The Truth About Cars?
Not a bad day for Toyota, but a good one for Ford
At The Truth About Cars, Ken Elias posits that though Monday’s announcement of the GM bankruptcy was a bad day for the once dominant U.S. automaker, it was an even worse day for Toyota. His theory is that GM, bolstered with taxpayer dollars and free from creditors’ demands, will come roaring back with bold new products and lower fixed costs, more competitive than ever:
Toyota (or Honda) products have been the default choice. That “Easy Button” is starting to get harder to press for buyers. Yep, Americans will begin to come back to consider Detroit products (at least GM and Ford), and that’s not good for Toyota. And we’ve really never left Detroit for our big pickups and SUVs, while the Japanese are still mostly playing catch up.
Yep, it’s a bad day for Toyota and a great day for America. You can look forward to a new Detroit that will be competitive, if not lead, in cars and trucks for mass market Americans. Count on it
This is pure fantasy. Elias’ equation is missing two critical variables.
The first factor depends on how much government will be in Government Motors. Key decisions for GM and Chrysler are being made by President Obama’s auto task force, a committee of professors, politicians and pretenders who don’t know squat about the car business. Chief among the pretenders is Brian Deese, a 31-year-old law school dropout:
“…who is neither a formally trained economist nor a business school graduate, and who never spent much time flipping through the endless studies about the future of the American and Japanese auto industries.”
It remains to be seen to what degree Deese and his task force colleagues will be influencing product decisions at Government Motors and the Chrysler-FIAT-UAW-Governmental collective. The White House panel, non-transparent and answerable to no one except POTUS, views the problem of rebuilding the two automakers through cultural and political lenses. What sense does the task force have from the perspectives of automotive engineering or marketing appears to be minimal, at best. The cars these committee members think we need have a slim chance of being the cars we want.
Yes, Americans want great fuel economy. They can get it now, and they don’t have to settle for a cramped golf cart in a box to have it. The Volkswagen Jetta TDI, for example, is capable of delivering just under 60 highway miles to the gallon and 44 mpg in combined city/highway driving in the real world, much better than its conservative EPA rating of 29/40mpg city highway. Its near-bulletproof turbodiesel engine has neither the clatter nor the stink of your neighbor’s Dodge pickup with the Cummins engine. The interior is comfortable, reasonably roomy for a compact car and constructed of quality materials. The styling is not that of a drop-dead gorgeous Aston Martin, but it’s far from being econobox ugly. Those who see driving simply as a process of getting from one point to another will be perfectly content with this car. Those who actually enjoy driving will be delighted with it. The TDI is so much fun to drive that the model has its own SCCA racing series. Best of all, the TDI’s starting price point is a painless $21,990. There’s even a bonus. The IRS has to give Jetta TDI buyers a tax credit of $1,300 by virtue of its clean burn diesel engine. If you’re looking for great fuel economy and there’s a VW dealer nearby, this car deserves serious consideration.
The Jetta TDI is just one example of how a car manufacturer met the challenge posed by government-mandated emissions and fuel economy standards, and it was done not by a board of government overseeers calling the shots, but by Germans who know the car business and let engineers do the heavy lifting.
The second factor, another dependent variable, hinges on the way car and truck owners interact with the car companies, and for most of us, that happens at the dealership. For those who live in rural areas and small and medium-sized towns, the auto dealer is just as familiar a stop as is the grocery market and the hardware store. More so than in large cities, these customers are more likely to have their service done at the dealership rather than by a quick lube or an independent garage. In small towns, people know each other by name, and the sales rep in the showroom, the tech in the shop and the person behind the parts counter are likely to be members of a customer’s congregation or their kids’ Little League coach. Take away the dealership, and the entire community sits up and takes notice.
And yet that’s exactly what GM and Chrysler are doing. They are closing their small-town dealerships by the hundreds and putting thousands of former employees of former local, friendly car dealers out of their jobs. Many of their friends and even casual acquaintances will take it personally. They will see it as another stab at their communities, already perceived by those who live in them as under siege. As part of the overall ripple effect, other local businesses from the office supply store to the company that delivers the coffee and stocks the vending machines will feel the pinch. Local governments will take a hit too. Tax revenues will decrease, leading some counties and municipalities to want to raise their tax rates. This usually doesn’t sit well with taxpayers, who are those same friends and acquaintances of the people who lost their jobs. The dealers are also a source of small-scale philanthropy in smaller towns – buying ads in the high school newspaper and yearbook, sponsoring kids’ sports teams, loaning out convertibles for local parades and helping to raise money for everything from church bake sales to the March of Dimes.
Also, marketing research studies have shown that people don’t like to drive 35 or 40 miles to get their cars and trucks serviced. 15 or 20 miles, on the other hand, they can live with. And when deciding which brand of vehicle to purchase, dealer accessibility is a very important factor for many buyers. Brand loyalty isn’t what it used to be in the automobile business, but it seems as if GM and Chrysler are driving a stake through the heart of what remains of it.
Ford, however, is taking a significantly different approach. It began paring down its dealer network three years ago, and the family-owned company has focused on persuading its dealers in larger markets to consolidate, leaving most of its rural and smaller-town franchises untouched. James D. Farley, Ford’s North American sales director, says that the company has shed some 700 of its dealerships since 2005. It has done so at a slower and much more deliberate pace than its rivals, sending fewer and much smaller shock waves through the auto market. Farley is critical of Chrysler’s dealer plan:
“It seems very abrupt and unplanned,” he said. “You don’t orphan 4 million customers overnight without some fallout.”
Some of those customers, primarily those in rural areas, will migrate to Ford dealerships, he said. “It really depends on how GM and Chrysler handle these orphan owners,” he said. “If they don’t give them a lot of attention, it will result in consumers going to other brands.”
“We don’t think it’s productive to just get rid of rural dealers,” Farley said.
He’s right. Obama’s auto task force, mostly made up of liberals, probably never even considered the fallout the pressure they exerted on Chrysler to close dealerships would have in flyover country. To them, small towns don’t matter. But it was in the small towns and rural areas that Ford, GM and Chrysler first built their respective customer bases and where automotive brand loyalty was born.
Which brings us back to Toyota. Many small towns don’t have Toyota dealers, so the closings of GM and Chrysler outlets in these areas won’t really affect Toyota or most other foreign-owned automakers much if at all. GM and Chrysler dealer closings will help Ford, not hurt Toyota. It remains to be seen whether the comeback of GM and Chrysler will be a success story or the biggest flop since New Coke. The Obama government’s involvement in both does not bode well for the future of either. Even a resurgent GM and Chrysler aren’t much of a threat to Toyota in the long term at all. And Ford will be gaining market share every day, at least in the short term.
Elias’ optimism for the future of GM and Chrysler and his prediction of a stagnant Toyota in the U.S. market is all unicorns and rainbows. Pollyannish Obama fanboys may buy it up, but real car guys remain unconvinced.