Monday, March 30, 2009

Millinnials Hold the Key to the Auto Industry's Future

As the announcement of Rick Wagoner’s resignation as CEO of General Motors makes clear, the enormous investments the federal government has been making in private enterprises, including the auto industry, will severely test the ability of private sector executives to meet the expectations of their new government bosses. The long-term credibility of Detroit now rests on their ability to win over the rising generation of Millennials, born between 1982 and 2003, who are the future consumers for the auto industry—and the core of President Obama’s political support. Their environmental focus and civic minded attitudes will challenge executives to align their private sector goals with public policy in ways the country has not witnessed since the New Deal. Sadly, so far, it’s a test many business leaders seem likely to fail.
In the case of the American auto industry this failure has deep roots. Attempts to nudge Detroit into producing more fuel-efficient vehicles have been going on since the 1973-4 Arab Oil embargo, which led Congress to establish Corporate Average Fuel Efficiency (CAFÉ) standards for cars and light trucks. When Bill Clinton became President he agreed to delay the adoption of higher CAFÉ standards until it could be proven that such goals were attainable.
This formulation opened the door for what came to be known as the Partnership for a New Generation of Vehicles or PNGV. Reluctantly supported by the Big Three, PNGV provided approximately a quarter of a billion dollars in government research funds to demonstrate the feasibility of producing a midsize sedan that could get 80 mpg. Often called “the moon shot of the 90s,” each car company was to make a prototype of such a vehicle by the politically convenient year of 2000 and begin mass production by 2004, another presidential election year.
Vice President Gore, who had been in charge of the PNGV program since its inception, met personally with the Big Three CEOs from 1998-2000 to make sure they did not forget their past commitments to build an environmentally friendly family sedan. But the answer from many in Detroit was emphatic: profits were coming from SUVs and heavy-duty trucks, not cars. When Gore suggested they deploy a 60 mpg hybrid passenger sedan in 2002 rather than waiting for an 80 mpg version in 2004. Ford’s Peter Pestillo and his UAW ally, Steve Yokich, quickly replied, “no way.” Pestillo maintained, “We need much more time than that to make them cost competitive.
Not all executives were blind to the challenge. General Motors’ Vice-Chairman, Harry Pearce had been the driving force behind GM’s ill-fated EV1 electric car experiment. Despite a bout with leukemia that took him out of consideration for CEO of the company, he and his allies within GM had a powerful influence on the company's CEO, Jack Smith, and a powerful ally at Ford in the Chairman of its Board of Directors, William Clay “Bill” Ford, Jr., great grandson of the company’s founder.
Unfortunately for America, General Motors decided to go in the opposite direction. Rich Wagoner, who became the company’s ' CEO in June 2000, embarked upon an SUV-centered strategy that won GM big profits for a brief period. Since then, however, GM’s stock has plunged 95%, from more than $60 per share to less than $4 in 2009. General Motors, which lost $70 billion since 2005, has seen its market share cut in half. Seven years after the Bush administration basically abandoned the PNGV program, when asked what decision he most regretted, Wagoner told Motor Trend magazine, “ending the EV1 electric car program and not putting the right resources into PNGV. It didn’t affect profitability but it did affect image.” [emphasis added]
Having failed to embrace a public partnership with a sympathetic government, Wagoner was forced to beg for a federal bailout with onerous conditions to avoid bankruptcy. Ironically, he learned this past weekend that the price for such government support would be his resignation as CEO.
Had the auto industry taken Gore’s lead a decade ago and built a positive image among the very environmentally conscious Millennial Generation, it might have built a constituency to support the government’s assistance. Instead, the companies’ brands, particularly GM’s, have taken such a beating that the President-elect recently reminded the car companies that “the American people’s patience is wearing thin.” In contrast to young Baby Boomers buying songs by the Beach Boys celebrating the Motor City’s products, the country seems ready to drive their “Chevy to the levee” and tell the company “the levee is dry.”
But that is not the right answer. Millennials bring not only an acute environmental consciousness to the country’s political debate, but a desire for pragmatic solutions to the nation’s problems that promote economic equality and opportunity. To secure their support, however, the domestic automobile industry has to be seen as a contributor in ending America’s dependence on foreign oil and improving our environment. Not only would such an approach assure the industry’s future profitability, it would also remake its image in a way that will appeal to the next generation of customers, Millennials, and the politicians they support.