Mark Cuban echoed a lot of popular sentiment about the car industry here that I feel is just poorly reasoned. Every time the beleaguered industry does just about anything anymore, they’re pilloried for it, and it just doesn’t make sense.
First there was flying the corporate jet to Washington, where the Congressmen questioning them asked ridiculous things like “who here is willing to sell their jet now and drive back?” as if you can just put a Gulfstream V on Craigslist and it’s gone later that day. Then they advertised in the Wall Street Journal thanking Americans for the bailout (to which I was opposed, by the way) and they’re criticized for spending on that.
Just because a company is having a hard time does not mean it should stop making efficient investments. In fact, it maybe should make more of them. A corporate jet is not just a luxury to a large corporation whose executives are required to travel frequently. It’s an investment. The cost of an hour of a corporate executive’s time sometimes makes them well-worth it. I’m not sure if that’s the case for Chrysler specifically, and that would have been an intelligent question to ask before suggesting they eBay their entire fleet.
Same with advertising. Advertising isn’t a luxury for a car company, it’s a necessity. When done properly, every dollar in ads amounts to more than a dollar in profits. As an investor in Chrysler, which George W. Bush has essentially made us all with the bailout, the last thing I want them to cut is their ad budget. I’d maybe want them to examine it for cost efficiencies, but cutting it out entirely would be certain death.
Also, an ad calling us their investors is, I think, brilliant. People have been shown to greatly prefer patronizing businesses they own stock in over ones they don’t. If Chrysler can make Americans feel a sense of ownership, it might have some small effect on people when it comes time to buy a new SUV. I don’t know if that approach will work for them or not, but it’s certainly a valid angle.
Worse yet there’s this silly notion that American car companies are losing because they simply aren’t innovative enough. Bullshit. They’re losing because every car costs $2,000 more to build due to higher wages and health care. That’s it. End of story.
You can’t out-innovate $2,000 per unit. It’s not possible. It’s just too much money for an industry that’s become largely commoditized. It’s like trying to compete with Bud Light but being forced to sell at Sam Adams prices.
When every mid-sized sedan is more or less interchangeable, $2,000 is just a tremendous difference, and as a result every American car for twenty years, in order to compete, has had to either cost that much more, or cut back on that much worth of features. They’ve largely chosen the latter, because the former would have destroyed their volume, and as such they’ve gotten a reputation for shoddy quality. They’ve closed the gap a lot in the last 5 years, which is a testament to just how hard they’re trying, and in fact they might be out-innovating slightly, but they just can’t win a battle that’s perpetually uphill.
It’s not as if Americans can’t engineer good cars. Our engineers are just as intelligent and driven as theirs. Our aviation and defense industries prove that. It’s just that their cost basis means they’d have to out-engineer the Japanese by an impossible margin to compete. And the car industry is so massive and has so many companies vying for supremacy that there just isn’t $2,000 worth of slack laying around to pick up. Cost-cutting has, since Henry T. Ford, been the primary focus of the industry, and they’re pretty good at it.
Cuban says they should focus less on reducing costs and instead “figure out what cars consumers want, and how much they need to sell for.” To illustrate just how stupid that idea is, here are the top 10 selling cars in America (source):
1. Ford F-Series
2. Toyota Camry
3. Chevy Silverado
4. Honda Accord
5. Honda Civic
6. Toyota Corolla
7. Nissan Altima
8. Chevy Impala
9. Dodge Ram
10. Ford focus
Looks to me like they’ve figured out what cars Americans want. They’ve got 5 of the top 10 models, including numbers 1 and 3. What more do you want from them? Actually, what you want is for them to make a profit on those proportional to what their competitors do.
Americans don’t just say “I want a mid-sized sedan and I want to pay $25,000 for it.” They decide what type of car they want and then shop around. They want to get what they want and pay the least for it they can. American manufacturers have determined the price they need to sell for, and they’ve been selling at that price. The problem is that price is above the cost for Toyota to manufacture it but below that cost for GM.
Also here’s an interesting line about total profits from a slightly outdated NPR comparison between GM and Toyota:
$4.15 billion loss from North America operations off-set by profits in Europe and Asia for an overall loss of $3.8 billion
Note that in other parts of the world, where their per-unit costs are on par with the Japanese, they actually make money.
And that’s why the executives are focused on lowering employee wages and benefits. You can’t out innovate $2,000 in a commodity business. And even if you could, doing so should net you $2,000 in extra profit over your competitors, not parity. Forcing them to continually fight uphill will inevitably lead to failure.
All of that is why I’ve never purchased an American car, and why I was against the bailout. They’ve been unable to convince me to buy one because their cars weren’t as good as Toyota’s. It may not be the fault of their engineers, but I’m still not driving a vastly inferior car just so unskilled laborers in Detroit can make $50 an hour flipping switches and pushing buttons.
And they’ve been unable to convince me that the bailout is a good idea unless there were strict guidelines ensuring that changed. They seem to have been unable to convince the Senate of that too, but thanks to Bush being as fiscally liberal as he is socially conservative, they didn’t have to.