A way to save the Big 3: Turn your clocks ahead one year

The cost for bailing out the Big 3 automakers (if they get everything they want) is now $75 billion and rising, yet the problem for the automakers is time as much as it is money. In John McElroy's column in Autoblog, he argues that the contract between the automakers and the United Auto Workers that goes into effect in 2010 will dramatically decrease the automakers' costs by shifting the burden for medical expenses to the UAW. In addition, a two-tier pay scale will be implemented, with new hires getting significantly lower salaries than existing workers. Therefore, a key goal of any government bailout should be to keep the automakers alive until the new contract goes into effect.

If McElroy is right, one way that the U.S. government could help the automakers would be to turn the clock ahead one year, figuratively speaking. Here's the idea: In return for Government financial aid, the contract scheduled to go into effect in 2010 would go into effect one year earlier, on January 1, 2009. The initial cash payments into the UAW's health care funds would be paid by the U.S. Government, not the automakers, in the form of loans to the automakers. (The money would go to the UAW directly from the U.S. Treasury, so that the automakers couldn't divert the money for other uses, just as banks are diverting funds that were supposed to be used for lending to other purposes.) This would save the automakers billions of dollars that they can use to finance their operations. The loans would be repaid by the automakers once they regain profitability.

This plan would give the Big 3 more flexibility to open and close plants as needed to meet customer demand, and it would also give them incentives to implement the kinds of cost-saving platform engineering strategies adopted by the Japanese manufacturers decades ago. With labor costs under better control, and with more flexible production, this plan would do many of the things that bankruptcies would do, with dramatically less "trickle-down" impact.

One other thing that the U.S. Congress could do would be to preempt car dealership franchise laws in the states. These laws require massive payments by car manufacturers to dealerships that they want to close. There's plenty of attrition in the ranks of car dealers today, but it would make much more sense for the car manufacturers to be able to take active control of their distribution strategies. This wouldn't cost the taxpayers a thing, although it would increase unemployment due to the closed dealerships.

The key is not to simply throw money at the problem, but to make business changes that will finally bring the U.S. auto industry into the 21st century.

More pain in autos for October

Autoblog's October "By the Numbers" survey is out, and the auto industry in the U.S. slid deeper into recession last month, with all makers except Audi and Mini showing year-over-year losses. GM was the biggest loser, down 45% from October 2007, and every GM brand except Saab was down at least 40%; HUMMER was down more than 60%, and Cadillac, GMC and Saturn were down over 50%. In September, GM was one of the better performers, due to its "Employee Pricing for Everyone" program, but it was discontinued at the end of that month. In addition, GMAC withdrew financing for all but the very best credit risks, which left GM's dealers with far fewer options for customer financing.

Of the major companies, Chrysler was down almost 35%, Ford fell over 30%, Nissan was down 33%, Honda was down over 25% and Toyota was down 23% (even with its annoying "Saved by Zero" ad campaign.) Only BMW was able to stay nearly even with last year, with a 5% year-over-year decline, and that was largely due to a big increase in production capacity and sales for Mini. In total, industry sales dropped 32.3% to approximately 821,000 vehicles (vs. 1.2 million in October 2007,) the lowest monthly count since February 1993, and adjusted for population growth, the worst monthly total since World War II.

Too many car brands? How about too many models?

Not too long ago, I suggested that Ford, GM and Chrysler should shrink the number of lines of cars each company has (if GM acquires Chrysler, that will cause a bit more shrinkage than I had in mind.) There's another way to look at this problem, and it's model proliferation. I just checked Edmunds.com, and for the 2009 model year, here are the figures:

• 106 Coupes
• 94 Sedans
• 87 Convertibles
• 15 Minivans and Vans
• 25 Wagons
• 81 SUVs
• 26 Light Trucks

That's 434 different models, and it doesn't even include all the variations within models (upgrades with bigger engines, nicer interiors, etc.). Car manufacturers are trying to manage the proliferation of models with platform engineering--a variety of "top hats", or bodies with interiors, riding on top of a smaller number of platforms, or chassis. The problem is that for most manufacturers, there are still too many platforms, top hats and variations. There are even variations in the way cars are put together that increase costs and cause grief on the production line. For example, one top hat design might require that the doors be attached before the interior, while another one requires the opposite. The manufacturer can't run both top hats on the same line, because the assembly station order is different. It's a problem that most manufacturers are addressing, but it took a long time for them to do it.

There has to be a more reasonable and economically sensible position between 434 models with countless variations, and "you can get any color you want, so long as it's black."

Wanna buy GM?

As of the close of trading in the U.S. today, GM's market capitalization (the total value of equity investments in the company) was around $2.7 billion. For now, at least, the market is betting that GM won't recover from its slump. Could GM become an acquisition target for a European or Asian car manufacturer? Renault, Peugeot/Citroen and Fiat have all talked about reentering the U.S. market at one time or another. One of the myriad of Chinese manufacturers could scoop up GM and use it as an entryway into the U.S. market. The problem, however, is GM's enormous obligations to its employees for jobs, pensions and medical insurance. Any acquirer would either have to take on those obligations or figure out a way to get rid of them, such as massively transferring production outside of the U.S. to plants not represented by the United Auto Workers. That's why an acquisition of GM by a competitor, as appealing as it might look on the surface, is probably not in the cards.

Bad times if you're in the car business

According to Autoblog, for the first time in its history (and, some sources indicate, the first time since the 1980s), every car maker and brand had lower sales in the U.S. last month than in September 2007. Every one. The best performer, Audi, was down only 5.4% year over year, while the worst performer, Hummer, was down 54.8% (no surprise there). In terms of manufacturers, GM fared best, down 15.8% from last year, primarily on the strength of the company's "Employee Pricing for Everyone" program, while Nissan was worst, down 36.8%. Nissan, Ford, Chrysler and Toyota were all down more than 30%, demonstrating that the problem isn't limited to the Big Three.

Other than the GM Employee Pricing program, which helped Chevy, Saturn and GMC in particular, there doesn't seem to be a pattern to explain why one brand did better than another. Some people were still buying luxury cars, Mercedes-Benzes in particular; they were down 16.4%, while Lexus was down 36.1%, and BMW was down 29.5%. Why did Mercedes do so much better? I have no idea. Why was Subaru down only 11.9% while Mazda was down 35.6% and Toyota was down 31.8%? Again, I haven't a clue.

The point is that the car business is terrible right now, whether you're a manufacturer or a dealer. Most industry observers expect more promotions to be announced, and perhaps an extension of GM's Employee Discount program, in the next few days. It's a great time to buy a car, assuming you can get credit (which is one of the big reasons why everyone's sales are down.)