You’re making Kia’s with a Mercedes Cost Model – A Car & Startup Guy’s Take on the Big 3 Bailout

I want to preface this post by stating that I am a hard core car guy who’s owned cars from just about every auto company.  I love, love cars.  Innovation, execution and design are all things I long for in a car.  Also as a startup junkie I am biased as every day I am ultimately working to either unseat incumbents or make their lives very uncomfortable.

If you have been following my twitter feed, then you’re familiar with my distaste with the idea of a federal bailout for the auto companies.  Despite my conservative political views, I do accept the idea of the government as the banker of last resort if and when the financial markets come to a screeching halt.

Yes the financial markets are very weak and wounded, but they are still functioning.  The reason the big 3 have turned to the US government tin pail in hand is that not no rationale investor would lend those companies money.  Thus we, as taxpayers, should ask ourselves why should we invest in 3 companies that no private, profit seeking investor is willing will do so? esimates it could take 400 Billion in direct taxpayer financing to save those 3 sceloratic dinosaurs.  In large part because it’s good money after bad and thus you’re really just trying to build new co’s inside the rotten shells of old co’s.

The fundamental problem with the big 3 is not that can’t sell cars – they can and do sell millions world wide.  The problem is that the big 3 can’t sell their cars at a price point where they make a profit.  The market values their often misguided, mediocre offerings at a rate well below what the big 3 need to make a profit and survive.  The reality in terms of brand reputation and actual product performance is that big 3 are more like Kia and a lot less like toyota or bmw.  The problem is that when the big 3 sell at kia’s prices they lose money because they have bmw’s cost structure.

Now the uaw and big labor had a lot to do with it with 5000 pages of work rules and european style socialist job protections which required the big 3 to produce high volume vehicles instead of focusing on smaller, more profitable niches like bmw. But the big 3′s inability to create products people would pay a market premium (see prius) or dream of driving to show status (bmw, porsche) has left them where they are beggars at the table.

I understand the short term societal cost that putting thousands upon thousands of people out of work.  And I am ok with spending tax dollars helping folks transition to a new world order.  But the future would better served using those government funds to fun 100 startups reborn from the ashes of the big 3.  Unleash the best and brightest teams of designers, engineers, and yes factory workers come together and form new companies.  Yes offer government financing to make it happen.  Dictating to 3 large dinosaurs to build competitive, innovative cars that will sell for a profit when they have essentially shown no ability to do that for 40 or 50 years is maddening to me.

For our country and economy to survive and grow, we need old dinosaurs to die and spawn their replacements from their remains.  Creative destruction has been an amazing blessing.  Look at how the internet grew out of the breakup of ma bell.

It’s easy for our political leaders to look to the past, the hard thing is to look to the future.  Let’s hope (though I doubt it) it happens.

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One Response to You’re making Kia’s with a Mercedes Cost Model – A Car & Startup Guy’s Take on the Big 3 Bailout

  1. Right on. Seems to me like the Big Three are still stuck in the 1950s/1960s “Wal Mart Auto Retail” model, where you leverage economies of scale to sell a large volume of cheap vehicles to a populace that is mostly unwilling to pay a premium on quality, efficiency, performance, etc… The 1970s oil crisis should have shook them out of that rut, when people first began moving over to foreign imports en masse, but it didn’t. Instead they went cheaper, smaller (Geo, Neon, etc…) despite the fact that they couldn’t reduce their overhead appreciably.

    I have a family friend who’s been a senior engineer at Ford for three decades, and do you know what the Ford executives did when Toyota first made a launch into the auto market? Nothing. They never even bothered to take a Toyota for a test drive to learn what the big deal was. Zero opposition research. Pitiful.

    The big, dumb, fat, and happy days are over for the big three. I’m not trying to pitch my personal blog, but I wrote an entry about how I think the emergence of new auto startups like Carbon Motors (out of Atlanta) is a promising sign that innovation can and will emerge and thrive if the Big Three should be allowed to fail.

    My reasoning is that all of the production middlemen currently utilized by the Big Three to produce individual parts for cars (engines, interiors, brake pads, etc…) will still be functional but now with greater availability to take on new clients and at a lower cost as a result of the collapse of the big three and the inevitable decrease in demand along with it.

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