their hourly wages. These sorts of rules (and anything else that requires companies to pay workers for not working) increase the cost per car in a particularly vicious way, as the consumer gets nothing for the money the manufacturer expends. Right now, the cost per car sold of these sorts of rules is about $1000 per car, added to the $1300 per car spent on retiree health care.

So, to be competitive, Detroit has to recover $1000 per car sold that (a) represents costs its non-Union competitors don't have and (b) adds nothing of value for the consumer. There are only two ways of doing this, regardless of whether you are an idiot or not. First, you can sell big expensive cars with lots of margin and (for a few years at least) no foreign/non-union competition. Or, second, you can go with much cheaper finish on cars with non-union competition. Thus, American cars in the Civic/Accord/Corolla/Camry range just seem much cheaper and uglier than the Japanese cars.

Now, were they idiots when they signed the Union contracts. Yes, they were. Idiocy at a particular moment in time, and at a time when they've had it all their way for decades and see no trouble on the horizon (Japan? Are you kidding me? OPEC? What's that?) is much more believable. But we've also got to remember that Unionization was politically powerful and thus favored in the 60s and 70s and in Michigan at all times and that this sort of thing (paying people not to work) is, from the Union point of view, the essence of unionism. America as a whole didn't see any trouble on the horizon either and would have viciously attacked the Big Three if they had tried to explain that they couldn't sign featherbedding Union contracts because the Japanese were about to eat their lunch.

February 15, 2007 11:41 AM  
Blogger joe shropshire said...

According to this list, the American Corolla is the F-series pickup truck. Looks like one Toyota, two Ford and two Volkswagen nameplates in the top five all-time best sellers.

February 15, 2007 1:28 PM  
Blogger EVadvocate said...

David:

How can the Big 3 compete with Japan when their overhead is higher? The same way every other industry competes when faced with higher costs: create demand for your product.

Why can the GAP sell jeans for $140 when Target sells them for $20? Styling.

Why can GE sell fluorescent light bulbs for $14 when incandescent bulbs which provide the same amount of light go for $0.25? Energy efficiency.

Why can Kitchen Aid charge $150 for a mixer when Oster sells them for $30? A Kitchen Aid will outlast its owner and the Oster will be in the trash within two years.

All things being equal, the consumer will buy the lower priced product. But if your car has a better maintenance record, is more fuel efficient, or has an innovative and appealing look, consumers are willing to pay more for it.

Why haven’t the Big 3 tried any of these approaches? I’m no fan of unions but I don’t think they can take the blame for Detroit’s utter stagnation.

February 15, 2007 2:12 PM  
Blogger Harry Eagar said...

GM began its slide when it picked Smith for chairman instead of someone who liked cars.

February 15, 2007 6:59 PM  
Blogger David said...

EV: None of those cases you cite involve higher overhead. More to the point, none of them involve companies with manufacturing costs (and this isn't overhead, technically, but cost of sales) that provide absolutely no benefit to the consumer. And, by the way, I'm not blaming the Unions, who just did what Unions are in the business of doing. The whole point of allowing Unions to violate the antitrust laws and bargain collectively is to increase the cost of labor.

Also, I said that the American car companies were reacting in two ways. One, they try to make higher margin products, which is what most of your examples involve. That's fine, but it only lasts until your lower cost competitors enter those markets. Now a days, the American minivans can't compete with the Japanese minivans, even though the Americans created the market. For every unit made, the Japanese can spend $1000 more on the car than the Americans can and have the same cost, so the finish and detail on Japanese cars are superior. Or, on the other hand, they can manufacture the car more cheaply and charge less.

Otherwise, you have to explain how one particular industry is run by idiots, staffed by idiots and only hires idiots when the answers are obvious to any casual observer. In fact, when we see a persistent problem that seems to have an easy and obvious solution that those most motivated and with the best information appear to ignore, what is almost certainly going on is that we don't understand what's really going on.

February 15, 2007 7:23 PM  
Blogger Oroborous said...

The success of foreign-brand auto plants in America is due to them assembling vehicles that Americans want to buy, not to them having more-intelligent workers or managers.

So the question is, why aren't American auto companies designing vehicles that Americans want to buy ?

We can't lay that deficiency at the feet of the unions, that's all management's bailiwick.

Now, as joe shropshire points out, Detroit's edge was in big pick-ups and SUVs. Consumers just ate those up, for many years.

But Detroit doesn't seem to have made contingency plans for a world with expensive oil.

February 16, 2007 2:32 AM  
Blogger Hey Skipper said...

Oroborous:

I don't understand at all why they don't just copy what works.

I was going to explain, but David said everything I was going to, plus a whole bunch more.

The crux of Detroit's problem is that it has a built in cost disadvantage of at least $1,000 per vehicle. Therefore, even a copied Camry is going to be inferior to the real thing, because Toyota can price the Camry at a profit point that will be a loss point for Detroit, provided the content is the same.

Detroit's alternative is to de-content the car, typically in non-functional areas such as interior appointments. Functionally, the Detroit version is just as good, but consumers will inevitably prefer the car with greater perceived value.

Because of the cost disadvantage, which (save for health care costs) can be laid entirely at the feet of the UAW, Detroit not only had to specialize in high-margin vehicles, but has far less room to recover in the event of a mistake.

I'm pretty certain Big Three saw the specter of expensive oil, but when your built-in cost structure eliminates the possibility of making money on low-margin vehicles, what is the option?

I disagree with David that the Big-3 were idiots when they signed Union contracts, because that is akin to saying a store owner is an idiot for paying protection money to the Mob. The UAW, as good an example of a rent seeking cartel as you will ever find, engaged in pattern bargaining. They picked the weakest of the Big-3, and threatened it with a ruinous strike, creating a dire set of alternatives.

Consequently, the targeted manufacturer would cave, thereby creating the pattern bargain for the entire industry. Among other atrocities, as David noted, is the jobs bank, which pays union members 90% of their wages in the event of a layoff. Beyond the debilitating cost burden, which only gets worse as revenue decreases, the jobs bank completely eliminates the incentive for workers to find a different line of work in response to changing market conditions.


Why the UAW was never subject to anti-trust action is beyond me.

As is the continued kowtowing to unions here in Michigan.

EVadvocate:

The future is in electric cars. More efficient than gas and zero emissions.

Zero emissions? Where the heck does the electricity come from? Regarding efficiency, because an electric vehicle can use regenerative braking, and uses essentially no energy when stopped, an electric car is more thermodynamically efficient than a gasoline powered equivalent. Factoring in the losses involved in making the electricity, distributing it, and the heat losses during charging, and I'll bet the picture changes substantially.

So substantially, that a diesel powered car is probably more efficient (they are more efficient than hybrids).

But if your car has a better maintenance record, is more fuel efficient, or has an innovative and appealing look, consumers are willing to pay more for it.

Your analysis is fine as far as it goes, but it is static. They aren't willing to pay more for qualities they can get elsewhere for less, which is ultimately what will happen until the Big-3 sheds the UAW.

February 16, 2007 7:02 AM  
Blogger Harry Eagar said...

There's an intraDetroit story. GM (Boeing, too) used its WWII military contracts to improve its production technique, relative to its competitors.

Ford bought a Chevy, disassembled it, analyzed it and concluded that GM had about $100 cost advantage on the assembly line in 1947 -- when a Ford sold for $800.

Relatively, that's about twice the advantage we are attributing to the Japanese v. Detroit today. Yet Ford did not disappear.

February 16, 2007 8:07 AM  
Blogger EVadvocate said...

Skipper:

Zero emissions from the operation of the vehicle. If the electricity is generated in a plant that produces emissions obviously those would have to be considered in any side-by-side comparison, but generating electricity doesn’t have to produce emissions so it is not an inherent product of the car.

Even considering losses in the processes of generation, transmission and charging, the cost of operating an electric car are equivalent to buying gas at about $0.60 a gallon.

February 16, 2007 5:25 PM  
Blogger David said...

Skipper: Nice comment. The last time I bought a car, I tried hard to find an American car I liked. If you sit in a Japanese car and then you sit in a similarly priced American car, there is just no comparison whatsoever on trim and finish. Japanese cars look like American cars costing $10-15k more. The Camry in particular is a really nice car inside, with the high end Camry really being a low end Lexus. In the end, I settled on an Avalon -- a nice car with no American competition.

The reason that the UAW wasn't charged with violating the antitrust laws is that Congress amended the antitrust laws so that they wouldn't apply to labor unions. Sauce for the goose is apparently not sauce for the gander.

eva: the cost of operating an electric car are equivalent to buying gas at about $0.60 a gallon. I know almost nothing about it, but that can't possibly be true. I suspect that those numbers ignore things like the limited range, short battery life and expensive battery replacements.

February 16, 2007 5:56 PM  
Blogger David said...

And a little noodling around on the web indicates that the actual cost of an electric car is equal to $7.00 gasoline, and that's without even adding in depreciation.

February 16, 2007 6:09 PM  
Blogger Oroborous said...

Diesel engines are great in many respects - fuel efficient, powerful, last forever - but they emit a lot of particulates, which is why they aren't in widespread use in non-commercial vehicles in America, as they are in Europe.

February 17, 2007 6:26 AM  
Blogger Hey Skipper said...

... but they emit a lot of particulates, which is why they aren't in widespread use in non-commercial vehicles in America,

Unless a small amount of urea is injected into the exhast upstream of the cat -- that completely eliminates the particulates.

Unfortunately, because the urea tank must be separately serviced, and the EPA has concluded that we are too stupid to do so, the EPA has effectively banned passeger vehicle diesels in the US.

The only other remaining barrier is the high sulfur content of US diesel fuel; however, refiners must bring US diesel in line with European diesel by the end of (IIRC) 2007.

February 18, 2007 7:59 PM  

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