Monday, December 29, 2008

Big Changes in a Crisis: Automobiles

As I noted last week, the current economic crisis that is deepening in the U.S. and spreading around the world poses not just the immediate challenges involved with economic policy -- assisting those who have lost their jobs and homes, stopping the slide, and putting the economic back on an upward path. It also offers many opportunities to think big, to reconsider in fundamental ways the laws, policies, and expectations that define the way our lives and our economy work. A crisis presents a rare opportunity to shake off the conventional wisdom and to gather the political will to create better ways of doing things. A crisis also, however, by its nature guarantees that many new policies will be rushed into place and thus that they will be flawed and potentially self-defeating. Thinking through these possibly large changes is thus essential to minimize the costs and maximize the benefits of change.

The most salient areas of possible large-scale change that had previously been highly resistant even to small changes include banking and finance, housing, health care, environmental policy, and education. Each of these major public policy areas have come to be thought of as "industries" with entrenched interests that fight fiercely to protect themselves from fundamental change. Nevertheless, all of them are likely to emerge from the current crisis in radically different form. Such a fate also clearly awaits the automobile industry. Today, I will describe some of the opportunities that have suddenly become imaginable as the U.S. auto industry faces the worst crisis in its history. The industry can, and should, change the ways it designs, manufactures, sells, maintains, and disposes of cars and trucks. Policy makers should help to shape those changes, especially given the historical reluctance of the Big Three to change the way they do business.

As of this writing, the Bush administration has promised to divert money that Congress approved for the financial bailout to offer about $15 billion in loans to GM, Ford, and Chrysler, giving them until March 31 to come up with a plan to put themselves on a path to long-run prosperity. The most promising possibility would be to require the auto companies to embrace environmental concerns rather than to continue their unending battles against laws to protect the environment. The product mix is already changing, with large SUV's and pickup trucks finally being replaced by smaller and more fuel-efficient vehicles. More hybrids are apparently on the way, and electric vehicles might finally make serious inroads in the U.S. Certainly the Big Three should be required to agree to serious increases in fuel economy and environmental standards for their cars, rather than (as they have in the past) engaging in scare tactics to convince the public that environmentalists want Americans to drive strange-looking glorified golf carts.

All of this is important, of course, and such changes appear to be under serious consideration. As I suggested recently, however, once the auto makers have manufactured their cars, there is much more that they could do to improve their prospects with car buyers. The way that cars are sold in this country is, in a word, absurd. The entire process of buying a car is insulting and stressful, with car salespeople trained to manipulate and deceive buyers into overpaying for cars. In response to my post about auto sales tactics, one reader posted a link to a fascinating article in which an investigative reporter describes his experiences as a car salesmen at both traditional and "no-haggle" dealerships in southern Calfornia. The stories are both depressing and entirely believable. Another reader whom I know sent an email in which she described her experiences in dealing with car salesmen. (She is a petite, youthful woman, making her an especially enticing target of car salesmen.) Her comments also touch on many of the other problems with the way the Big Three automakers do business:
These [sales] tactics are why I bought a Saturn ten years ago when I was in the market for a car. Meanwhile, though, I brought two young salesmen to the brink of tears as I dickered, the first because he (literally) did not know his oil from his transmission dipstick. I ended up buying from a nice kindergarten teacher at the Saturn dealer. Every time I asked something about the car, she either immediately had the information, or she could get it in less than a minute. She could also tell me the cargo capacity of not only the Saturn I was looking at but also a dozen other similar vehicles. Last year, at 200,000 miles, I threw a rod in my beloved Saturn's engine. I shopped for three days. No car at the same size had the same gas mileage. No dealer wanted to deal; all of them wondered when my husband would be coming in. I ordered a new engine. The car now has 230,000 on it. Most of the parts are original. So, Detroit, what will it take to put me in a new car? Make one that drives as well, as cheaply, as comfortably as my old Saturn SW2. Make sure it gets at least 45 mpg; if you could give me 38 ten years ago, surely you can manage 45 now. Give me exactly the same price you give everyone else. I'll buy the car in a heartbeat. Meanwhile, I'm lusting after a used Saturn I pass on my way to work, same model as my car, that I'm betting has way lower mileage . . . either for replacing my car or cannibalizing for parts.
As humorous as war stories about car dealers can be, this is a serious waste of economic resources. The auto makers -- including the foreign brands -- have to date not dared to fight the dealer networks and their protectors in every state legislature, even though the tactics used by car dealers are a constant source of trouble and expense for the manufacturers (since, understandably, customers blame the abusive tactics of Big Bob's Chevrolet on GM as well as on Big Bob and his minions). Indeed, as the article that I noted above makes clear, the "no haggle" dealers are merely toned down versions of the sleazy norm, continuing to use the same old tactics to sell add-ons, etc. Even on-line sales must go through a traditional dealership in almost every case because of state laws that protect the business model of the car dealers.

The problem, from a business standpoint, is that customers are alienated and angry. Buying a car is such a stressful experience that people put it off as long as they can. While GM would like to build a bond with their customers to increase the likelihood of repeat business, car salesmen and their dealerships are in it for the quick kill. It was, in fact, the traditional dealerships that put huge amounts of pressure on GM to euthanize Saturn. (Although GM has not officially killed off Saturn, they certainly have allowed it to wither and have blown a huge opportunity to build on its early success.) If the Big Three automakers really want to get the people behind them, they could do a lot worse than proposing a complete break with the way cars are sold.

Even more fundamentally, we could ask why people own cars in the first place. As I pointed out here last summer, we need to seriously reconsider the fundamental assumption that individuals should own their residences, and this argument extends to automobiles as well. Current practices and laws make it extremely difficult to lease cars. (For example, despite my best efforts, I have not even been able to find a no-haggle lease.) This makes the family car "the second biggest investment you'll make," which makes no more financial sense in many instances than that biggest investment. People are simply accustomed to thinking that they should own their cars and their houses, even though there is no good reason to do so for many, many people. The inefficiencies of the used-car market are legendary in their own right, and we could pool a lot of risk as well as take advantage of some serious economies of scale by encouraging non-ownership of cars (and houses).

All of this, of course, assumes that we should be encouraging people to have access to cars at all. The more fundamental challenge is to make driving less and less desirable and necessary, through better regional planning and investments in rail, etc. As we attempt to do so, however, there is no reason to squander this opportunity to require auto makers to improve both the cars they make and the ways we buy and rent them.

-- Posted by Neil H. Buchanan