Thinking Ahead at Ford and Charlie Brown’s Football

This post is a guest contribution by John S. Boyd, writer of the BlindReason blog.

This piece about Ford’s just announced $8.7 billion loss was interesting via the FT here with an excerpt below:

Ford has unveiled an ambitious facelift for its troubled North American operations aimed at shifting its focus from big pick-up trucks and sport-utility vehicles towards smaller, more fuel-efficient passenger cars.

Announcing a net second-quarter loss of $8.7bn, the number-two Detroit carmaker said on Thursday that it would bring six small European models to north America, and convert three existing truck and SUV assembly plants to small cars.

The conversions are in addition to plans announced earlier to cut SUV and pick-up production for the remainder of this year.

The carmaker also plans to accelerate the introduction of a new fuel-efficient V6 engine and to double four-cylinder engine capacity. It quashed speculation that it might eliminate the Mercury premium brand from its product line-up.

Alan Mulally, chief executive, said the moves were designed to respond “to the rapidly changing business environment”.

Ford’s US sales volumes shrank by 14 per cent in the first half of 2008 from a year earlier, including a 28 per cent dive in June, due largely to plummeting sales of such former mainstays as the F-Series pick-ups and the Explorer SUV.

Essentially Ford’s message was– “Hey we just lost $8.7 billion. But don’t worry, we got this idea…we are going to make smaller cars”.

Now don’t get me wrong, it seems like an obviously sound idea but I wonder if they are not a little late on this and more than a dollar short.  All the US car makers are in the same boat and their pace of adaption to business changes are glacially slow so I am not picking on Ford alone here.   Chrysler which is privately owned now seems equally flat footed so I don’t think it’s necessarily a function of managing short term business profits to long term strategic plans.

This would ordinarily be 20/20 hindsight commentary but this has happened before in the 1970s and 1980s. High oil prices caused a shift to higher fuel economy cars and smaller cars and the Japanese destroyed these companies for decades with various crisis and requests for bailout assistance.  

No question Americans love big SUVs, and they don’t mind forking over a higher margin for them temping car companies all around the world..  

Much like Charlie Brown aiming for the football with Lucy promising that the football won’t be pulled away again these high margins seem especially tempting for American car companies.  But are the short term higher margins worth the big write offs you take when the fuel price jumps and you have to retool plants?

Since Americans don’t mind paying so much for large SUV’s why not just make them with alternative fuel engines that give them ultra high fuel economy.  It may cost quite a bit more but American’s have shown a propensity to pay extra for big behemoths and it would shield them from fluctuations in gasoline.  Of course if they do this they will sell less of them but they won’t have to retool plants and risk bankruptcy on huge write offs every 20 years.  This thinking never seems to be factored in, time and again– Just like Charlie Brown and his football..

With the plummeting dollar, and an increasingly competitive manufacturing base in the United States you would think this would give US car makers, particularly export oriented ones like GM a big edge selling to the 1.3 billion new consumers entering the marketplace. US based auto manufacturers actually have a huge opportunity to expand and grow as the US dollar provides a very large cushion of competitiveness.

If the US auto makers actually shifted to a new more technologically advanced fuel standard, wouldn’t this give them a huge edge over foreign competitors? Wouldn’t other countries be tempted to migrate to this new standard given the largest market in the world had shifted? This might be a chance for the American auto makers to become technological leaders for the first time in 40 years but they’d rather keeping kicking that same football.

Do we need a “Tabula Rasa” to get this kind of change in the industry? i.e. something like a bankruptcy to have these companies start from scratch or can management make the changes needed.

What’s the reason for management’s inability to adapt quickly or prepare for change? Why is it so much worse than other US industries?

Energy prices have been rising for years but why are the US companies caught so flat footed over and over?

• Is it the relationship between the companies and unions? Either lack of flexibility in contrasts or built in costs that give them a competitive disadvantage compared to everyone else?
• Is the misalignment with our fuel taxes in the US vs Europe and Japan the reason our companies can’t adapt quickly? I.e. if our gas prices are always lower are car companies that much more vulnerable when we experience big price surges because of the elasticity of demand for gasoline?
• Is it a case of be careful what you wish for? The US Auto industry has lobbied tooth and nail to keep higher fuel economy standards from becoming law and the US has severely lagged against the rest of the world in these standards.  But the billions in political pork and back room lobbying has got them lower standards but has it now come back to haunt them?
• Is it all of these combined or is it something completely different causing this. If so what?

You can reach John for comments as johnspencerboyd@gmail.com