Making the Case for Failure
A recurring refrain we've heard over the past six months is that Business X (whether it's an investment brokerage, bank, auto maker, pornographer, etc.) is "too big to fail."
I respectfully beg to differ.
Yes, I'm going to go there - a biological allegory to illustrate my point.
Basically, the dinosaurs were too big to fail, yet fail they did because of their size. The bigger you get the slower you get. A radical change can kill you off.
So let's look at the Big Three. Their argument regarding the government's re-examination of fuel efficiency and automotive emission standards is that they're too radical, and the industry couldn't possibly cope with the new environment.
My answer?
You take Uncle Sam's dime, you do what Dear Uncle wants.
My advice to General Motors - the largest non-government corporation in the world - is to voluntarily emulate Ma Bell.
We who are of a certain age recall Ma Bell, the Bell System, ripped apart into the several Baby Bells by court antitrust action back in the 80s. Each of those separate telecommunications companies were encouraged to leave the nest and sink or swim as the market dictated. Some failed, others prospered. And the divestiture spurred innovation and competition.
So, GM, break yourself up. GM can keep the trucks, and send all the other brands out on their own. Baby Generals.
Sure, it'll be a wrench, but if the telecommunications industry can do it, so can you. It'll enable people to innovate and compete. And we can look forward to the eventual extinction of the internal combustion engine and our addiction to the hydrocarbon slime that is petroleum.
I respectfully beg to differ.
Yes, I'm going to go there - a biological allegory to illustrate my point.
Basically, the dinosaurs were too big to fail, yet fail they did because of their size. The bigger you get the slower you get. A radical change can kill you off.
So let's look at the Big Three. Their argument regarding the government's re-examination of fuel efficiency and automotive emission standards is that they're too radical, and the industry couldn't possibly cope with the new environment.
My answer?
You take Uncle Sam's dime, you do what Dear Uncle wants.
My advice to General Motors - the largest non-government corporation in the world - is to voluntarily emulate Ma Bell.
We who are of a certain age recall Ma Bell, the Bell System, ripped apart into the several Baby Bells by court antitrust action back in the 80s. Each of those separate telecommunications companies were encouraged to leave the nest and sink or swim as the market dictated. Some failed, others prospered. And the divestiture spurred innovation and competition.
So, GM, break yourself up. GM can keep the trucks, and send all the other brands out on their own. Baby Generals.
Sure, it'll be a wrench, but if the telecommunications industry can do it, so can you. It'll enable people to innovate and compete. And we can look forward to the eventual extinction of the internal combustion engine and our addiction to the hydrocarbon slime that is petroleum.
posted by Walt at 8:56 AM
3 Comments:
The fundamental problem with your suggestion is that the automotive industry today requires economies of scale that are not easy to achieve by a small company. For example, Fuji Heavy Industries sells approximately 300,000 Subaru cars in the United States every year, but has struggled to keep its technology up to date. In a world of five-speed automatic transmissions, they're still stuck with the same four-speed automatic transmission that they've had for the last fifteen years, because the costs of certifying their cars with a new transmission (the EPA requires complete and expensive emissions testing and certification for all engine-transmission combinations) would kill all corporate profits of Subaru America for the next ten years.
For another example, Chrysler Corporation's Jeep division had corporate 2.5L 4-cylinder and 4.0L 6-cylinder engines. These engines, originally designed by AMC in the early 1980's, were specifically designed to be Jeep engines and had attributes desirable for off-road vehicles -- good low-speed torque, low maintenance (due to hydraulic lifters and steel timing chains rather than overhead valves and timing belts), and rugged construction that made them basically bullet-proof. Yet Chrysler phased them out in favor of the corporate 2.4L Dodge Neon engine and 3.8L Chrysler minivan engine, neither of which is particularly appropriate for a Jeep. The reason? It would have cost too much money to modify the 2.5L and 4.0L to meet new emissions standards. While the 2.5L was spread across roughly 40,000 vehicles per year and the 4.0L was spread across approximately 200,000 vehicles per year (at its peak production), the break-even point for certifying an engine-transmission combination is around 350,000 units per year. If you can't sell 350,000 units per year of an engine-transmission combination, you might as well not bother showing up in the U.S. marketplace.
Now, Subaru has to a certain extent managed to survive via being cross-subsidized by corporate partners, whether the corporate partner was GM, or Toyota (which currently owns 16.5% of Subaru). But they still can't make a profit in the United States with as few cars as they sell. And neither could the pickup truck division of General Motors if not for the cross-subsidization they get from sharing stamping plants, engine plants, transmission plants, etc. with the other makes of General Motors. While GM needs to collapse some of its brands -- Saturn, for example, has utterly failed as a brand due to GM's complete lack of interest, and the Hummers can be sold as Chevrolet products just as easily (the H2 is a Chevy Suburban in the first place, while the H3 is a Chevy Avalanche with tailpiece), none of its brands sell enough to really survive as a separate brand. Unlike telecommunications, the infrastructure for auto manufacturing simply requires a lot of units to be sold to make it worthwhile...
- Badtux the Manufacturing Penguin
So the auto industry survives by selling millions of shoddy products, and that's the only way it can survive.
On a different note, thank you very much for commenting! I don't often get any evidence that some actually reads my ravings.
Well, we would hope that they would sell millions of good products. But they do have to sell literally millions of vehicles in order to survive. That's just how it is. It costs over 10 billion dollars to design a new car. Chrysler estimated it would have cost 2 billion dollars to re-engineer the Jeep I6 engine to meet new Federal standards, which is when they decided to transition to the minivan engine instead, for which the engineering was already done. Subaru will eventually introduce their own five-speed automatic transaxle, but it will cost them roughly 250 million dollars to do so, and take them a decade to pay off given they only sell 250,000 cars per year.
These realities are why Renault-Nissan is a single company rather than multiple companies, are why Saab and Volvo willingly merged with GM and Ford because they could not afford to meet new U.S. and European safety and emissions standards otherwise, are why Toyota now owns a major position in Subaru and Fiat now owns a major position in Chrysler. The economies of scale are such that it is simply impossible to survive as a single stand-alone make. You need multiple makes sharing parts to make it work, or you need a national government propping you up. Otherwise you end up in the same position as Studebaker in 1964 or AMC in 1978 -- with obsolete cars, but replacing them will cost more than you'll ever make back. You can't buy a Studebaker or AMC anymore, in case you haven't noticed.
-- Badtux the Car Penguin
PS - if you want to get more comments, dump the moderation. I find that simply turning on the authentication gets rid of the spammers.
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