Struggling car companies will have to take the axe to their businesses in order to ride the recession. Mark Bursa takes a sideways look at how one iconic company used a radical approach to keep its ‘axes’ intact!
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What happens when an icon falls? It’s a scenario that’s being played out around the world as the recession takes its toll. Here in the UK we’ve lost century-old retailer Woolworths. Its 800 stores closed for good after Christmas, as administrators have failed to find a buyer.
Woolworths, a descendant of the ‘penny bazaars’ of the 19th century, was undoubtedly an iconic brand. But its business model has been rendered unworkable, undermined by out-of-town retailers such as the distinctly un-iconic Tesco and Asda.
The collapse of Woolies proves that strong brand recognition is not enough to guarantee survival. Brands do fail – and not just small, insular ones such as Oldsmobile, Plymouth or Rover. Poignant news reports late last year highlighted the 20th anniversary of the Lockerbie disaster – which effectively did for one of aviation’s most iconic brands, Pan Am. Big, globally recognised brands fail too.
Pan Am couldn’t have anticipated Lockerbie, which in truth really only hastened the end for a business that had been on the slide for some time. The auto industry argues it couldn’t have foreseen the credit crunch, or the effective collapse of the banking system.
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By GlobalDataSo now the automakers are begging for bailouts. GM, Chrysler, Jaguar Land-Rover and co may be financially weak, but they’re certainly brand-rich. If we’re talking icons, surely Chevrolet, Cadillac, Jeep, Jaguar and Land-Rover must qualify, even if their iconic sheen has become a little tarnished of late.
The reasons for GM, Chrysler and Tata’s woes are well documented. And it looks likely that they’ll all get some form of bailout, dressed up as loans. Ratan Tata has shown goodwill by dipping into his pocket to fund JLR’s short-term cash-flow – this at least atones for his poor timing in demanding UK government money the same week as Tata was announced as a sponsor of the Ferrari Formula 1 team.
Now UK business secretary Lord Mandelson is likely to help out – possibly through some form of government-backed loan guarantee scheme that will allow car companies to borrow from banks at no risk to the lender, rather that than pump in taxpayers’ money.
This will steady the ship – and buy JLR some time. The same applies to Chrysler and GM, which can use Dubya’s US$17bn breathing space to come up with some form of restructuring plan. But how? Surely there’s a way to leverage those iconic brands, and to employ a clever business model to ensure that the company that is built around those brand values succeeds?
Well, actually, there is. There’s a great example of an American company, whose brand and high-ticket products are as iconic as you’ll see, that recovered from near-collapse in a recession, but has since been rebuilt to become a market dominator, with a global brand and a range of products ranging from affordable entry-level models to bespoke, premium-priced alternatives.
Fender more or less invented the electric guitar. It certainly defined the instrument, with iconic designs such as the Stratocaster and the Telecaster – both launched in the 1950s, and still being made in more or less their original form today. As the 1960s beat boom gathered pace, the company grew – and in 1965 it was bought, at a premium price, by entertainment giant CBS.
But things didn’t go so well. CBS had its own problems, and the Fender company suffered from underinvestment. As a high-ticket niche producer in a mass-market corporation, Fender was deemed non-core. Sounds familiar? It’s not far off where Jaguar was toward the end of its time with Ford – though at least Ford had spent some money of product development and manufacturing facilities.
Under CBS, poor old Fender’s guitars were built on worn-out equipment, so quality dropped. The customers knew this – and what’s more, by the mid-‘70s, they had an alternative. Just like the car industry, the Japanese had learned how to reverse-engineer Fender’s products. Extremely well – in fact, rather like certain Chinese car makers today, they were making blatant copies, identical in all but name, cheaper to buy and much better built.
Of course, what was lacking was the brand – a Tokai Breezysound just doesn’t have the cachet of a Fender Strat – but the damage was done. In the early 1980s, CBS sold Fender to its management at a knock-down price. The end seemed inevitable.
What happened next is truly remarkable, and is worth noting. The US operations were run down to little more than a ‘custom shop’. But rather than battling the Japanese copyists through the courts, Fender’s managers went to Japan – and hired the company that was making the copies to build real Fender guitars. It’s the equivalent of Ford outsourcing all Ford-brand manufacturing to Toyota – a bold move indeed.
This fixed the quality issue at a stroke, and allowed Fender to price its instruments more competitively. Customers were delighted – it meant better-quality guitars at affordable prices. And what’s more, it meant the US ‘custom shop’ guitars could be premium-priced. Define “win-win”.
Since then Fender has refined this model, using various emerging markets as a source point for even cheaper models; creating a budget brand called Squier, and shifting output around the globe to find the best low-cost locations – Korea and India were tried, before the company settled on Mexico as its low-cost volume base.
So now you have three operations – affordable instruments from Mexico; mid-range models from Japan and premium products, including models endorsed by famous musicians and facsimiles of their actual guitars, made in America. You can buy a Mexican-made Squier Strat for 99 bucks. Or alternatively, you can have a Fender Strat that looks exactly like the one played by Dave Gilmour out of Pink Floyd – for US$4,799. And guess what – Fender makes a profit on both.
How does this apply to the car industry? Well, in some cases, this already goes on. Honda sources some European cars from low-cost China. Within GM, Daewoo performs a similar function to Fender’s Japanese factory, building volume models for global markets, where they can be sold at profitable margins. Other emerging markets plants could do the same job. GM is not short of these – it has state-of-the-art plants in Poland, Brazil, Thailand and China.
The problem for GM, like Fender in 1980, is its US operations. Older plants with quality issues, making products people don’t want to buy any more. Fender bit the bullet and wound down its US volumes – focusing instead on low-volume premium products in its home market. For GM, such a scenario would see more and more output shifted out of America – and that wouldn’t satisfy the US Government demands for the safeguarding of US jobs.
Something has to give, though. The Fender model might not be 100% repeatable in the car sector, but the principle of offshoring volume and concentrating on domestic quality should be part of any plan.
To some extent, this has already happened in the UK, where a premium-brand auto sector survives, albeit not in British ownership, via JLR, Bentley, Rolls-Royce and Aston-Martin. Offshoring production of luxury brands to emerging markets is not so easy – though Mercedes and BMW both do it. BMW uses South Africa as a source point for right-hand drive models, and both employ CKD in markets such as India, China and Russia.
Tata could – perhaps should – shift Land-Rover Defender output to India. There’s an argument that JLR has one too many plants, and a bit of production shuffling could see Land-Rover’s more up-market models, such as Range Rovers, moved out of Solihull and in with Jag at Castle Bromwich. Solihull could then close, leaving Castle Bromwich and Halewood to handle all JLR products. Volume would be constrained, but chasing volume has been one of the roots of Jaguar’s problems. Future Jaguar growth is likely to come from emerging markets, so perhaps CKD is the way forward there too – providing the company survives.
These are difficult times, and this article is not meant to be a recipe for turning round a stricken automaker. It’s just a little bit of out-of-the-box thinking, on a subject close to my heart. And for the record, I own one or two of Fender’s products – including US models from the ‘60s and more recent Japanese-made models. I love ‘em all – and they’re all icons.
Mark Bursa
