Once again, I take no pleasure in watching another of my predictions come true: The collapse of the American automobile industry.
Word of mouth built the foreign auto makers, and now WOM has finally destroyed the American car companies. It's very instructive to see how.
What reversed the WOM for the foreign auto makers?
Imagine a situation where almost everyone believes that the products made by a particular country are vastly inferior. Obviously, people wouldn’t buy those products from that country if they had an alternative source of supply, unless the price was significantly lower, or unless the lower quality products had something more valuable than quality.
Prior to the early 1970s, German and Japanese cars were of poor quality. Their sales were low and remained so despite increases in quality that eventually surpassed American cars. The word of mouth went solidly against them. What turned it around? The 1973 Arab Oil Embargo.
The Arabs stopped selling us oil because we supported the Israelis in the 6 Day War. Prices soared. The government imposed price controls, causing scarcity and rationing, as price controls always do. There were long — sometimes miles-long — lines at gas stations. People suddenly needed fuel-efficient cars.
Detroit failed to respond adequately. The Japanese and German cars didn’t need to respond, because their cars were much smaller and, therefore, more fuel-efficient. Many people, particularly students, switched out of necessity and were pleasantly surprised. “Made in Japan” ceased to be a derisive phrase and came to mean “quality." The WOM changed, almost overnight.
The American manufacturers were saved eventually by the 1980s oil glut, economic prosperity and the resulting growth of larger cars and SUVs. But the WOM remained solidly against them on quality.
Show me a WOM Gap and I'll show you a big change that's about to happen
When you see a large Word-of-Mouth Gap, you have an unstable situation and you can usually bet on word-of-mouth winning, except when the WOM is flat-out wrong, in which case it can change quickly.
By Word-of-Mouth Gap, I mean a situation where people’s actions are currently running counter to a prevailing word-of-mouth trend. For instance, the overwhelming majority of Windows users wish they were on a Mac. Spot a company that people hate and make a lot on short-selling. Spot a company that people love but has low sales and you've spotted a potential winner (if they can manage their growth).
The US car industry has similar gap between action and WOM. In recent years, the American manufacturers accounted for about half the car sales in the United States. However, despite recent quality improvements, at this point almost everyone believes that American cars are of lower quality than foreign cars. The "Top Ten Quality" lists (a form of WOM) have only one or two American cars. Despite this, there are various reasons for buying American, including patriotism, perceived availability of parts, social pressures, familiarity, dealer loyalty, resistance to change, etc. These reasons tend to apply more to older people. As younger people who have never owned an American car displace them, foreign car sales will rise.
It’s hard to remember that most people used to trade their cars in every two years. "Planned Obsolescence" was Detroit's primary marketing strategy. As people started keeping their cars longer, frequency of repair, the prime measure of quality, became more important to many than loyalty to American cars. So did comfort, innovation, luxury and technological advances.
This word-of-mouth gap is an unstable situation. The perception of quality is intangible and highly subjective. In the automobile industry, it takes years, usually a generation or two, to turn around quality perceptions.
That's why I've been predicting (Since 1973. See my more recent August 2005 and April 2006 posts) the decline and eventual demise of the American Automobile Industry as we know it. It took longer than I thought, and I was wrong about what would displace them. I thought it would be Caterpillar Tractor and John Deere, not the Japanese. Imagine a Caterpillar or Deere car!
Can the US Car Industry be saved?
It is painful to watch the current attempts to save the American automobile industry through bridge loans, restructuring, lower wages and an auto Czar. (I thought the Czars were ruthless dictators who routinely disregarded what was best for the people—who made the Communists look good by comparison.)
To change things, people need to look at root causes, rather than symptoms: decades of failure to be responsive to the needs of customers, particularly the failure to address quality problems adequately has resulted in horrible WOM. It would take decades to fix it, far beyond bridge loans.