CHAPTER TWENTY-THREE
What Really Ails the U.S. Auto Industry
GENERAL MOTORS, FORD, and Chrysler have improved car quality so much that several of their models are now as well made as anything the Japanese offer. And through their discounts and financing deals they now offer the lowest prices. Yet they still steadily lose market share to the Japanese.
Detroit has also sharply reduced costs; some new Ford plants in the U.S. and in Mexico may now be the world’s lowest-cost producers. Yet the Big Three are losing money hand over fist while the leading Japanese companies are profitable. All three—again with Ford in the lead—have sharply reduced the time it takes to develop a new design and bring it to market. But in the meantime the Japanese have reduced their lead-times even further, so that the time gap between Detroit and the Japanese has hardly narrowed at all.
There are a great many different diagnoses of Detroit’s sickness: “fat” instead of “lean” manufacturing; union work rules: management’s short-term vision; departmental parochialism, and so on. But the root of Detroit’s problems goes much deeper. Detroit still operates on the assumption that the U.S. car market is homogeneous in its values and expectations but sharply segregated by income into four or five “socioeconomic” groups. This theory of the market shapes how Detroit sees the market, how it organizes itself, and how it designs, makes, merchandises, and distributes its products. But this theory became obsolete at least 15 years ago.
Sloan’s Legacy
Both the homogeneity of the market’s values and expectations and its socioeconomic segmentation were first discerned by Alfred P. Sloan right after World War I. Sloan built GM on this insight into the world’s biggest and for many decades its most profitable manufacturing enterprise. And both Chrysler and Ford—Chrysler during its rise in the ’20s and ’30s, Ford during its rebirth after World War II—built themselves in GM’s image and on Sloan’s socioeconomic market segmentation.
The Sloan theory of the U.S. market worked for more than 40 years—a good deal longer than such theories usually last. But it ceased to be valid in the ’60s. Ford’s Edsel should have been a roaring success. It was researched, designed, and marketed as the ultimate socioeconomic car for the newly affluent “middle-middle” market. Instead, it was rejected by every socioeconomic group. The marketing success of that period was the Volkswagen Beetle—the symbol of the “youth culture” and a low-priced car for affluent people. The 1973 petroleum crunch then finished off socioeconomic segmentation in the car market. It made driving a small, fuel-efficient car fashionable, if not patriotic, and a status symbol for the upper-middle class.
Many older Americans, those over 55 or so, still buy cars according to socioeconomic segmentation. But Detroit is losing the younger ones and with them the future. Up to half of them buy “lifestyle” cars—primarily non-Detroit cars. Income is, of course, still important. But where it was the determinant in automobile buying from 1920 until 1965 or 1970, it has now become a restraint—in the U.S., in Western Europe, and in Japan. The determinant increasingly is “lifestyle”: that is, values and expectations a potential customer largely selects for himself. And lifestyle is as elusive and qualitative a concept as socioeconomic segmentation was tangible and rigorously quantitative.
Equally important: Sloan’s theory of the market assumed one car per family. But the American family today owns two as a rule. There is nothing “typical” about the choice of the second car. In the same upper-middle socioeconomic group—all two-career professional families—there may be the family whose two cars are a Buick and a Dodge minivan; the family with two compacts, one American, one Japanese; the family whose two cars are a big Mercedes and a Ford Escort; and the couple, both professors at the state university, who drive “His” and “Hers” BMWs. Which of the four is “typical”?
A market of socioeconomic segments is stable. It makes sense, then, to have long lead times for a new design. A lifestyle market is fuzzy and extremely volatile. One has to plan long-range and for every possible (or impossible) contingency so as to be able to act with extreme speed when opportunity knocks.
The lifestyle market is the one the Japanese take for granted, the market that they see, plan for, are prepared for. For their automobile industry barely existed when socioeconomic market segmentation prevailed: it emerged only after World War II and entered the U.S. only in the ’70s. Japanese cars are therefore designed from the beginning as lifestyle cars, and the cars for one lifestyle market are designed to look very much alike regardless of price. All Toyota “family cars,” for example, from the low-price Corolla to the luxury Lexus, have the same look of comfortable solidity. They differ mainly in options and accessories rather than in style or in the way they handle.
But the Japanese are also organized to be opportunistic, which means that they continuously plan for every conceivable contingency so that they can move with lightning speed whenever an opportunity opens. When the success of Honda’s Acura showed that there was a substantial market for a luxury car among baby boomers reaching middle age, Toyota and Nissan both already had detailed plans for such a car—and this enabled them to have it produced and out in the market in less than three years.
The Japanese also try to design parts so that they can be combined in any number of ways even though this considerably increases the cost of tools and dies—rank heresy for any American automobile producer. This made it possible, for instance, for Mazda to bring out in no time at all its sports car, the Miata—the marketing sensation of 1989. Though it looks entirely different from any other Mazda car, 80 percent of its parts are standard. This then enabled Mazda to make good money on the Miata even though it probably has sold fewer than a hundred thousand units, at which volume any American manufacturer would lose his shirt.
Detroit knows how to design successful lifestyle cars. In fact, every truly successful American car since World War II has been a lifestyle car: the Jeep as it was transformed after World War II from army roughneck into a high-performance and comfortable “outdoors” vehicle; the Rambler, American Motors’ original compact, which was designed as the second car of the newly affluent; Ford’s Mustang and Thunderbird; the Dodge minivan. But despite these successes Detroit remains in the grip of Sloan’s socioeconomic market segmentation. GM set up the Saturn Division a few years back as a new and separate lifestyle-based business. But when the Saturn car was unveiled last year, it turned out to be just another socioeconomic car for the already overcrowded “middle-middle” segment.
Forty-five years of unbroken success are indeed hard to slough off. Everybody in Detroit management has grown up with socioeconomic market segmentation as an article of faith, if not as a law of nature. Worse: the way the Big Three are structured all but forces them into a socioeconomic strait-jacket.
Sloan decentralized GM in the early ’20s into divisions, each of which serves one socioeconomic segment. He similarly organized distribution in dealerships, each serving one of these segments. Despite countless reorganizations, this is still how GM, Ford, and Chrysler function. As a result, planning, design and marketing are either socioeconomically determined—that is, run counter to the way the market now actually works—or, if one of the Big Three designs a lifestyle car it is then subordinated to the socioeconomic axiom.
One example: the Chevrolet Cavalier is arguably the best second car on the American market—small enough to park easily and big enough for the entire family and a lot of luggage. But in order to give each GM division a “popular” car, it was parceled out among them. Several divisions thus offer and advertise the same car under different names, through different dealers, and at different prices. Thus GM customers are confused and complain that GM cars have lost all product differentiation. GM customers also tend to settle for the cheapest version with the fewest options and accessories and thus with the lowest profit margin for GM.
The Cavalier’s main competitor, Toyota’s Corolla, is marketed, advertised, and sold as one model by one group of dealers and with a full array of options and accessories. As a result, Corolla customers tend to buy the biggest package of options and accessories, which is where the profits are. And the Toyota dealers can also give much better service because they have so much more volume.
Teams vs. Traitors
The socioeconomic bent of the American automobile industry also explains in large measure its long lead times in developing new models and in reacting to market changes. Instead of being divided into autonomous market-segment divisions, the Japanese companies are decentralized into powerful, autonomous companywide functions, such as engineering, manufacturing, and marketing. It is easy for them to form companywide teams to work on designs outside the existing product scope. In Detroit, however, where market-segment divisions dominate, people who work on such teams risk being considered traitors by the division on whose payroll they are.
How can Detroit free itself from the straitjacket of its past success? It may require the complete restructuring of the traditional divisions and of the traditional dealer system as well. It may even require that GM, the biggest (and for more than 50 years, the most successful) company, be split into two or more competing businesses (which, incidentally, was advocated by some GM executives right after World War II). And until Detroit restructures itself to fit today’s rather than yesterday’s American automobile market, and today’s American society, no amount of improvement in manufacturing processes, equality management, or interfunctional and interdepartmental teamwork is likely to restore it to health and to leadership.
[1991]