Commentary by Rance Crain

BIG 3 U.S. CARMAKERS FACE DESPERATE TIMES

The Current Domestic Automotive Business Model Isn't Working

By Published on .

Desperate times call for desperate measures.

Dieter Zetsche, CEO of DaimlerChrysler's Chrysler Group, is fearful American autos are turning into commodities.

Rance Crain, editor in chief, 'Advertising Age'

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"If your only deal to the customer is this 'deal of the day,' and you're in a commodity game, this seems to be heading toward minimal profits and the drying up of capital for the auto industry," Mr. Zetsche told Automotive News.

Not a winning model
"This typical Big 3 business model is not a winning one," he said. "This is why we are striving for something else."

The "something else," of course, is to follow the lead of foreign automakers and make cars that buyers are willing to pay full value for. But General Motors, Ford and Chrysler have all tried that strategy without positive results. Buyers continue to believe foreign cars are more stylish and dependable.

Detroit's advertising reinforces its cars' commodity status. All these 0% finance claims ("nothing from nothing leaves nothing") leave precious little time to talk about style and performance. When a Big 3 carmaker does run a "product ad," it waxes lyrically about the car without talking much about the details.

Aggressive price cutting
Chrysler Group's Mr. Zetsche doesn't buy the theory that pushing incentives harder will improve the profit picture. But what alternatives are there? Either you're a premium-price player or you drive down prices aggressively and continually, as Wal-Mart Stores and now Amazon.com are doing. Amazon gushed red ink until it went the low-price route with

aggressive discounting and free shipping. And it sharply reduced its losses.

Retailers (and carmakers are retailers) face two choices, Amazon founder and CEO Jeffrey Bezos said in a recent conference call: Work hard to raise prices or to lower them. Amazon, he said, "decided to relentlessly follow the second model," The Wall Street Journal reported.

And that means all prices, not just at the lower end. The airlines continue to lose buckets of money letting travelers buy cheap fares on a restricted basis while pretty much gouging business travelers who buy at the last minute. When you think about it, carmakers do the same. They rebate the hell out of low- and medium-priced vehicles and gouge the buyer of high-priced and popular SUVs. That strategy must send a mixed message to their employees and suppliers about whether they're really serious about cutting costs.

Declining profits
If they want to emulate the hugely profitable Wal-Mart and Southwest Airlines, the U.S. auto companies have got to take an unrelenting approach to lower costs -- on both the high end and the low end. And they need to advertise their commitment to lower costs not with rebates but by cutting the base cost on a continual basis. (What have the Big 3 got to lose? Profits fell from $17 billion in 1995 to $2.8 billion last year, when they sold 55,552 more vehicles, Automotive News says.)

The foreign guys are taking the high-price approach and are able to get away with it. In their dreams, the Big 3 aspire to that state of high-price nirvana, but the foreign makers will always be one step ahead of them in providing what consumers are willing to pay full price for.

As I said, desperate times call for desperate measures. And the Big 3 are out of options.

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