I never saw the creepy remake of Willy Wonka and the Chocolate Factory because I was told by several friends that Johnny Depp's depiction of Willy Wonka was so demented that it made Gene Wilder's depiction seem banal in comparison. I don't need the nightmares.
However, if you do remember the story, the long term lack of success with the automotive industry reminds me of the scene where Charlie asks Willy about the Everlasting Gobstopper. Here is a piece of candy that, no matter how long you suck on it, never gets smaller or loses any flavor. I find this concept to be completely disgusting, but let's assume for a moment that this is a feature that some kid would actually want. If you pay ten cents for a normal piece of candy, wouldn't you be willing to pay much more for the Everlasting Gobstopper?
There's also the episode of Knight Rider where some tire executives hire villains to stop a company that's invented a tire that impervious to nails. How much would you pay for tires that lasted the life of your car?
I compare that to the quality of automobiles. Back in 1946, cars didn't last as long, at least not with their original parts. They also didn't have airbags, traction control, anti-lock brakes, six-speaker stereo systems, bucket seats, seat belts, and countless other improvements. In 1946, the Buick Roadmaster Sedan cost $1,822. Adjusted for inflation, that's $19,156. Using Edmunds.com, I priced a 2008 Mazda 6 with a 6-CD in-dash stereo, compass/autodim mirror with HomeLink, door edge guards, floor mats, and wheel locks. It came in at $16,271. There are a lot of legitimate arguments for why cars cost more back in 1946. The two main arguments would be that that cars are less costly to manufacture now with welding robots, supply chain optimization, etc. and global competition. Buick didn't have to contend with Honda, Toyota, Nissan, etc. We'll come back to the role of competition and what it means when the industry as a whole did a poor job of capturing more consumer surplus for themselves.
There is one looming argument beyond all others why the willingness to pay for a car should be higher now than it was back in 1946: The Interstate Highway System was established by the passing of the Federal-Aid Highway Act in 1956. Prior to the establishment of the interstate highways, cars had a relatively short range. The highways serve as a complement to a car. It'd be like buying an iPod with no iTunes or a CD player with Michael Jackson's Thriller glued inside.
There's more proof of this. In Europe, where there exist several substitutes for traveling by car and where gasoline is much more expensive, Europeans are willing to pay more for their cars. A Ford Focus in the UK starts at $19,600 (using 1.47 USD = 1 GBP). Based on the competitive landscape for transportation needs in Europe from expensive gas and trains, planes, subways, and buses, you'd think Europeans would be less willing to pay big bucks for a car, yet they pay more. So, what's going on here?
So, I've kicked around that cars are worth more than we've paid for them. Competition is what has driven vehicle makers toward covering less and less of their fixed costs (e.g. building the factory) on a per vehicle basis. In any industry with extremely high fixed costs where a unit sold captures very little of that fixed cost, the only real solution is volume to achieve minimum efficient scale and capture as much economies of scale as possible. The problem is that demand for new cars is plummeting and companies like Toyota are even having problems with achieving profitability. What's this mean overall? It means the car industry is just way too overloaded with capacity, and unfortunately for GM and Chrysler, now is not a great time to be seeking salvage value on factories that only make cars since the last thing someone wants to do right now is make more cars.
Being from Michigan, I would love to see GM and Chrysler stay around and prosper, but it's a foregone conclusion that the industry needs to shrink. I don't foresee Toyota and Honda going anywhere given their market leadership. That leaves GM and Chrysler in a precarious situation, but it doesn't seem we're going to let them fail. The only car companies left to fail are going to be the small brands: Hummer, Saab, Volvo, and maybe even a Nissan.
Even after all of that bloodshed, I still think there will be overcapacity. It may drive one of the big dogs out of business, regardless of government intervention. It's like watching American Idol, except we're talking about the real world, with real jobs, in an industry that began in the United States. Maybe that's OK though. We lost the electronics manufacturing industry a while back and we weathered that pretty well. Perhaps the effect of downsizing of the US auto industry seems much worse than it actually will be, but who knows? If I knew this, I'd be a highly-paid automotive consultant who gets quoted in the Wall Street Journal.
0 comments:
Post a Comment