"What are the odds that every Detroit 3 exec of the last 35 years has been an idiot?"

by reader Sammy

Title: “What are the odds that every Detroit 3 exec of the last 35 years has been an idiot?”

“In their almost gleeful calls for the death of the domestic auto industry, some U.S. senators and other critics of the Detroit 3 have suggested rampant incompetence and utterly failed business models.
“They’re not building the right products,” Sen. Richard Shelby, the Alabama Republican, said on NBC’s “Meet the Press.”
“I don’t believe they’ve got good management. They don’t innovate. They’re a dinosaur, in a sense.”
Let them go bankrupt, say Shelby, Mitt Romney and others.
From time to time, I’ve been very critical of Detroit 3 management. But as their very survival hangs in the balance, I ask a question: Is it coincidence that every domestic U.S. car manufacturer is in exactly the same leaky boat?”

*Quotes taken from this editorial.

This is an important question as it will help determine the case for public assistance. Let’s look at some prominant features of the business landscape faced by the Big 3 over the recent past:

1) Large labor (including legacy) costs put in place when the Big 3 market share was 70%+. These costs required 2 things: a) high volume, and b)high gross margins, achievable only on large/expensive vehicles.

2) Unfettered foreign competitors entered, hailing from hyper-competitive home markets where gasoline prices are kept artificially high by government taxation.

One result of these two factors is that Detroit ends up building the best light trucks in the world, while Asia and Europe build the best smaller cars. They occupied market niches according to their comparative advantages.

Detroit begins to increasingly specialize in the larger vehicles the consumers demanded, which carry profits of approximately $10K per vehicle, while trying to become competitive in smaller vehicles due to volume requirements. This business model is minimally successful, but along comes 2008 where the landscape is altered by a huge anomalous spike in gas prices and a recession which reveals the two vulnerabilities of the market niche the Big 3 occupied: poor fuel economy and high prices.

Is this a variation of “Geography is Destiny?” Or, what could have been done differently?
by reader sammy