Detroit Automakers: What "leaner and greener" really mean

Will the Chevrolet Volt be a symbol of GM's success or a piece of its history?
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Over the past few years, they have been mantras for Detroit's automakers, "We have to do things faster." And, "We have to produce 'greener' cars and trucks." Now, a report recently released by the University of Michigan's Transportation Research Institute (UMTRI) defines what those statements need to mean if the Detroit 3 are to prosper once again.

According to the report, "Fixing Detroit: How Far, How Fast, How Fuel Efficient?" a successful turnaround by Detroit automakers will depend on speedy and wide-reaching cultural transformation. In addition, the report suggests that the domestic automakers have systematically underestimated the value of fuel economy, which has affected their profitability.

"The key to a long-term recovery is executing an excellent portfolio of products," said Walter McManus, director of UMTRI's Automotive Analysis Division and co-author of the report. "And we find that increasing fuel economy standards will lead to a portfolio of products that is more likely to raise the profits of the Detroit 3 automakers than to lower them."

Easy to say, hard to do
Of course, Detroit's automakers have been trying to "change the culture" since the 1980's. Former GM Chairman Roger Smith's grand experiment with Saturn was intended to change General Motors' culture. And in UMTRI's report, there is overwhelming agreement that change should take place as fast as possible and be as comprehensive as possible. A crisis presents a unique opportunity to make changes that would not be possible in "better" times and urgency is a must for the successful renewal of a company on the brink.

Yet even though current GM CEO Fritz Henderson has admitted, "GM has to make decisions faster," it's still not clear whether the automaker has the urgency or the will to make changes as broad and deep and fast as necessary. It has been reported here that the large majority of GM's current senior management staff has been with the company for more than 20 years - can they not only adapt to, but force changes in GM's culture?

A focus on customer perceptions of value
UMTRI's report suggests that the Detroit 3 must understand how their customers view their products and what it is customers want and are willing to pay for. This assertion is nothing new. However, a culture of cost cutting that started in the 1970's has led in many cases to the development of products that people have not liked and that have required incentives to get people to buy.

Press reports are stating that capital and engineering resources for the next generation of domestic products have been cut fairly drastically. If so, then there is reason to be concerned about the long-term health of the companies and their market success.

Improved fuel economy will lead to improved value
One of the results of shrinking product development budgets is a concern that the Detroit 3 will be forced to build more fuel-efficient vehicles by a government that places more importance on ideology than the market. Story after story frames the issue of a struggling industry that will not survive tough fuel economy standards. However, according to UMTRI's report, there is compelling evidence that the domestic auto industry has underestimated the value of fuel economy to customers, and has consistently undervalued the impact of fuel economy on their profit potential.

Achieving mileage standards 30 to 50 percent beyond current law could result in an incremental $3 billion a year in gross profits for the Detroit automakers. Rob Kleinbaum, former GM employee and consultant and report co-author, says the industry attitude about fuel economy is symptomatic of its current culture.

"For years it has discounted consumer research results when calculating the benefits of improving fuel economy, often by as much as two-thirds," he said. "If GM had followed its market research results over the last three decades, they would not be in Chapter 11 today."

The bottom line: "Leaner and greener" must become reality
Of course, none of the findings in the UMTRI report is new.  And one might wonder about the timing of report since it seems to bolster the U.S. government's assertion that Detroit's automakers have to move farther and faster than they're used to.  However, since 2004, GM and Ford's automotive operations losses total $83.6 billion. During that time, they've lost a cumulative 14.2 points of market share. It's clear that something has to change. The question will be how much, how fast.

Given Detroit's recent history, it will need to put more muscle into changing strategies, operations and culture and maybe not so much into its cars.

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