Will we ever learn?

Monday, June 9, 2008

General Motors recently announced that it is closing plants that produce SUVs and other fuel inefficient vehicles. This results from massive financial losses. Ford made similar announcements of huge losses earlier this year and last year.

The U.S. auto giants apparently have lost the option of retooling plants to produce other vehicles. The companies kept producing money losers to the point that much of their market share was lost, if not permanently, at least for a long time.

Some of the negative economic impact on this country from the plant closings will be offset by the fact that foreign car companies are opening new plants in America that will employ American workers to manufacture fuel-efficient vehicles.

Why are U.S. companies so slow to respond to changing markets, while Japanese, German and Korean companies are able to swiftly respond to changing markets?

This is nothing new. Imports into America of products that were previously made almost exclusively by American companies grew during the 1960s and this became a flood of imported electronics and vehicles during the 1970s.

It took a long time for American companies to respond to increasing demand for quality control. American auto manufacturers have been even more reluctant to respond to increasing demands for fuel efficiency.

Americans have historically shown great inventiveness, both in product design and manufacturing technique, but when a company grows to a certain size, an arrogance appears to settle in and the company continues with its old ways past the time those ways are profitable.

American companies have failed to learn from the business model used by Japanese companies, a model designed by an American.

William Edwards Deming, an Iowa native, was the architect for Japan's rise from the ashes of World War II.

Such concepts as involving all workers in quality control and focusing on long-term goals rather than short-term profits were fully embraced by the Japanese in the post-war years. These concepts were only much later accepted by American companies and to a much lesser extent than in Asia and Europe,

The present problems for GM, Ford and Chrysler results from their reluctance to turn away from SUVs, pickups and luxury cars, once the profit machines for the auto makers.

The markup for the high-end vehicles was several times that of economy vehicles. Economy vehicles have long had a rather narrow profit margin.

Consumers enjoy the status of high-end vehicles, a luxury that few can now afford, not only because of high gas prices but also because of other economic concerns.

The SUV and pickup market had also been fueled by the artificial "cost of ownership" formula. When demand for used SUV and pickups was high, the resale value was a fairly high percentage of the original cost. That supposedly made the cost of ownership lower than for other vehicles.

This formula didn't take into account the higher fuel and maintenance cost of the high-end vehicles and certainly didn't take into account the possibility that the demand for SUVs and pickups could plummet.

We hope American companies can eventually learn from their mistakes but it appears that, for the foreseeable future, foreign companies are in a position to gain more market share.