Thursday, October 06, 2005

Queens of Denial

This week started with the spotlight in Detroit. GM and Ford were once again whining about healthcare costs related to building their products. If I hear this nonsense again, I’m going to be sick.

GM’s and Ford’s managements got themselves into the mess they are in, over time, all by themselves. And the mess didn’t start with healthcare costs, legacy or otherwise. It started with building cars for which people won’t pay the manufacturer’s list price in sufficient number to result in profitable operations.

So long as Rick Waggoner and Bill Ford continue to be in denial about this issue, their companies’ fortunes will continue to decline. Using smoke and mirrors to blame the UAW for their respective woes may seem clever. But big labor doesn’t design the cars at GM and Ford. Management does. And management also freely entered into the contracts which have saddled them with fringe benefits they now feel are unaffordable.

I’ve done quite a bit of research on drivers of consistently superior company performances, looking over long timeframes among many large-cap companies. The very best companies consistently grow revenues at high rates. This typically involves both repurchases by customers, as well as an ability to sustain price levels. This type of customer behavior, repurchasing and paying full price, is usually seen when a company adapts its offerings to evolving customer needs over time in a competitively-advantaged manner.

GM and Ford don’t appear to be able to do either one. That’s their real problem. Failure to solve this problem will overwhelm the resolution of any of their other apparent problems, including those involving workforce healthcare. Even if they did get resolution on the latter issue, they still are stuck with a management that continues to churn out unwanted cars that are unable to sustain their sticker prices.

It stems from losing their way with product design. Detroit just doesn’t seem to be able to develop very many new vehicles for which the market clamors in large numbers. And now, it’s ironic that the one class of vehicle for which they can get list, in large numbers, is suddenly losing value faster than you can say “SUV.” With current energy prices, this product class is going to be out of favor for a while.

Judging from where GM and Ford appear to be putting much of their energies these days, I’d say we’re going to be shy at least one major US-based car manufacturer before the decade is out. It may involve a merger among onshore rivals, if Congress is afraid to let so many UAW workers lose their jobs at once through a total financial failure of GM or Ford. But I'm willing to bet there will be one less automotive CEO in Detroit when 2010 dawns.

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