According to a new University of Michigan report, a successful turnaround for Detroit automakers could hinge on a rapid cultural transformation. What's that mean, exactly?
Well, the report, "Fixing Detroit: How Far, How Fast, How Fuel Efficient," noted that the existing culture within the domestic auto companies systematically underestimates the value of fuel economy - which has crippled profitability.
Here's what Rob Leinbaum, former GM employee and report co-author had to say...
"For years it has discounted consumer research results when calculating the benefits of improving fuel economy, often by as much as two thirds. If GM had followed its own market research results over the last three decades, they would not be in Chapter 11 today."
And here's an excerpt from the report that discusses fuel economy standards...
"To address the questions of speed and scope of change, we looked at the actions of other large corporations that have managed successful turnarounds. There is extensive literature on this subject, both academic studies and interviews with corporate leaders. In order to address the question of fuel economy standards, we model the impacts of different fuel economy standard increases (30%-35 miles per gallon (MPG), 40%-37.7 MPG, 50%-40.4 MPG) on the profitability and sales of the industry and separately for the Detroit 3, the Japan 3, and all others. The model captures the cost of fuel economy improvement on suppliers, its impact on pricing, and the resulting changes in demand. The inputs to the model are the most recent and accepted estimates of all the key parameters, but since there is debate on many of these values, we conduct an extensive sensitivity analysis on the results.
Findings
The lessons from successful turnarounds are very clear:
Implement Broad, Deep, Fast Change: All successful efforts addressed the fundamental issues that drove them into crisis and they did it as quickly as possible.
Replace Management Team: In addition to changes in strategy and structure, in all cases there were widespread changes in management.
Transform Culture: All of the successful companies considered changing culture a critical requirement and made it a top priority for success.
Build a portfolio of excellent products: The path to long-term financial health for any company rests on having a great product portfolio. Our domestic auto industry, in its modern incarnation, has never been able to execute an excellent portfolio, only isolated successes.
The impact of higher fuel economy standards on industry profits is also very clear:
An industry-wide mandated increase in fuel economy of 30% to 50% (35 MPG to 40.5 MPG) would increase the Detroit 3's gross profits by roughly $3 billion per year, and increase sales by the equivalent of two large assembly plants
The Detroit 3 gain profits over base in all scenarios, with the largest profits gained from pursuing more aggressive fuel economy.
Japanese automakers profit gains are smaller than the Detroit 3, with the smallest profits gained from pursuing 50% increase (40.4 MPG) in fuel economy.
At 50% increase, the Japanese industry loses sales while the domestics continue to gain in sales and profitability, a result driven by the different starting points.
The value given to fuel economy by automakers has critical impact moving forward:
There is compelling evidence that the Detroit 3 have systematically underestimated the value of fuel economy to customers.
Because Detroit 3 automakers have long underestimated the consumer value of fuel economy, raising fuel economy standards will not cost more than consumers would be willing to pay.
In every scenario, the average cost-per-vehicle (direct plus indirect) is less than what consumers would be willing to pay."
This particular report built on an earlier University of Michigan Transportation Research Institute study that predicted the Detroit automakers could lose billions in profits and thousands of jobs in the event of an oil spike. The study predicted that when gas crossed the $3 a gallon market, losses could reach $11 billion.
Ford and GM had combined losses of more than $57.2 billion by the time gas hit $4 a gallon last year.
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