Rapidly changing fortunes.

If events during the last few months have proven anything, they have shown that there is no such thing as "conventional wisdom" about the auto industry. Virtually every major North American OEM has had some significant change or major announcement that has kept the industry continuously highlighted in the popular press. Although most of the news has been negative (e.g. continued share declines by the Big Three, major vehicle recalls, etc.), there has also been a fair amount of positive coverage regarding hybrids and the success of new vehicle segments like crossovers. While there has been a continuous drumbeat regarding the decline of the North American automotive industry, it certainly is not reflected in the sales numbers, as shown in the accompanying chart.

The issue that frequently gets lost in all this bad news is that this is not an industry in crisis from a consumer perspective. Americans love vehicles as much or more than they have in the past. What is happening is that we are going through a major transition between old and new business models, mainly because of the increasing strength of the end consumer. In the past 10 years, the industry has switched from a seller's market to a buyer's market, leaving many OEMs and suppliers caught with unsustainable business designs for this new environment.

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The Japanese OEMs are Not Invincible

One of the more interesting developments of the last few months has been the revelation that some of the Japanese OEMs have their own share of difficulties. Most surprising has been the increasing visibility of some quality issues at Toyota. In early September, J.D. Power and Associates released its latest North American quality survey (vehicle reliability over a three-year period) that indicates a decline in quality ratings in several vehicle segments for Toyota. Toyota was clearly concerned that this could do long term damage to the consumer's perception that Toyota is the automotive quality leader, so their public relations department went into overdrive to make it clear to the public that their upper management took this ratings decline very seriously and that they were taking immediate steps to correct it. While no one is seriously concerned about the long term quality of Toyota's products, it does demonstrate that consistent performance is a challenge for any OEM.

An even more telling example involves Nissan. Earlier this summer, there was significant press coverage regarding Kirk Kerkorian's recommendation that General Motors seek the assistance of Carlos Ghosn and Nissan. As most industry participants are aware, Mr. Ghosn orchestrated a remarkable financial turnaround at Nissan/Renault earlier in this decade. Personally, my favorite reaction to the suggestion that Mr. Ghosn should put his talents to work at GM was Dick Dauch's (President of American Axle) comment at the recent Center for Automotive Research Management Briefing Seminar that "General Motors doesn't need any help from the goddamned French." While the statement was a tad ethno-centric, it was fair to suggest that Nissan has enough issues of its own to address. They have had some significant sales problems in North America in 2006 and there are some serious concerns about the competitiveness of several of their future models. More importantly, Mr. Dauch rightly pointed out the improving fortunes of General Motors and the tangible results we are beginning to see from the General Motors leadership team.

A Reason for Optimism

If anyone had told me five years ago that I would be one of the current voices of optimism regarding General Motors, I would have laughed. While there is no question they still have massive structural and market issues to overcome, GM has made significant progress in a number of areas that really matter:

* Quality. GM has made huge strides in quality in the past five years. They had, for example, numerous vehicles in the top 10 in the J.D. Power quality survey referenced earlier and they appear to have fixed many of the fit and finish issues that plagued them throughout the 1990s. While it may take a while for the American consumer to give them credit for this quality turnaround (most studies show a five year lag between actual improvements in quality and widespread recognition of these improvements), GM has significantly narrowed the quality gap with the Japanese. That is why GM recently announced their 100,000 mile warranty on new vehicles.

* Product Design. The most dramatic change for GM in the last five years has been the significant improvement in vehicle design. From niche vehicles like the Pontiac Solstice and Cadillac Escalade to core programs like the upcoming Lambda platform, GM seems to have regained their ability to connect with the American consumer.

* Execution. It was not that long ago that GM consistently missed (by wide margins) the timing and targeted volumes of every new vehicle launch. Lost in all the automotive press coverage of the last six months has been how well GM has done on the launch of the new GMT 900 platform (particularly given the importance of this program to the future of the company). Most vehicle variants have launched on time and close to anticipated volumes and indications are the other models planned in 2007 will launch equally well. This is a major testament to the improvement in GM's product planning and operational acumen.

The best statement I can make on how impressed I am with the improvements at GM is the fact that I am in the process of buying a new Cadillac SRX. This will be the first GM vehicle I have purchased in over 10 years.

Crisis Du Jour at Ford

In startling contrast to the stability and forward progress at GM is the continuing saga at Ford. During Bill Ford's five year tenure as the leader at Ford, we have had program after program designed to turn the company around (remember the Year of the Car a few years back?). After seeing Ford's market share continue to hemorrhage in 2006, he finally stated that the job had gotten too big for one person to handle and that he was bringing in a new President and CEO, Alan Mulally from Boeing. This situation would be laughable if we weren't talking about one of the larger commercial enterprises in the world. Regardless of whether you are optimistic or pessimistic regarding Mr. Mulally's future, it is clear that one person, no matter their previous track record, is unlikely to save Ford. What Ford has been lacking since the late 1990s is a "vision thing" for the company that clearly articulates their short and long term competitive position and a cohesive management team that is capable of getting through the internal and external roadblocks to that vision. If Ford was going to take this radical approach, it should have happened five years ago, before Ford's position had been allowed to deteriorate for so long.

And last, but not least, the choice of an industry outsider by Ford is a quintessentially American response to a crisis and speaks volumes about the differences between American and Japanese automotive leadership. Can you imagine Honda or Toyota deciding in a crisis that they would bring someone with no automotive experience in to run their company? This "bet the farm" approach could never happen anywhere but in the United States. Sometimes big bets turn out positively and, in this instance, we hope Ford got lucky and picked the right guy.

By Kim Korth, President, IRN, Inc. [e-mail]