What’s The Problem With Detroit?

Detroit has had a rough decade. During the go-go nineties when oil was cheap and money plentiful, giant gas-guzzling SUVs sold like hot-cakes and domestic automaker CEOs were the toast of the town. Then came China and India’s resource-hungry economic boom, 9/11, Iraq, triple digit oil prices, and the Japanese. Where Detroit was still living in the days of low-cost oil, Toyota, Honda, and the other Asian auto manufacturers were producing small, reliable, affordable, and fuel-efficient cars. That turned out to be just what the doctor ordered.

So What’s Wrong With Detroit?

For starters, American automakers aren’t producing what consumers want to buy. Even though the price of oil is back below $40 per barrel for the moment, you’d be hard-pressed to find an economist or energy analyst who thinks oil won’t eventually be back above $100 per barrel in the not-too-distant future. The fact of the matter is we are running out of oil even as demand is increasing. To that end, Detroit needs to abandon the gas-guzzler mindset if they are to achieve long-term success.

Another problem is the perception of poor quality in U.S. automobiles. While it still exists, the quality difference between Detroit and Japan has narrowed dramatically. In fact, it’s all but disappeared in some cases. The recently-redesigned Chevy Malibu has received rave reviews and nearly perfect reliability ratings, for instance. Still, it will take time for Detroit to shake the well-deserved image of manufacturing shoddy, unreliable, inefficient automobiles.

Who’s To Blame? The Answer Might Surprise You

It would be easy to throw up your arms, point at General Motor’s, Chrysler’s, and Ford’s management teams and say “It’s them! They are to blame! Detroit’s naïve and arrogant management refused to see the writing on the wall until it was too late.” And you wouldn’t be entirely incorrect.

It would be equally easy to point to the United Auto Workers union and exclaim “Their greed put management in a tight spot, saddling Detroit with unreasonable health-care and retirement costs and putting them at a severe cost disadvantage relative to the Japanese.” And you wouldn’t be entirely incorrect.

Four Pillars made an astute observation recently, noting that American automakers stuck to gas-guzzlers because people were buying them. Toyota and Honda, he says, started off manufacturing small, fuel-efficient cars because that’s what their home market demanded. I couldn’t agree more. Toyota and Honda were no better-prepared than General Motors or Ford. They didn’t predict the current situation and their dominance wasn’t the result of design but rather of accident.

The Importance Of The Home Market

Don’t believe us? Michael Porter talks in-depth about the critical importance of the home market in his landmark work, The Competitive Advantage of Nations (if you really want to understand the nature of international trade, competitive advantage, and why certain industries tend to be dominated by clusters of firms all in relatively close geographic proximity, this book is an absolute must read). In short, the wants and needs of the home market are most closely felt by firms because management shares a common language, cultural perception, and taste as their local customers. Thus, the home market has an extremely powerful influence on competitive strategy not only at home but abroad. Toyota and Honda are absolutely, without a doubt, no exception to this.

Since Japanese customers naturally prefer smaller automobiles for geographic, financial, and cultural reasons and Japanese auto manufacturers were forced to compete fiercely in this market for decades, corporate culture was skewed heavily toward this class of automobile just as Detroit’s was skewed towards large SUVs and trucks. This home bias carried over into Toyota’s and Honda’s international competitive strategy. Was this an intentional and shrewd move based on evolving economic realities? Hardly. It was mostly luck. Toyota happened to be on the winning end of things while GM wasn’t. Their positions could easily have been reversed, however, even assuming identical management teams and identical competencies. The home market phenomenon almost entirely explains the current economic reality of the auto industry. I encourage you to read Porter’s work for a far more in-depth explanation of exactly why the home market is so critically important. So yes, Detroit’s management is to blame. Yes, the UAW is to blame. But mostly, you are to blame, America.