The Hindu Business Line : US auto-makers floor the lobby pedal

The headline of a news report in The Wall Street Journal said, ‘Big three try to rev up weakened political clout’. Big Three? This was a meeting of the CEOs of GM, Ford and Chrysler with members of Congress about a move by the latter to set higher fuel efficiency standards. All the major auto companies in the world operate in the US, spread their manufacturing and sourcing widely around the world, and promote themselves as global companies. T he new standards, if approved, would apply to all of them if they sell in the US. Yet, only the Big Three seem to get to lobby the lawmakers openly.

The Big Three looms large in the American psyche. Americans love their auto companies, even if they don’t always buy the cars these firms produce. Popular songs have been written about car brands. From its early days, the automobile has changed the way people live in the US. Suburbs have developed far away from places of work to house millions of families because they can depend on their autos to get about.

In a scandal of the industry’s early years, an auto company collaborated with other interested businesses to buy railroads along the west coast and shut them down so they can sell their products! A popular adage was that what is good for GM is good for America. When, a few months ago, it appeared that Toyota was on the cusp of surpassing GM as the world’s largest auto-maker in terms of sales (which it did), American newspapers followed the progress like it was a running race with a tinge of disappointment that the home-town favourite was about to lose.

Challenges aplenty

The auto industry is facing several challenges. The global strategy of many is unravelling. Just a few years ago, most major auto companies in the world were consolidating. They were standardising platforms. Cross-border mergers were the rule, as they went looking for partners and to acquire, brands to fill perceived gaps in their product lines. That has come a full circle.

Companies are looking to come back to what they are familiar with. They need to focus, they say now. Even as the head of Chrysler was meeting lawmakers, the company, DaimlerChrysler, was splitting with the Germans divesting the Chrysler part to a private equity group in the US. The merger had not worked the way it was anticipated, and Daimler was re-focusing its strategy. Given the load of pension and healthcare liabilities that the Chrysler part carried, the Germans were desperate to get out of the relationship and gave up 80 per cent of Chrysler just to get rid of those liabilities.

Ford Motor Co., which lost $12 billion (Rs 48, 300 crore) last year, has been getting rid of its luxury brands acquired in the UK. It has sold the Aston Martin brand, and is looking for buyers for the Jaguar and Land Rover brands. It is also rumoured to wanting to divest its Volvo division.

GM, which experimented with starting a new brand and new form of a company with a different work culture with its Saturn division, has all but given up on that experiment. GM has been cursed with continuously falling market share for several decades now, ever since the Japanese autos landed on the US shores. Even giant-killer Toyota, which has eight manufacturing or assembly plants in the US spread across as many states in order to buy local political influence and support in the country, is suffering from excess capacity and plans to go slow in putting up plants. BMW bought Rover and having burnt its fingers, got rid of it while retaining the Mini brand.

Changing Dynamics

Demand conditions in the industry are shifting. For one, the higher petrol prices have made everyone look for more fuel efficiency in the vehicles they drive. For another, the increased awareness among the consumers of the automobiles’ environmental impact, especially with regard to their carbon-dioxide emissions, have made them look for alternative fuels. Even Iran, sitting on a pot of oil, is requiring dual-fuel vehicles to be sold in the country. Sales of large pickup trucks and sports utility vehicles have been slowing, while hybrids are enjoying popularity. Even firms such as Toyota have had to copy the US auto companies’ sales techniques of offering discounts and zero-interest financing to sell their vehicles.

The US automakers have legacy costs that are a serious obstruction to their flexibility and attempts to run profitably. The healthcare and pension benefits for their union workers is reported to result in a $30 (Rs 1,200) per hour labour cost disadvantage, compared to foreign auto-makers in the US. The latter, which employ about half the workers in the industry, do not carry the legacy burdens, as they either employ non-union workers or have negotiated appropriate agreements with their workers.

Legacy Costs

The United Auto Workers, the industry union in the US, has not been successful trying to get the workers in the foreign company plants to join the union. The US automakers are paying the price for giving in to union demands in the past. For example, a plan called Jobs Bank in existence since the 1980s, requires the companies to pay their laid-off workers almost full wages for many years even though their jobs have been permanently removed. The companies are now putting pressure on the unions to give up some of these benefits.

Finally, the CAFÉ (corporate average fuel economy) standards are in the process of being revised. These standards are set by the government and have been in existence for about 30 years, specifying the fuel efficiency requirements of the fleet. It is about 25 miles per gallon (100km/9 litres) and lawmakers want to revise this to a fleet wide average of 35 mpg (100km/6.7 litres) by 2020, and a 4 per cent annual increase after that. The Bill has still not passed the Congress.

Skirting problems

American automakers would like to buy more time. They have been seeing the trend towards higher fuel prices, public concern towards the emission, and the harm that their union contracts have done to their companies. Yet, they are not ready, for top managements have always chosen to buy time rather than face the issues. So, it is business as usual and the CEOs are lobbying the lawmakers saying that revising fuel consumption standards would make cars too expensive, and make them build vehicles that are not in demand. They also want the government to invest more money in research into alternative bio-fuels and advanced battery technologies. Toyota and Honda already enjoy a reputation for fuel-efficient and hybrid vehicles that puts them at an advantage. They are also leading the pack with regard to new technologies in engine design, fuel consumption and manufacturing processes.

Meanwhile, the hold of the US auto companies on the psyche of the nation continues. An editorial inThe Wall Street Journal mocked the lawmakers as being pro-Toyota for wanting to make the CAFÉ standards stricter.

(The author is a professor of international business and strategic management at Suffolk University, Boston, US. He can be reached at cgopinat@suffolk.edu)

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