What to do about Detroit [2009 Archive]

As Automotive Industry “refugees” here at Green Horn Investor, we”re interested in the investing business of the Automotive Market.  Prompted by a post from Seth Godin who brings up an interesting angle on what to do with Detroit we thought we”d add in a bit of our insight.

There is a huge amount of angst within the industry itself and people outside the industry who just do not really understand the ramifications of saving or squashing such an industry.

-Those that advocate “let them fail”, which means a huge loss of direct jobs and small and medium businesses that depend on the spending habits of those jobs.  Foreign car companies, they say, will add more capacity and jobs.  But those are just assembly plants.  Not the supply base that extends from engines to gloves and tags that make things all over the US.  Those are the real jobs that will disappear.  There is also the freedom arsenal of being able to switch over automotive production and talent to any war material needed.

-Those that advocate “give them cash”, which means a huge loss of jobs when the money runs out.  There will be squandering.  There will be improvements.  The amounts of cash are tiny and won”t really provide real sustenance for survival (we think the ”recession” will last several years yet).

A typical car has over 25,000 parts used in building it.  It is one of the most complex devices that people throw into the harshest environments they want to go to – from the Beaches to the Mountains to urban parking structures. How many rainy pot-holes does your precious iPod get regularly thrown into?  Or how long does your leather couch upholstery last with a big wet Labrador retriever bouncing on it?

Anyway, back to Seth Godin”s idea… organize collapsing the Big Three and making it easy to be replaced by “500 new car companies” like there was at the dawn of Automotive Technology.  He does touch on the Regulation issue – to eliminate or reduce requirements (there are many supriferous ones, but others which could include brake testing, or emissions, or crash safety… that might need to be considered a bit more thouroughly).

In the early 1900”s, Detroit was ”Silicone Valley”.  Mechanics and tinkerers in their garages built the cars and the companies that lived through the last century.  There were ”tech wrecks” along the way, M&A activity (especially involving Chrysler), and real business innovation.  It would really be impossible to recreate that environment again.  Especially when foreign automotive companies are standing there ready.  And these are “mature” products, there is not a lot of innovation in today”s vehicles like there was early on when everyone was trying to figure out how to improve durability or function (like safety and convenience of electric starters instead of hand cranking). 

How many radio companies were there that narrowed to a handful? Or television companies that narrowed to a few? Or computer manufacturers that have narrowed? How many home improvement/lumber stores do you shop at? The normal progression of products and companies is to get to a few large companies.  Buyers want simple brand choices and standardized products and tend to favor this selection pattern (ever shop at Walmart or Target?).

A few smarty-pants silicone valley cash-out kings have started some automotive companies – and are struggling.  It”s a tough market to compete in.  Remember there are 25,000 parts to fiddle with, and massive global entrenched competitors with very loyal domestic US buyers (Toyota, Honda, BMW, etc) – how many customers will put up a three to five year loan to a couple of guys in a garage? How many really?

The Domestic Big Three will need to turn into the Big Two and slim themselves down to a few brands each with only a few products in each category produced at multiple plants at high volumes (making profitable vehicles takes a high volume business).  The GM-Jeep company may even declair bankruptcy to shed union and dealer and pension liabilities that currently puts them at a cost disadvantage (employee health care costs more than the steel in a car – and health care is rising faster than the price of steel!).  Revamp the regulation issues, tax fuel to convice buyers to desire smaller vehicles that the companies can then plan to invest in that will do more for environmental improvement than any new high-tech powertrain will do for the near term.  Actually, that fuel tax will encourage alternate powertrain solutions by building in a natural incentive.

Detroit will survive, it will just look different.  We keep watching the Automotive sector stock prices.  There is value there after the hard choices are made. 

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