Can 'Cash for Clunkers' Help Jump-start the Auto Industry?Published: August 05, 2009 in Knowledge@Wharton
Ford reported its first month-to-month sales gain in 20 months, thanks to the U.S. government's "cash for clunkers" rebate program, which gives consumers up to $4,500 if they trade in older cars for new and more fuel-efficient models. Other manufacturers said their continuing sales declines would have been worse without the program. All in all, the officially named Car Allowance Rebate System (CARS) provided taxpayers with a good return on their investment, Wharton management professor John Paul MacDuffie says in an interview with Knowledge@Wharton. But, he adds, the auto industry -- most notably GM and Toyota -- have a lot of work to do to prepare for a marketplace transformed by the financial crisis and growing demand for fuel efficiency. Where should they start? Watch Hyundai, he suggests.
An edited transcript of the conversation follows:
Knowledge@Wharton: We're here today with Wharton Management Professor John Paul MacDuffie to talk about the auto industry and the "cash for clunkers" program from the U.S. government that seems to be providing quite a spark. John Paul, thanks for being with us today.
John Paul MacDuffie: Glad to be here.
Knowledge@Wharton: Do you think there's a good return on the investment for taxpayers in this program?
MacDuffie: There are probably some different angles on that question. I think probably the best way to see cash for clunkers is as a short-term stimulus for the auto industry. But [it is] also designed to help the overall economy. Any program like this that relies on incentives to purchase now tends to steal demand from future periods. But right now, that's a good thing for the auto industry, which has had such a devastating drop in sales over the last year, both because of the general economic conditions and the credit crisis. And for companies like General Motors and Chrysler that are just coming out from bankruptcy, seeing people flooding back into showrooms is a very positive sign.
Knowledge@Wharton: Do you think that the fact that consumers have reacted in such a surprising volume to this offer says anything about where consumers are right now? Are they ready to spend, if they just feel confident about it?
MacDuffie: Well, of course, they're looking for a deal. And if you happen to have a vehicle that qualifies, it's a pretty good deal. Typically, these are vehicles people would have replaced at some point and now they're replacing them probably earlier, and they're getting a nice rebate on a new vehicle. One thing I saw in a news report today is that used car sales are also up. And the usual thought about something like this is it's going to steal sales from used car sales. But apparently, people who show up at a dealership with a vehicle they hope [will] qualify for a rebate ... are sticking around [if it does not]. And, in many cases, they're buying a used vehicle. So in that psychological sense of getting people out shopping, it seems to be having spillover effects beyond just the specific thing it's designed for.
Knowledge@Wharton: Dealers have always said, they just want to get somebody in the showroom, and they'll take it from there, right?
Knowledge@Wharton: What kind of management lessons have we learned from this chapter in the auto industry, in terms of responding to a really, really tight credit market?
MacDuffie: There's so many different stories out there in this very dramatic past year, that I probably have ... to sort that into some different categories. For GM and Chrysler, they got into as much trouble as they [did] not only because of some weaknesses they had as a company, but because their debt ... had soared to such high levels. And then they were so vulnerable when the crunch came that they just had no hope. Maybe the biggest lessons out of the GM and Chrysler bankruptcies so far is that the government action seemed to push them to make more changes faster, that the bankruptcy process itself turned out to be unbelievably fast, and therefore to have less of a negative impact on these companies than anyone expected. So, they emerged with a real chance to show people if what they've been saying is true -- that they in fact do have good products, and they are making a lot of positive changes, and they just needed to shake some of the legacy costs, and some of the burdens of the past. So, they now have that chance. For Ford, it looks like a real example for the new CEO -- who came from another industry, with some new perspectives, who managed to fashion a strategy that certainly was partly lucky, but also partly savvy in terms of getting a hold of some credit for Ford, borrowed money they could pour into new product well before the crisis hit -- to capitalize on being the one company that didn't take government aid. Something that -- by the way, still remains largely very unpopular with the public.
Hyundai is the up-and-coming company that looks to be gaining maybe the maximum advantage out of the crisis so far. Their sales have actually been growing, when most others have been shrinking. They did a very smart thing that's being heralded by marketing professionals everywhere ... with this Hyundai Assurance Program, where they basically promised, if you buy a new Hyundai and you lose your job, you can [return the car and have the balance of the loan forgiven]. And generally, they seem to be hitting the marks pretty well, with getting new products out there. Their new luxury vehicle, the Genesis , [though this is]not the best time, you would think, to launch a luxury vehicle -- ... is a great value, and is getting great press. It won Car of the Year, and now the sportier version is getting rave reviews as well.
I think the management lesson that a company like Toyota seems to be extracting from this is that they may have grown a bit too quickly, and too aggressively, to have this full product line-up. It took them into the kind of large vehicles, trucks, and SUVs that are now out of fashion. So, they [now must] scramble to adjust to their own somewhat misplaced trajectory.
Knowledge@Wharton: One of the remarkable things about Hyundai was that it responded so quickly to the change in the market.... It saw that Americans were hesitant to buy, because they were worried about the future. And so [the company] put together this marketing program pretty quickly. And then they followed it up with a program that offered some rebates on their car payments.
MacDuffie: Yes. And, of course, some competitors have come in quickly with copycat programs. But [Hyundai] got the real benefit of it by being the first.
Knowledge@Wharton: And so, is speed part of the lesson -- reaction time to these changes in the market?
MacDuffie: Well, I think speed is certainly important. One of the things that is undoubtedly hurting a company like Toyota right now is that they have a tradition of not doing layoffs. And so they had a lot of temporary workers in Japan at the start of this crisis. They did end the contracts for the temporary workers. But otherwise, they're holding onto all their employees. It's obviously adding a lot of cost for them. You might say the fast thing to do would be to make those layoffs, to reduce those costs in the time of the downturn. But that would be so against Toyota's culture. And we may find that ultimately they ... benefit, in terms of the commitment and motivation of the work force, and keeping the quality strong -- all those things -- in the long run. So, there's probably a mix -- you have to make sure you don't undercut your long-term capabilities and strengths by something you do quickly.
Knowledge@Wharton: Now, Nissan just this week announced that it would be introducing the first all-electric car in Europe, Japan, and the United States, in 2010, far ahead of their original schedule, and I believe ahead of other manufacturers. What do you make of that?
MacDuffie: Nissan has made it clear for a few years now that they didn't see the value of making a huge investment in the hybrid drivetrains that have gotten so much attention for Toyota and Honda. That it's an expensive investment and Toyota got the largest benefit by being first to market. Honda has certainly grabbed some advantage being right behind them. But for Nissan to develop its own versions, and bring it to market -- years later -- probably does not offer a lot of advantage. So, they've got a couple of hybrid models. They licensed the technology from Toyota, actually. But for them, the place they decided to make a mark and make a stand was with electrical. So, 2010 could be an interesting year in terms of the all-electric vehicles. That's when the General Motors Volt, the Chevy Volt, is supposed to be introduced. And Toyota has been saying that they would have a plug-in hybrid by around that time. They haven't been very specific. Toyota's usually rather cautious, and doesn't care so much about being first to market. They just want to be sure it works. So, Nissan may actually sneak in there before Toyota. But the public will really get their first look at these vehicles, and we'll be curious to see what the prices are like. The Volt, we were hearing, would be priced around $40,000. That's going to put it out of the reach of many, many consumers. We don't know where the Nissan's going to come in just now.
Knowledge@Wharton: Are there other things that are going to keep people away from electric cars, other than just their own initial resistance to the idea?
MacDuffie: Well, the plug-in hybrid is ideal for people who primarily have a lot of relatively short range trips they'll be able to run entirely on the charged battery. The Volt has a design where there is a gasoline-powered engine, but it is used only to recharge the battery. So then, you can extend the range that way. You know, it does point out that infrastructure ultimately is going to be a huge part of making this whole electrification process very extensive. Because ... if you got your own garage you park in every night, you can plug it in there, it's fine. But if you don't have those conditions [it won't work]. The best-known example of somebody out there talking about the whole range of these things is Shai Agassi from Better Place. He wants to be in all aspects of providing the infrastructure for the electricity -- becoming almost an energy provider to the users of [electric] automobiles. [That would include] a place that people can come and swap out a depleted battery for a new one, but also putting recharging stations into parking lots, along city streets. This is going to be a massive effort that will require government participation. But there may be a public-private partnership that makes it happen.
Knowledge@Wharton: Is it possible to handicap the race for the new technologies for automobiles? Is the successor to the internal combustion engine more likely to be a fuel cell vehicle, an electric vehicle or something else?
MacDuffie: I think the fuel cell world still seems a long way off. And so the excitement has really shifted to these various all-electric alternatives. There still may be some action in alternative fuels which can be used -- ethanol-based fuels, or bio-diesel, or things like that. But I think the all-electric [car] is where probably the most action will be. One interesting question from an industry-structure point of view is what role will be played by small start-ups like Fiskar or like Tesla, versus the big [car companies]. It seems unlikely that any small start-up is going to be able to really scale up to the level that would bring prices really low. But a promising start-up that has a really great technology might be a prime acquisition target in a couple of years. So, there will be that kind of model of innovation appearing in different places, and then getting folded into the larger production and distribution system that you really need to have a mass impact.
Knowledge@Wharton: Now, Ed Whitacre just took over as Chairman of GM. What's the next quarter going to look like for GM? Are they still going to be in their rebuilding phase?
MacDuffie: Oh, absolutely. And rebuilding not only in terms of getting product out there, getting the factories going again, but also in terms of thinking about what the management structure should be, and what the management culture should be. The board is, for the most part, new, with not only a new chairman, but many new board members appointed by the different constituencies. The seats are held by new owners, essentially -- a lot [of them] by the [U.S.] government, some by the Canadian government, one by the United Auto Workers. So, how is that new board going to work? What kinds of things are they going to demand of the management? Are they going to make some changes in management? Some have raised questions about whether Fritz Henderson, the CEO, will be able to lead a sufficient change in GM's culture, given that he's one of a long line of CEOs that grew up as a finance person, as a lifer in GM. In that sense, he's not substantially different from a Rick Wagoner or a Roger Smith, some of the finance CEOs of the past.
So, one of the things I think we'll look for is whether there's a reaching both outside, for perhaps some new talent, but also down in the ranks for younger people who may have a real grasp of what GM needs to do to change and survive this transition.
Knowledge@Wharton: What is the thing that GM needs most, in terms of its product line?
MacDuffie: They can really use some buzz about some new products to help get people into showrooms. It would help if that happens not just for sort of niche vehicles like the Camaro, which is currently producing some of that kind of buzz, but for some of the more mass market vehicles. Ford seems to be doing very well, particularly in this cash for clunkers program, with both the Focus and the Fusion, two of their mainstream vehicles. And they're trying to make sure that cars are back to being the heart of their line-up. GM's Malibu has gotten some awards, but for the most part their sedan line is still not all that distinguished. And another thing they need ... is a very, very consistent quality record across the board for each new product. So, the buzz, the excitement is great. But there's still a lingering suspicion that the quality may not be that good, even though they've made dramatic improvements. They've had such a huge product line, they've had good products and bad. All it takes is for someone to hear about a neighbor who had a bad experience with a GM car, or for somebody to rent a GM car and not like it, for that reputation to be continued. So, how do you turn around a reputation that's built over years? That's part of their challenge.
Knowledge@Wharton: Would that make them a likely candidate for acquiring one of these interesting start-ups?
MacDuffie: That's a good question. Maybe, down the road. But for the moment, I think GM really needs to focus on the blocking and tackling -- the core of their business -- and not get distracted from that. Pulling off [a success with] the Volt ... in terms of how the product works, and how the customers like it, ... will be big for them even if the sales are not that high. But if the Volt has problems, and there are competing products in that same space that do better, then it will look like another in a stream of product-related failures or disappointments out of GM. And they need to change that storyline.
Knowledge@Wharton: Thank you so much.