Detroit has lost its way, has it lost its mind?

Sure looks like it.

Back when General Motors, Ford, and Chrysler made 90, or 80, or even 60% of the cars sold in America, "Detroit" was a synonym for the automobile industry.  That habit remains even though the former "Big Three" now have less than 50% of the American market.  The automobile business directly or indirectly supported millions of jobs in Michigan and all across the land, but no longer.

Books have been written about how management, labor, and government worked together to mess up the business; there's no need to review the grim details.  I say "worked together" because Detroit was so powerful and so profitable that none of the three parties involved could have messed it up alone.  They had to work together to give away so many jobs, so much market share, and so much money.  The way the government "helped" the auto industry doesn't bode well for the government involving itself any deeper in health care, but that's another story.

Now we see Detroit management making another bone-headed business blunder all by themselves: they can't blame labor or government for this one.

Some months ago, GM announced that they weren't going to sell discounted cars to rental companies any more.  Not long afterward, Ford and Chrysler followed suit.

The reason they gave is that rental companies get stripped-down models and dump them on the used car market after a year or two.  The theory is that having so many used cars available makes it hard for the former Big Three to sell new cars at full price.  One might think they'd make their new cars more attractive, but they didn't do that, they decided to give away market share by ignoring the rental market instead.

This echoes a blunder made by Henry Ford II back before he fired Lee Iacocca, who later saved Chrysler from bankruptcy and put the minivan on the market, taking much profit that could have been Ford's.  Mr. Iacocca wanted to make a small car for kids buying their first autos.  "Small cars mean small profits" huffed Mr. Ford, and insisted on making big cars.

We all know what happened.  VW and the Japanese companies made smaller, cheaper cars.  Customers who bought their first car from someone else hardly ever went back to the Big Three.

Mr Ford forgot that it's essential to defend the low end of your market.  If someone comes in at the low end and gets any market share at all, they can move upmarket easier than you can move downmarket, and they'll eat your lunch.  VW did that until their costs got too high, then the Japanese did it, then the Koreans, and here come the Chinese!

Losing the low end of your market is death; IBM nearly died when people started buying lower-cost PCs, Xerox nearly died when the Japanese made low-cost copiers.  RCA lost the radio market to cheap Japanese transistor radios, Detroit is dying from losing the low end of their market. Losing the low end of your market is death!

Detroit is doing it again!  They're giving away another market!

Think about it.  What's the goal of all automobile advertising?  To get people to buy cars?  Nobody buys cars just from advertising; the best that auto advertising can do is get you into the showroom to look at the car and maybe take a test drive.

Test drives are a pain for sellers.  The dealer pays for the car and the gasoline, and all this takes the salesman's time.  If you start with advertising and add in all the costs of getting one person to take one test drive, you'd find it's a lot of money.

Rentals are a lot better way to sell cars.  People pay to take a ride in a rental car.  The rental company explains the controls if the customer doesn't know where the knobs are.  Even if the Big Three only break even selling to rental companies, they get a lot of potential customers into their cars for free.

I have personal experience with this.  I probably wouldn't have considered a Kia.  I don't care about car advertising, I consider the various claims and happy music to be lies until proven otherwise.  When there are so many car manufacturers in the world, I'm hardly going to waste my time test-driving each one, particularly some obscure name I'm not familiar with.  So a Kia would never even be a consideration.

But I travel frequently on business and I have to rent cars.  Sometimes the car is pretty decent; other times the car's lousy.  I note which cars I like and don't like, and why; and obviously, that's going to have an effect when the time comes to buy one.  I've driven rented Detroit iron hundreds of times; but lately, I'm getting cars I've hardly heard of, some of which are better than decent - including Kia.

As they gave away the "starter car" market years ago, Detroit has given away a great many test drives which they could have had for free. The rental companies aren't going to go without cars; they'll buy from Kia and the Chinese.

Yet another bone-headed business blunder, and this time, management did it all by itself.

Will Offensicht is a staff writer for Scragged.com and an internationally published author by a different name.  Read other Scragged.com articles by Will Offensicht or other articles on Economics.
Reader Comments
A friend of mine pointed out that Detroit may not WANT people to drive their cars without the salesman present to overcome any difficulties. Their cars change enough from year to year that long-term brand loyalty is dead - any sensible customer coming back has to test-drive the car all over again to see if he or she still likes it. Thus, very little business is repeat business in any sense.

Given that they have to win over every customer from scratch every time, it may be that they do not want people to drive their cars and get irritated at some detail or other without the salesman there to talk them over it.

Wouldn't it be better for them to design cars that aren't so confounded irritating? Or to keep them similar enough that repeat customers could buy with confidence?
December 30, 2007 3:03 PM
Add Your Comment...
4000 characters remaining
Loading question...