8 mistakes Detroit keeps making

Aug 21, 2013
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When autos are described as a "cyclical business," it means more than the normal waves of rising and falling sales that follow the rhythms of the economy. The industry tends to repeat itself. Some of this comes from the predictable pattern of every-four-year redesigns. Another part comes from proven solutions to recurring problems, such as cutting prices during slow sales. But a surprisingly sizeable slice comes from doing the same thing over and over again and expecting a different result -- the classic definition of insanity.

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1. Marking up hot cars

Tacking an additional dealer markup onto models in short supply and hot demand is a long-established retail practice that probably started seconds after the window price sticker with the suggested MSRP was adopted. Parts of the auto business are more about fashion than transportation -- think muscle cars, sports cars, and convertibles -- and dealers can't resist trying to make a quick killing while they are in demand. Automotive News reports that a handful of Chevy dealers are planning on add on up to $20,000 to the sticker price of the 2014 Corvette when the $52,000 car goes on sale in the fall. The news will ignite another fierce debate about whether the dealers are merely using market economics to ration a scarce product -- or alienating long-term customers by gouging.

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2. Fleecing the customer

Remember the bad old days when new car buyers got hit with hidden fees at closings or were coerced into after-market products they didn't need like fabric stain coatings? Well, a dealer group in Dayton, Ohio seems to have revived the practice. According to Automotive News, the Jeff Schmitt Auto Group has been accused of using a "five-finger close" to cover up extra charges on sales contracts and telling finance customers that they were required to buy rust-proofing, service contracts, and other expensive add-ons. Owner Jeff Schmitt says only "a very small number of customers" may have been aggrieved, but his company's activities have caught the attention of the Ohio attorney general's office.

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3. Delaying new model launches

Henry Ford made what is probably the slowest new model chanegover in history when he shut down Model T production for nine months to get ready for the Model A in 1928. Launches have gotten speedier since then, but they are still causing trouble. Chrysler has held back the introduction of the 2014 Jeep Cherokee (above) because of calibration issues with the new nine-speed transmission. Ford (f), meanwhile, delayed the launch of the 2013 Lincoln MKZ for four months to fix quality problems and also encountered issues getting the 2013 Escape and Fusion into showrooms. To make sure it doesn't run into similar problems with the 2014 Fusion, Ford is laying on extra training for production workers, according to trade reports, so Old Henry's record seems safe for now.

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4. Blaming the yen

Ford Motor CEO Alan Mulally recently called Japan a currency manipulator and said the weaker yen threatens to undermine U.S. automakers' profits. He may have been channeling General Motors' ex-CEO Rick Wagoner who, in 2006, accused the Japanese government of artificially weakening its currency to blunt competition from U.S. automakers. Or he may have been taking after former Chrysler CEO Lee Iacocca, who, in his 1985 autobiography, complained for the umpteenth time that again Japanese automakers and banks worked together to keep the yen cheap so their exports would be more attractive. Their complaints haven't been all that effective. In case you haven't noticed, Toyota (tm), Honda (hmc), & Co. are still here and are still stronger than ever.

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5. Relying on fleet sales

If you just read the headlines, you'd think that the Japanese were inflating their sales numbers with low-margin fleet sales, while the Detroit Three were heroically tapering off. "All three domestic American automakers reported declining fleet sales in July while they were up significantly at Nissan, Toyota, and Hyundai-Kia," reports The Truth About Cars blog. But if you read a little further, you discover that Detroit is coming off a peak, while the Asians are moving up from a very low base. Some 22% of Ford's sales went into fleets in July, while only 5% of Toyota's did. Fleet sales to daily rental companies are a much-maligned practice that sap new car sales and undermine residual values. New labor contracts were supposed to help Detroit gradually withdraw from the business, but old habits are hard to break.

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6. Fleeing high labor costs

Detroit has spent decades searching for the low-wage nirvana that will allow it to cut production costs. General Motors (gm) thought it had found an answer in 2002 when it took over the assets of the bankrupt Daewoo and started building small cars in Korea. Now the Asian nation accounts for more than 20% of GM's total production, and more than 80% of those cars, like the Chevrolet Cruze and Buick Encore, are exported. But here comes word that GM wants to start phasing out Korean production, partly because labor costs there have risen sharply . No word on where it might go next in search of cheap labor -- Southeast Asia? Sub-Saharan Africa? GM seems to have learned little from mighty Volkswagen, which remains firmly tied to its manufacturing complex in high-wage Germany.

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7. Buffing diesels' image

"Marketers work to dispel 'smoky and loud' image of diesel engines" reads the headline in the August 12, 2013 issue of Automotive News. That's not to be confused with the assertion that turned up on the web on Jan. 29, 2010 that "Because of the advances in technology, loud and smoky diesels are a thing of the past." Or the October 2010 statement on Car Review.com that "for many years, diesel engines have gotten a bad rap for being smoky and loud." I guess that "smoky and loud" image is a hard one to shake.

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8. Rebuilding Detroit with bricks and mortar

There's more going round and round in Detroit than at just the auto companies. The bankrupt city is getting a downtown makeover with renovated office buildings, a $600 million hockey arena, and construction of a three-mile light rail train line on Woodward Ave. All that real estate investment is expected to spark the revitalization of a troubled city; it's the "If you build it, they will come" theory. But that's not what happened in the 1970s when Henry Ford II erected the Renaissance Center (now GM's corporate headquarters), the 1980s when large developments were built on the waterfront, the 1990s that saw Grand Circus Park and the New Center area get a lift, or the 00's, when the Tigers and Lions moved into new downtown stadiums and three casinos went up. Detroit has plenty of real estate; what is hasn't been able to do is attract the people needed to fill it up. That won't happen until the city begins to deliver municipal services on a consistent basis, rationalizes its tax base, and finds an antidote to its poisonous racial politics. And that may be a tough lesson to learn.

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