Failure to evolve leads to extinction

It is a fact of life and death that if you don’t change, sooner or later extinction sets in. This is a fact of life not only in nature but in business as well.

Hind sight is 20/20 so the saying goes, and predicting the future is difficult,….. or is it. Connecting the Dots takes on the challenge of predicting what will happen next, and some things are more difficult to predict than others. However in this case it was practically a no brainer.

We have known for at least 30 years that some day oil would start to run out, and in the last half of the 1990’s the pros in the field nailed it down to around 2010 as being the tipping point. A few factors came into play and the date floated a bit, but non the less it was coming.

Many Americans saw this and looked at the bigger picture how all of this was tied to global warming. There were plenty of efforts on a grass roots level, and other countries around the world were getting on board with dealing with global warming. Fuel efficient cars were being produced in Japan and Toyota had a loin’s share of the world market. Evolution was underway, or at least so in Japan.

Meanwhile in America President Bush was buddy, buddy with big oil and the trend was drill more and burn more. The oil lobby was very powerful and there was little incentive to develop new technology. The American car market was pushing bigger stronger faster because there was a good profit margin. Japan had already for the most part developed technology that was years ahead of American technology when it came to cars that took sips and not guzzled from the fuel tank. The American car industry was not evolving, or at least not evolving in the correct direction.

Arguably one could say it was American culture and the love affair Americans have with their cars that drove the big car market. But then why does Toyota and other non domestic cars hold such a big portion of the American car market becomes the other side of the argument. The fact is there is a need for big and for small, and it all is driven by necessity and not desire. A person that works as a carpenter is more likely to drive a pickup truck than an accountant. Bigger families are more likely to drive a mini van than a compact. But to own and drive a big car because it is trendy, particularly when oil is so near the end is simply foolish and the name Darwin comes to mind.

There is another factor that must be considered, and that is advertizing can start trends. We are not talking about commercials, but more subtle advertizing that is more suggestive than anything else. Hollywood movies play a big roll, and if you think brand name products are in movies by chance, think again. Those huge blockbuster feature movies you pay to see, are just another method of advertizing. Because products in the movie become associated with a desired lifestyle or a person, they sell. There are many more followers in this world than there are leaders.

So now reality has set in with the oil price spike that has since retreated. Detroit is on the verge of becoming more of a ghost town if American car manufactures can’t quickly adapt. Connecting the Dots touched on this in July in Detroit canary syndrom and how that prediction is panning out is becoming more obvious and dire. The news story below although a bit long supports what we have been saying and predicting right along. The next few months will be very critical to see if evolutionary changes can be made in a short period of time or not. The problem is it looks like American public may be asked to foot the bill for corporate greed and a buddy, buddy outgoing President. How that will go over with Americans is hard to say. Should evolution be allowed to happen and let the un-evolved become extinct or not is really the question here.

DETROIT – At Ford Motor Co. they called it “Blue,” a team set up around the year 2000 to design an array of small, fuel-efficient cars to compete with the Japanese. It didn’t get far because no one could figure out how to make money on low-priced compacts with Ford’s high labor costs.

Besides, the automaker was racking up billions in profits by selling pickups and sport utility vehicles. Times were good and gas was cheap.

“Blue” is only a small blip in automotive history, but it tells a big part of the story about why Detroit automakers are in a mess so critical they could be only months away from bankruptcy.

Democratic leaders in Congress asked the Bush administration on Saturday to provide more aid to the struggling auto industry, which is bleeding cash and jobs as sales have dropped to their lowest level in a quarter-century.

House Speaker Nancy Pelosi and Senate Majority Leader Harry Reid said in a letter to Treasury Secretary Henry Paulson that the administration should consider expanding the $700 billion bailout to include car companies.

Critics say leaders over the years at Ford Motor Co., General Motors Corp. and what is now Chrysler LLC were slow to take on unions, failed to invest enough in new products, ceded the car market to the Japanese and were ill-prepared for the inevitable rise in gas prices that would make their trucks and SUVs obsolete.

“There’s been 30 years of denial,” said Noel Tichy, a University of Michigan business professor and author who ran General Electric Co.’s leadership program from 1985-87 and once worked as a consultant for Ford. “They did not make themselves competitive. They didn’t deal with the union issues, the cost structures long ago, everything that makes a successful company.”

Industry representatives, however, say their critics are simplistic, giving them no credit for huge progress this decade in cutting costs, raising productivity, and building competitive cars while handling multiple government regulations and a powerful labor union.

“In the last five years, there’s been more restructuring done in the automotive business than any other business in the history of the United States,” said Tony Cervone, a GM vice president of communications.

Whatever the reasons, the Detroit Three are closer to collapse than ever, and likely won’t make it without billions in government loans.

On Friday, GM posted a $2.5 billion third-quarter loss and ominously said it could run out of money before the end of the year. The company spent $6.9 billion more than it took in for the quarter and reported that it had $16.2 billion in cash available at the end of September.

Ford reported a $129 million loss but said it burned up $7.7 billion in cash for the period. It had $18.9 billion on hand as of Sept. 30. Its chief financial officer says he’s confident Ford will make it through 2009, but that’s because the company took out a huge loan last year.

Industry analysts believe Chrysler, now a private company that does not have to open its books, is as bad off as GM as U.S. sales continue to plummet because of tight credit and lack of consumer confidence due to the economy.

To survive, automakers are pressing Washington for $50 billion in low-interest loans on top of $25 billion already approved to build more fuel-efficient vehicles. The $25 billion, though, is gummed up in Energy Department regulations and may not be available until next year.

The industry’s path to cliff’s edge is a complex one that even critics say is intertwined with government fuel economy and safety regulations and the United Auto Workers union.

The demise started in the 80s when Toyota Motor Corp. and Honda Motor Co. mastered building reliable and efficient cars while the Detroit Three lagged behind.

As GM, Ford and Chrysler saw their market share start to slip, the 90s arrived and high profits returned as Americans snapped up pickup trucks and SUVs.

As Honda and Toyota took over the small and mid-size car markets, Ford, GM and Chrysler put most of their resources into trucks and SUVs, which brought in billions in profits that covered growing health care, pension and labor costs.

“In a market-based economy when you have to try to be profitable, you go where the money is,” said David Cole, chairman of the Center for Automotive Research in Ann Arbor.

When times were good, the automakers did not take on the UAW, which the companies say drove up their labor costs to $30 per hour more than Japanese companies paid their workers. The figure includes pension and health care costs for hundreds of thousands of retirees.

When GM pushed for changes in 1998, the union went on strike at two key Flint, Mich., parts plants, shutting down the company and costing it about $2 billion in profits.

“They were making money and the union had a monopoly,” Cole said. “They’d shut them down. That’s why they had some very lengthy strikes that were very painful.”

But when the SUV and truck market started to fade in the mid-2000s, executives realized their business model would no longer work and began globalizing their vehicles, streamlining manufacturing processes and developing new and better cars.

The UAW, realizing that the companies were in trouble, agreed to a landmark new contract last year that nearly eliminated the labor cost difference between the Detroit Three and the Japanese, shifting retiree health care costs to a union-administered trust fund.

But just as the cost cuts started to take hold and new products were rolling out, gas prices rose rapidly to around $4 per gallon and Wall Street collapsed, virtually eliminating credit which 60 percent of car buyers need.

“A lot of things sort of coalesced simultaneously,” said Tom Libby, senior director of industry analysis for J.D. Power and Associates.

Automakers have all said bankruptcy is not an option because people would not buy cars from a company that might not exist in a few years. But if the car companies run out of money and can’t pay the bills, bankruptcy could be forced on them, according to industry analysts.

GM’s statements that it may run out of cash this year or next likely will have an effect on sales, Libby said.

“It doesn’t help, and they know that,” he said.

The current crisis, Cervone says, is not unique to the domestics. Honda and Toyota, he says, also have seen huge sales drops in the U.S. in recent months.

If Detroit gets federal help, the companies that do survive should become profitable next year, Cole said, if the credit market thaws out.

Cole says there’s no way at this point the Detroit automakers can survive without federal aid. But if they get it, the ones that do survive should become profitable again next year if the credit markets thaw out.

“They’ll get out of it,” says Libby. “They’ve got to do what they’ve got to do. They’re backed up against the wall.”

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