5/1/2001 | 4 MINUTE READ

Downturn Maneuvers—Motown Style

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We should know better, shame on us.


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We should know better, shame on us. Just one year ago, with North American automotive production hitting an all-time high, optimism reigned supreme. Would the automotive industry escape its old Rust Belt, cyclical industry reputation? With globalization and accelerated mergers and acquisitions, did we reach a plateau of consolidation and achieve a state of record profits and high-volumes? We all know the answer...now.

With the thud of crashing dot-coms, automotive companies have slammed on the proverbial brakes on hiring, spending and expansion. Given their managerial conservatism, automotive firms are trying to maximize their current resources and still achieve decent profit margins.

Supplier Company X—Stealth Mode Reductions

One large supplier (who shall remain nameless) has laid off 75% of its technical staff, eliminated over 1,000 positions in other areas and has cancelled all internal budget expenditures for the remainder of the year—all on stealth mode. None of these cutbacks were announced nor have the intrepid Wall Street analysts picked up on these recent internal dealings. Why has this been done without visibility? Maybe it has to do with admitting to a series of mistakes by senior management—poor debt management, slow integration of recent acquisitions or the loss of key OEM contracts. Or it could be the protection of the CEO's $2-million salary and bonus package.

How a company acts towards its employees, stockholders, suppliers, and customers during a downturn can tell you a lot about a company. Company X has extended its payment terms to its suppliers from 60 days (already above average payment length) to 90 days. Its suppliers were then asked to provide mandatory cost reductions of 5% on an annual basis—or else. Laid-off employees were asked to sign agreements guaranteeing them two additional weeks of pay in exchange for a signed agreement not to sue the company for any reason. Running like an LBO (leverage buyout organization), the company has completely stripped the cupboard bare and has even stopped doing R&D on new products—though this is not something its customers are being told.

Panic Attacks Ripple Throughout the Industry

Despite current production for total North American production tracking at 17.3 million units (slightly lower than last year's record pace but would still represent the third-best performance ever by the auto industry), vehicle manufacturers and Tier 1-2-3 suppliers alike are reacting as if the industry was in one of its historic deep swan dives. “Over-reaction” is a good phrase to insert here.

With the impending Bush tax cuts and stronger consumer confidence figures expected this spring, the automotive industry may have just hit a six-month skid instead of a two-year lull (as was the case in past dips). The massive layoffs and budget freezes will prove out to be unwarranted and overkill. Conservative action is needed during economic slow-downs but wholesale shutdown can be deadly.

DCX: Slapping Out Singles

As this automotive pillar quivers in the proverbial economic winds, have the troubles at DaimlerChrysler shaken the industry's confidence? What caused the unforeseen crash in DCX's profitability and market success? Stiff competition, that's what. With Ford and GM fighting a brutal incentive war and innovative products rolling off Japanese-owned assembly lines in Indiana, Ohio, Kentucky, and Canada, DCX was caught in the crossfire.

Having to participate in a game they were ill-equipped to play, DCX tried keeping pace with Ford and GM in the incentive arena. This drained DCX's vaunted cash reserves, and led to the massive restructuring we are currently witnessing. Was German or American management at fault? Market conditions and lukewarm products had more to do with it than anything else. Despite the PT Cruiser's surprising success, most of DaimlerChrysler's product lineup has grown stale. The Chrysler design powerhouse that once churned out homerun after homerun, is now content to slap out singles.

Utopia Revisited, Japanese Style

And now a look at the way it should be done–Japanese style. After a recent site visit to a large Japanese OEM, we came away amazed at the foresight, efficiency and management savvy of this company, which is consistent with what its peers are doing. The trick, it seems, is to not add hundreds of heads during strong periods, which eliminates the need for lay-offs during downturns. Running “lean and mean” at all times is essential. Most American companies subscribe to the “staff up, staff down” theory.

Why do the Japanese do so well? They do their homework. By performing in-depth consumer clinics, design reviews and competitive teardown studies, Japanese OEM's know exactly what the consumer wants and how the competition is trying to meet these needs. Without a firm grasp of an OEM's design processes, assembly techniques and system composition, how can an American company compete against a Honda Odyssey or a Toyota Avalon?

With the recent trend among the Big Three toward platform management, some focus has been lost on market viability, real-world sales targets and actually listening to the consumer. Have you done a complete teardown (to the nut-and-bolt level) of each competing vehicle? Have you performed consumer clinics on the entire product segment prior to model introduction? Do you have a rock-solid understanding of the market dynamics? In most cases, the answer is “No.” Flying by the seat of their pants, many platform executives think they know what the American public wants and needs. If that's true, how did the Aztek ever get into production?