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Steven Pearlstein

Big Three Lumbering Toward Failure

By Steven Pearlstein
Friday, March 25, 2005; Page E01

Six years ago it was Chrysler. Then four years ago, Ford was on the ropes. Now General Motors, facing a $2 billion loss this year from its carmaking operations, has been forced to lay off a quarter of its white-collar workers and plead with union workers to begin contributing to their health insurance.

As in the past, there is a tendency in the industry to believe that if GM simply closes another couple of plants, wrings a few concessions from its unions and comes up with a snazzier line of cars and trucks, all will be well. Don't believe it. In a global industry plagued by chronic overcapacity and steadily declining margins, the Big Three have been unable to earn enough to cover their cost of capital, even in their good years. They've already squeezed all the profit out of their supply chain. And now they are locked in a competition with foreign producers that they cannot win.

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"The track they're on is heading toward a train wreck," says David Cole, who heads the Center for Automotive Research in Ann Arbor, Mich.

It's not that the Big Three and the United Auto Workers haven't already made tremendous strides in improving productivity, outsourcing work and dramatically reducing the time and cost for designing new vehicles. They've mastered just-in-time and continuous improvement and boast some of the best quality ratings. Measured by the time required to assemble a car, theirs are some of the most productive plants in North America.

But for all that, the Big Three remain prisoners of their past, not only in terms of retiree obligations that run to $2,500 per car, but also an outdated dealer network, inflexible industry-wide labor agreements and an entire system geared to maximizing volume rather than profit.

Today's marketplace, for example, demands a greater variety of distinct products aimed at ever-smaller market segments. But to pull off such market segmentation would require nothing less than a revolution. Final assembly plants would need to be flexible enough to turn out half a dozen different models. And to give customers the greatest choice of colors and options while reducing the number of cars sitting on lots, these plants would have to guarantee a two-week turnaround between order and delivery.

At the same time, companies would need to reorganize their marketing and distribution around these distinct market segments, rather than around meaningless nameplates such as Buick, Pontiac, Mercury or Dodge and their competing dealer networks.

Years ago, the United Auto Workers decided to accept lower pay raises in exchange for company promises to pay laid-off workers 90 percent of their regular wage. The perverse result is that Ford and GM run plants even when there is no demand, forcing dealers to take cars they don't want and automakers to spend $3,000 in incentives to move them off the lots. As a result, much of the dealer profit has been squeezed out of new car sales.

Government has also contributed to the industry's structural problems. By one estimate, state governments subsidize foreign transplants such as BMW and Honda plants to the tune of $1,000 per car. And state franchise laws make it prohibitively expensive to rationalize dealer networks and nameplates. Worst of all are clean-air rules that essentially require companies to produce and sell low-pollution passenger cars at a loss, just to offset the environmental damage done by all their trucks and SUVs.

Finally, it's just not possible for any firm in any country to stay in the game paying $60 an hour in wages and benefits to workers at every stage of the supply chain. Like it or not, the market now demands that parts be fabricated offshore, at "China rates." That still leaves opportunity for U.S. firms to combine those components into major subassemblies -- but only if the UAW accepts lower wages and benefits at these first- and second-tier suppliers.

As George Stalk of the Boston Consulting Group sees it, the Big Three today are in roughly the same pickle as the integrated steel mills back in the early 1980s, or the full-service airlines around 1990: Their choice, he says, is either to make radical changes in their business model and cost structures or suffer a long, slow death.

Steven Pearlstein can be reached at pearlsteins@washpost.com.

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