Spinning out of control: Auto industry bailout may be too little, too late

As the U.S. Senate continues to debate whether to grant multibillion-dollar bridge loans to the major U.S. automakers, a growing chorus of industry observers is urging the lawmakers to just say no. Why the lack of support for a loan package that auto executives say would stave off the industry’s imminent collapse and allow it to emerge stronger and better able to compete in a global marketplace?

Many longtime industry observers argue that the U.S. auto industry is incapable of making the fundamental changes necessary to ensure its long-term survival.

“It’s difficult for any large organization to turn on a dime,” says Tony Manos, a change-management consultant and trainer American Society for Quality (ASQ), who says U.S. automakers have more challenges than their sheer size to overcome when trying to improve their fiscal health. “These companies are literally paralyzed by their current systems,” he says.

The biggest issue facing the Detroit-based auto manufacturers, according to Manos, is a business model geared to building large, high-margin vehicles like trucks and SUVs rather than the smaller, fuel-efficient cars that customers prefer. “Toyota builds cars based on customer demand,” Manos says. “The U.S. manufacturers never really bought into the idea of building what customers want.”

While Toyota and other non-U.S.-based automakers also offer trucks and SUVs, Manos argues those companies have done something else that never quite caught on with the U.S.-based Big Three: They focused on removing waste from all of their manufacturing processes, which means their entire operations are more profitable.

In asking Congress for the bridge loans, the U.S. auto executives admitted the continuing focus on large vehicles was a mistake, but Manos believes that admission comes too late. Even if the industry’s top executives order a change in the types of cars built, Manos argues, “It won’t happen fast enough to make a real impact.” He also notes that corporate cultures will have to be changed to reflect a focus on eliminating waste, and that won’t be easy to do.

“You need to have the commitment of the entire organization—top management, middle management, and the line workers—for such massive change to take place,” Manos says. “Typically in situations like this the most resistance comes from middle management because they set up the systems that are in place, and they can’t see the flaws. And they are in a position to stop new systems from succeeding.”

Manos does believe that for U.S. auto industry to have any chance of succeeding, any loans the government issues should come with a requirement that the industry be subject to some type of oversight. He’s just not sure the idea of “Car Czar” that has been floating around Washington is the right approach.

The Car Czar would be a representative of the U.S. government who would monitor how the automakers function after receiving government loans, with an eye toward ensuring they are adopting new, market-driven business models.

Kevin O’Marah, chief strategy officer with Boston-based AMR Research, is even more emphatic about what he thinks is the right strategy for dealing with the U.S. auto industry. “I don’t think Detroit would know what to do with $25 billion,” O’Marah wrote in a recent commentary on the AMR Web site. “And let’s not fool ourselves into thinking some Congressional panel can enforce intelligence from Washington as a condition of the bailout. Bankruptcy is the only way to blow up the machine so we can salvage the parts.”

As for the argument that allowing automakers to fail would cripple the entire U.S. economy, O’Marah says automotive suppliers will still send parts to Toyota, BMW, and Daimler plants in South Carolina, Alabama, and Kentucky, and dealers can sell and service Hondas instead of Chevy’s.

Other U.S. industrial icons—Caterpillar, Lockheed Martin, and GE—learned to deal with global competition without a government bailout, O’Marah concludes, and the auto manufacturers should do the same.

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