More on The Decline of Detroit

Finally, after several years of reading about how GM's, Ford's and Chysler's messes are the fault of 'legacy health care costs,' an article that focuses on, in my mind, the real issue- making better cars. Here's a sample of my thinking, from a May, 2007 post on Cerebrus buying Chrsyler from Daimler. There are others, if you read through the posts under labels on this post.

The Wall Street Journal carried an article by John Schnapp, retired head of Mercer Consulting's auto industry practice, in their Saturday/Sunday edition.

Schnapp cites some really chilling statistics. He points out that, as of the late 1990s, the Big 3 were surprisingly healthy. Chrysler had a 4.8% net profit on sales in 1997. GM was at 3.8%, and Ford at 4.5%. Their total returns were, respectively, 17% and 12.2% for Chrysler and GM for the decade of the 1990s.

I loved Schnapp's comments on CAFE standards,

"But a 35 mpg mandate will surely not shoehorn motorists unwillingly into tiny clown cars like Mercdes's European money loser, the Smart. Nor is it likely to affect occupant safety or even performance. It will involve broader availability of hybrids, already well underway, and application of incremental technologies like turbocharging, continuously variable transmissions and variable valve lift engines.

The overriding challenge, though, for the Detroit Three remains neither their cost burdens nor Congressional fuel economy activism. Rather it is overcoming their continued inability to win in the marketplace.

A decade ago, before any of the recent red ink began to flow, the stewards of these giant enterprises had ample resources to compete. Events have proven that they didn't use them very effectively. In 1996-97, with all of the same cost burdens now bemoaned, Chrysler- for one- made itself the world's most profitable automaker, generating rates of profitability roughly the same as Toyota does today."

To me, Schnapp's closing paragraphs clearly lead one to see this sector as simply, finally, falling afoul of Schumpterian dynamics. Schnapp's observation that the Big Three "had ample resources to compete.....they didn't use them very effectively," is the key passage. It looks like Detroit has just run out of competitive gas, so to speak, and ought to be harvested by competitors. Thus, Chyrsler is bought by a private equity group, Ford still labors as the lone, small US auto maker, and GM continues to believe it can 'turnaround,' if it can just blame everyone else for its problems.

I think the Detroit auto makers fiddled too long, and now, have squandered their final chance to remain competitively profitable, and, potentially, earning consistently superior total returns for their shareholders. The industry has changed, they have failed, and others will now lead it into the future.