Ray Malone's Commentary

I just read what the experts are telling GM, Ford, and Chrysler to do.... They are to mimic the Japanese Car Companies and cut the number of dealers. The expert recommendation was published in Forbes Magazine in 2006. You may have seen it quoted in many media articles about what is wrong with GM. They use the example of Buffalo, New York where there are 13 Chevrolet dealers with in a half hour on the court house steps.

They go on to say that GM has 7500 dealers selling an average of 587 new Gm cars and trucks each. While they point out that Toyota has 1215 dealers selling 1264 vehicles each. The conclusion is GM has too many dealers who are not making any money. The reason is GM dealers have to compete with each other and have to sell new cars at cost while Toyota Dealers make money on their new car sales. GM dealers have to make a profit on used cars and auto service in order to survive.

Lets make a couple of calculations. 7500 times 587 is 4,402,500 GM car Sales per year. While Toyoto has 1215 dealers selling 1264 cars for a total of 1,537, 760 cars. Since when isn't a dealership paradigm that sells 4.4 million vehicles better than one that sells 1.5 million vehicles

Think about that a moment. Say Crest tooth paste is selling more than Colgate. What about an expert saying that Colgate needs to reduce the number of stores selling Colgate... Yes the way to increase sales of Colgate is to stop K-Mart from selling Colgate so Walmart can sell more Colgate at a profit. That is just plain stupid on its face.

The fact is a Chevrolet has $2,000 more in labor costs than a Toyota. Its whole sale price is therefore much higher than a Toyota. So to sell a Chevrolet the dealer has to eat the $2,000 cost. What do you think would be a solution? How about building a car that is worth $2,000 more? That is easier said then done. But what about taking $2,000 dollars out of the cost of the Chevrolet by reducing the costs to make a Chevrolet by $2,000.

That could be done by replacing workers with automation machines, but that is very hard under the current contract. How about changing work rules at GM to the same work rules at the Japanese car factories located in the non union south? How about closing the plants in the unionized upper mid west and building new non union plants in the south where workers know the cost of demanding more then the employer can afford.

The key to success is for GM and Chrysler to declare bankruptcy. Then negate the union contracts most ridiculous components. They have to have wage equality to survive, but to win they have to do more than that.

The auto companies are all claiming that if they go bankrupt sales will fall because they won't know if dealers will be there to service the cars. All we have to do is go back 25 years. Back then it was very hard to get a dealer to even perform service. They were making the big bucks selling cars and were typically losing money on service departments. Every gas station back then had a service department doing tune ups, brake repairs and other minor repairs. There were car repair shops that typicaly did not sell gas but did major repairs. Most dealerships had a small service department with only the wealthy bringing in their cars for service.

Only when the wholesale price of US cars could not compete with the price of American made Japanese cars did the dealers figure out they would have to make money servicing cars. The car companies helped the dealers by making cars that required special tools to service. The special tools that worked on a Chevrolet would not work on a Buick... let alone a Dodge. Thus an independent service shop that had worked on all brands of cars had to charge a lot more to cover the cost of the special tools need to do things that could have been easier to design being repairable with regular tools. It was a way to make dealers profitable while selling cars at their cost.

The key to survival of the U.S. auto industry is pretty simple. They must get their labor costs per car in line with the Japanese manufacturers labor costs. It is interesting to note that the pay per hour in the southern non union auto plants are in line with the union workers direct wages. The differences are in work rules, retirement and guaranteed job provisions of union workers who are laid off.

The facts are that Detroit has to get labor cost equality or their sales will drop to near zero.

The next thing Detroit must do is get rid of the people who believe that if I do it the way it has always been done I can't get in trouble, but I approve innovation and it does not work they will fire me. New ideas and innovation do not always work. About two thirds of the new designs and manufacturing techniques will not work. But the one third that does work will way more than cover the costs of those that fail. But the pencil pushers will not take risks. Do it the way we have always do it, insures job security for the brass

Creativity has always come from those that challenge the status quo.

Many years ago I worked in a research lab. They would not hire a 3.0 point graduate if they could get a 4.0 graduate. They would not hire an applicant with a bachelors if they could get someone with a masters. They would not hire a masters if they could get a Ph.D. But every employee had to have a high grade point.

Over the years they were surprised that other research companies were awarded far more patents. Someone suggested that they finance a study to plot grade point in college by patents issued. Were they surprised with the results. The number of patents plotted against grade point was a bell curve around a 2.5 grade point average. Thus a 4.0 grade point and a 1.5 grade point were about the same... few if any patents.

The conclusion was that creative people don't do well in college. They tend to challenge the status quo. And acceptance and regurgitation of status quo is the prescription for a 3.85 acume.

But the people who have changed the worlds economy in huge ways are not the well educated. Take Thomas Edison for example. He never completed the first grade. Henry Ford was only had an 8th grade education. Bill Gates dropped out of college. it is interesting to note that a young man with the qualifications of Bill Gates could not get a job at Microsoft today. They require a degree and Gates dropped out of college.

In fact creative people don't think in the same way that our educational system thinks. Creative people think top down. Take for example how Edison invented the light bulb. He was playing with a battery and connected a small wire from the positive to negative connections. The wire got hot gave off light and then burned in two. So Edison reasoned that if he put the wire in a clear glass bottle and exhausted all the air, there was no way the wire could burn in two. The problem was the wire just melted in two. So he looked for a substance that would get hot enough to give off light but not hot enough to melt. It took him 6,000 tries to find it. Some have estimated that if Edison had been bright enough to get a list of most items arranged from conductors to insulators and tried moving about a 1/4 of the list from conductor to insulator and baking up or moving backward half that distance each time the trial ether did not get hot enough and forward half that distance each time it melted, he would have found thoriated tungsten the real answer in about 24 tries. Instead he found an organic substance that worked ... worked poorly compared to today's bulbs. But Edison was thinking top down. And only learning the science he needed to create his invention.

Creativity is top down thinking.. Education is bottom up. You learn about the atom then the molecule then the substance. That is not the way to create new things. It is a way to write technical papers that get a scientist a promotion and higher wage. It does not create new things or methods of building cars.

It was not the Ph.d's at IBM that invented the PC it was Wozniak and Jobs that created the PC and then marketed it.

Experts tend to study what the big successful companies do, and then say the losers must do the same. Stupid statements that the fewer places to buy a car that exist means more car sales are what the come up with. Toyota has fewer dealers .. GM should do the same is such a stupid statement that even someone with a very low I.Q. should be able to figure out. It is the better car at a lower price that makes Toyota more successful than GM. That should be a no brainer... but it is not. My conclusion is that many in the academic world and the media are not very brainy.

There are five criteria to successful cars. They are self evident. They are Quality, Style, Performance, Reliability and Price. Produce a line of products that win in 3 of the categories and company can survive. Make that 4 and a company will be a leader... make it all 5 and that company will soon dominate the field.

To get the price down will require the unions to look at reality. They have to accept wages that are comparable to the Southern US manufacturers. Then the bosses at GM and Chrysler have to do what Ford is doing.... remake the company to produce better cars that people want to buy.

In many respects our large corporations are like our military past. In peace time the pencil pushers rise to the top. They make no changes and reject the new technologies. In the 1930s our army and navy rejected much better tanks and airplane designs that the Germans and Japanese adopted. When WWII broke out out P40s could not compete with the Japanese Zero, and Tanks could not compete with the German Panzer. It was then that the warriors rose to the top of our military. The same occurred prior to the Civil War.. Only after years of losing with the pencil pushers in charge did Lincoln finally give General Grant the position and that promotion doomed the south. They say the pencil pushers rise to the top in peace time while the warriors rise to the top in war time.

It is much the same in our huge industries today. The pencil pushers are running GM and Chrysler, Ford you may notice has an original thinker in charge and does not need a loan.. they are just asking for access to a loan. Alan Mulally, President and CEO of Ford Motor Company was brought in because he had saved Boeing from all the problems Air Plane manufacturers had suffered since 2000. But even he does not see the full advantage Ford has. If Ford with its current assets can produce a break through one forth as good as Henry did with the model T, Ford could be back to the biggest most successful car manufacturer in the world.

Ford could start negotiating with Mexico about moving all Ford Production to Mexico. Then call a meeting with the Unions and then open the meeting with the singing a chorus of "South of the Border Down Mexico way. The key is worker perception. For years the unions have told workers that the auto industry has plenty of money.. The problem was to strike or threaten strikes to get it. The workers no longer believe what the unions tell them. It is time to reach out to workers with a "Please don't let your union make us move out of the USA appeal".

Just think of all the cheap plants and equipment that Ford could buy for next to nothing if GM and Chrysler go belly up.

Ford in the first 10 years of the 20th Century had lots of trouble getting money. He had to buy engines from the Dodge brothers to put in the model T. He bought tires and rims from Firestone because he did not have the money to build them on his own. But as his assembly line took the labor cost out of auto manufacturing, his assembly line made all other manufacturers copy and try to Excel and soon he had the money to build his own engines and the Dodge brothers formed Dodge Automobile company to say in business. By the late 1920s GM had beat Ford at his own game. Walter Chrysler had copied Ford's manufacturing techniques and added styling to be a major player in the game

Today there are likely many "Henry Ford" types in the USA. If we have sense enough to let GM and Chrysler fail and perhaps even Ford fail, there will be a few new "Henry Ford's" that will arise to kick some Japanese rumps.

If we will just believe in Free Enterprise the 21st Century can make the 20th look like poor and powerless USA times.

The one thing that history teaches as far as experts in manufacturing are concerned, never listen to one who does not have grease under his fingernails or in the case of computers ... a keyboard under his fingers or a CPU in his hands.