advice from a fake consultant

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Tuesday, January 23, 2007

On A New Auto Industry, Or, The Road Ahead

When discussing the current state of the auto industry in the US it is evident that future trends do not point to likely profits soon for the “Big 3” (or Big 2, or 3 again, if Daimler were to dump Chrysler) US automakers.

The labor cost problem is often referenced as an enormous issue that hobbles the industry going forward.

Design issues also take a toll, but that was the focus of a previous discussion, not today’s.

Instead, let’s look to how we might restructure the industry to create a new business model.

Before we begin, I want to point out that I am writing this from the point of view of a mythical auto company executive.

What I will propose will be potentially disastrous for the affected companies, their employees and retirees-but then again, it might just be their best shot.

I’m going to open this conversation with a completely out-of-the-box question:

If there’s a huge labor cost problem building cars, why don’t unprofitable automobile companies just quit building cars?

Bear in mind, I’m not suggesting they get out of the business; just consider a different model for the industry.

For a moment, think about the computer industry.

Computer components are, for the most part, “agnostic”, meaning your RAM can be used in a Dell, or HP/Compaq, or the generic box assembled at the local computer store.

This means, for the most part, retail computer sellers are really “integrators” who put their effort into designing final packages, rather than components. (There are exceptions; distinctive Dell cases being an obvious example)

There are advantages to this system. As an example, Intel can put more effort into chip development than any of the above mentioned companies would wish upon themselves. A second example: software.

Alert observers will note that this process is already under way.

Johnson Controls is an example of a company that makes “automotive modules” (they are a huge supplier of automotive interiors).

If we were to take the concept farther, the eventual outcome could be companies that design and market automobiles, other companies that assemble those cars and still other companies that design and build automotive components.

As far as I can see, the biggest obstacle (other than the timing of changes in legal control) is the question of who is going to eat the healthcare and pension costs of the legacy Ford, GM, and Chrysler companies.

So here’s a proposal:

Give the factories to the current workers, in exchange for indemnity from future medical/pension costs for those workers.

Those assembly companies would presumably be more able to convince their employee-owners that stock appreciation comes from a controlled cost structure than is possible for the legacy companies today.

These assembly plants would then compete for assembly work-from any legacy company, as each evolved to this structure.

Multiyear contracts could provide cost stability.

This only gets us part way there, however.

Retirees. Here’s where we get really far out.

If the legacy companies couldn’t make it in the car business because of excessive labor costs, could the legacy companies make it in the health care industry?

In other words, why not get in the clinic/pharmacy trade?

Something along the lines of a Kaiser Permanente operation, but centered on the legacy companies’ retirees’ geographic distribution and distribution of retained employees (although, if it somehow became profitable, it could be spread).

There are ERISA issues aplenty, which means negotiations backed by a bit of serious hardball would be required.

The legacy companies might need to approach the retirees and the Pension Benefit Guarantee Board (and eventually Congress and a currently unknown future Administration-start donating now!), with something like this:

Good cop: This opportunity will preserve quality heath care for hundreds of thousands of deserving workers…and registered voters.

Bad cop: If we go bankrupt, sell the assets for liquidation, pay back our debtors, and go away, the Federal Government will be on the hook for a substantial portion of the bankrupt pension plan…or face hundreds of thousands of registered voters, and still more angry stockholders…also registered voters.

(A variation of this approach can also be used to address UAW concerns, if the union is not amenable to the employee-ownership offer mentioned earlier.)

Interestingly, this does not require the legacy companies to offer these services with as much concern for reimbursement levels and other revenue issues as other providers.

This is because the only target the legacy companies need to hit is the current cost they lay out for those expenses, plus the expenses for the retained employees’ heath care costs-costs that should be lowered by at least the amount of profit the former providers and administrator took from the system.

If the legacy companies could de-unionize the health care providers they purchase, costs could be further reduced.

Regarding pensions: if there is a reasonable possibility that the PBGC could find a way to supplement the existing pension system without a takeover, a potential deal exists.

We’re coming to the end, and here’s where it gets really interesting…

…Remember my observation about the computer industry, how parts are interchangeable? Your Dell (or Apple, or generic) computer can accommodate hard drives, graphics cards, and every other internal part from numerous sources with pretty good interoperability.

Imagine if your Mustang could be ordered with a Delphi drivetrain, Bosch brakes, and interior components specified by you?

Imagine if you could also order your Dodge minivan with the same family of components? (Imagine if every car in your driveway had the same dashboard, motor, and electronics package!)

Voluntary standardization of mountings and connections (and adapters, and etc.) across the industry could make this possible.

It’s not as crazy as you might think. It’s already the standard in heavy trucks and commercial aircraft (“GE or Rolls-Royce engine for that Boeing 777, sir?” ”Cummins or Allison for that new Peterbilt?”).

There are a ton of pitfalls here, no doubt, but imagine the outcome if the US auto industry was the only place in the world you could be free to put the mechanics you want under the frame and body and interior you want.

If it could be made to work the Japanese will be coming to study us.


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