Friday, December 12, 2008

Future of the US Automobile Industry : Cash Bailout or Competitive Efficiency

The US Economy (and with it the global economy) has until recently been severely pressured by the failures in the Wall Street. It now appears to be the turn of the US automobile industry to adversely impact the US economy. The decline and the looming bankruptcy of the Big 3 US auto makers (General Motors, Ford and Chrysler) could have a more long term and widespread damage given the cascading connectivity of the automobile industry with a host of industrial and social sectors.

While the anxiety to save the US automobile industry is understandable, the path being pursued to bail out the industry appears to be illogical. While it is well said by the US Congress that the cash bail out by the US government can only be a life line but not a life insurance, there is no compelling evidence that either the US government or the US auto industry is committed to a specific plan to make the US auto industry truly efficient and self-reliant.

It is indeed surprising as to why the Big 3 of the US could not reinvent and recharge themselves when other global companies such as Renault, Fiat and Nissan could become more competitive despite the dire straits they had to go through from time to time. The answer perhaps lies in the insular approach of the Big 3 towards the newer concepts of competitive efficiency in automobile design, manufacture and management.

The US economy and the auto industry traditionally thrived in an era of cheap oil in which the size of a car was often equated with the comfort and prestige it offered. In the process the US automobile industry has been singularly guilty of not shaping the market direction with innovative product choices and creative manufacturing options. As a result the power to weight ratios of a typical US automobile always tended to be adverse relative to a typical Japanese automobile, leading to higher product costs, higher operating costs and lower returns to the manufacturers as well as consumers. Added to that, the shortfalls in quality and customer service ensured that the vicious circle of escalating costs and declining demand was complete.

The answer to this industrial tragedy lies in large scale adoption of new product technologies, including in-licensing of new Japanese and European design technologies and adoption of Japanese production system across all the global manufacturing plants of the US auto makers. A massive change in the mindset of the managerial bureaucracy and the workforce in the automobile industry is required to make this happen. Perhaps, the US government itself needs to be less nationalistic, less protectionist and more global by encouraging the Toyotas, Hondas and Renaults of the world to take a stake, both financial and operational, in the US automobile industry to achieve a lasting turnaround.

Perhaps, not so well appreciated is what emerging industrial economies such as India can do to help out the US automobile industry. The US auto industry may not acknowledge it, but India is the most vibrant automobile hub globally, outside of the US, European Union and Japan. Both from a historical and contemporary perspective, India has assimilated the best of European, US and Japanese automotive practices and amalgamated its competitive cost structure to develop its own automotive paradigm. The design and manufacture of Nano microcar by the Tata Group is a testimony to the new-found design creativity and manufacturing panache of select Indian automobile firms.

Two of the three US automobile firms (GM and Ford) are already present in India. Several of the Indian automobile and automotive components firms have had technology relationships with the US firms. It is time that the Indian automotive and component sectors are leveraged by the US automotive industry to achieve the needed cost competitiveness. In addition, Indian information technology sector and automobile design sector can collaborate to create new automotive designs which are leaner, more efficient and yet more long-lasting.

While some level of immediate cash bailout for the US automobile makers would be inevitable, a substantial portion of the next phase of cash support has to be placed into a modernization fund which would enable the US auto makers commit to in-licensing of competitive automotive design technologies (say, from Japan) and integration with globally cost-competitive component base (say, from India). These must be accompanied by large scale induction of manufacturing practices from the Japanese automotive industry to achieve sustainable competitiveness.

Posted by Dr CB Rao on December 12, 2008


Chinowsky said...

Very interesting. Would be interested in your perspective on what role the United Auto Workers union has played in the big three's downfall and why they are so resistent even now on making concessions. Furthermore, what advice do you have for the new Democratic congress and President in dealing with the unions whom they owe much of their vote to but whom also seem to be a material component in the expenses of the big 3. Perhaps this is not an issue in the Indian automobile industry?

cb@strategy said...

Unionisation has a psychology that defies logic. Leftists in India subscribed to strident unionism that destroyed industry in West Bengal and Kerala.