Over the course of just a few months, the profile of the U.S. automobile industry has changed in profound ways as GM and Chrysler, two of the Big Three American carmakers, have filed for bankruptcy. The most immediate, visible effects are likely to involve direct and indirect job losses as manufacturing plants are shut down and car-parts suppliers and other vendors go out of business.
Under a “best case” scenario--a relatively smooth and easy bankruptcy and emergence for the two industrial titans--the U.S. auto industry is likely to lose 60,000 jobs by the end of this year, growing to about 179,000 in 2010, according to a Center for Automotive Research study. The bankruptcies and their ripple effects also will shrink the U.S. economy by $3.4 billion in 2009, and by another $9.9 billion in 2010, according to the CAR study.
But the industry also will undergo other significant strategic and tactical changes, says Jagdish Sheth, chaired professor of marketing at Emory University’s Goizueta Business School and auto industry consultant whose works include The Rule of Three: Surviving and Thriving in Competitive Markets and The Self-Destructive Habits of Good Companies...And How to Break Them. In a recent interview with Knowledge@Emory, Sheth discusses the latest developments within the industry and the likely outcomes.
Knowledge@Emory: Your “Rule of Three” observes that in almost every mature industry, the natural competitive forces through shakeouts and mergers end up in three large companies as full line suppliers surrounded by many small niche companies. Until recently, the U.S. auto industry was dominated by GM, Ford Motor and Chrysler. With two of them filing for Chapter 11 bankruptcy, what happens to the Rule of Three?
Sheth: Nothing. The Rule of Three is still valid because the automotive industry, like many others, is no longer a domestic industry, but a global one. We have already seen this in the tire industry. At one time, the U.S. was dominated by Goodyear, Firestone, and B.F. Goodrich. In Europe, the big three were Michelin, Dunlop, and Pirelli. But today’s global tire market is dominated by Bridgestone (Japan), Michelin (Europe) and Goodyear (US). Something similar will happen in the auto market, and we will see three companies from different markets dominating the global auto industry, while others will operate in niche segments.
Knowledge@Emory: Which American companies will likely become global players?
Sheth: First, let us consider what is happening now. Chrysler is not just bankrupt, but is being sold to Fiat. It will get consolidated into a global play. So in the U.S., we are really talking about Ford and GM.
Knowledge@Emory: Which of these two American automakers is likely to dominate the global stage?
Sheth: Ford may be one of them, but only if it makes some strategic international mergers or acquisitions. Ford needs more of a global reach, and may have to merge with a European company; although now that the Nissan-Renault alliance is under strain, there might be a merger of Renault or Peugot with Ford.
If Ford cannot follow through with a significant merger or acquisition, then I think a European carmaker, perhaps Volkswagen, is likely to emerge as a global player; but only after it completes additional mergers such as the one with the owner of the Audi brand [in the 1960s].
Knowledge@Emory: Which carmaker will be the third major player?
Sheth: As things stand, Toyota will be the best candidate. It is already the dominant brand in Japan, which is a big market, and it is active in other Asian markets, such as China and India. Toyota is also entrenched in the United States and in Europe.
Knowledge@Emory: With two of the Big Three U.S. automakers effectively sidelined, will there be any competitive pressure on foreign automakers to maintain or expand their U.S. manufacturing operations?
Sheth: Importing a fully built vehicle is usually not very cost efficient. It means that millions of dollars sit idle as inventory is shipped to a destination, and then further delayed in warehousing and distribution. Instead, as car companies become increasingly globalized, they will find it more efficient to source components globally, while setting up localized assembly facilities. This is similar to the industrial model that PC makers already utilize. But to make this global model work, automakers must improve their supply chain management capabilities. Right now there are still too many delays and other inefficiencies.
Knowledge@Emory: Let’s go back to GM. If it emerges from bankruptcy as a much smaller company, does it still have any competitive advantage?
Sheth: Yes, but not as a carmaker. Instead, GM’s key assets are its capabilities. One of them is OnStar. Right now OnStar is known primarily for its roadside assistance communications, but it can be a key player as automobiles evolve through vehicle telematics, or the integration of sending, receiving and storing multimedia information (voice, data, video) through Internet connectivity. Eventually, vehicles will trade information with each other to reduce traffic accidents and congestion, and will serve as communication centers linking individuals to everything from their home security system to their kitchen appliances.
Knowledge@Emory: These are all innovative ideas, but the U.S. government effectively owns GM right now. Do you think the company can be nimble and responsive when it’s owned by politicians?
Sheth: First, I do not think the federal government wants to be involved in day-to-day management. Instead, I believe the government will act as an institutional investor, setting financial goals and governance targets that will encourage the company to get itself back on track. There is some evidence to suggest that is what happened in the banking bailout. The government initially provided huge sums of money to banks when it loaned money at high interest rates through the Troubled Asset Relief Program (TARP). But the governance requirements and interest rates were so onerous—intentionally so—that banks were incentivized to quickly take steps on their own to raise capital and pay back the TARP funds. Similarly, I think the federal government will quickly move to sell off its stake in GM, or orchestrate a merger or acquisition with a foreign or a private equity company.
Knowledge@Emory: What will increasing globalization mean to the dealership model?
Sheth: I have said before that there are too many dealers and that the traditional model—where state laws often protect dealers’ franchises—is not tenable. But this excess is now being rationalized by GM and Chrysler, which are using their respective bankruptcies to circumvent the state franchise protection laws.
I anticipate more superdealers to emerge, similar to American Nalley of Brunswick and Hennessey Auto Cos. in Georgia [and Reedman-Toll in Pennsylvania]. I also expect we’ll see more regional and national dealers like CarMax and AutoNation.
The automobile industry is changing significantly, and while the developments may cause some initial dislocation, the changes are necessary and will result in greater efficiencies in the long term.
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