What America Needs

I recently read a truly novel idea on a truly novel website, one of my favorite sources for unbiased opinions on all things cars -- thetruthaboutcars.com.

The site's raison d'etre is to present the car-buying public with alternative reviews to those found in major newspapers. But every once in a while, the site's editors also branch out into punditry. Case in point -- writer Robert Farago's epic tale of the rise and fall (and fall and fall) of General Motors (NYSE: GM  ) , provocatively titled "GM Death Watch," and now in its 31st installment. That one's well worth a read, but it's not what I want to discuss today.

Last Tuesday, columnist and automotive engineer Bob Elton penned a column suggesting that the demise of the U.S. auto industry is not yet written in stone. He argues that although GM, Ford (NYSE: F  ) , and, to a lesser extent, DaimlerChrysler all seem intent on ceding their respective market shares to Japanese rivals, America still has the wherewithal to remain an automaking superpower. It's just that the headquarters of that superpower may not continue to be in Detroit.

A novel suggestion
Elton's argument goes like this. Right now, GM, Ford, and DaimlerChrysler are all earning slim or no profit margins. Not one of the Big Three U.S. automakers nets more than 2% in profit margins, whereas their Japanese competitors routinely earn net margins two and three times as large. To keep themselves alive, the Big Three squeeze their parts suppliers (known in the industry as original equipment manufacturers, or OEMs) for price concessions. As a result, such big-league OEMs as Visteon (NYSE: VC  ) , Dana, and Delphi (NYSE: DPH  ) are currently doing business at a loss. (Canada's Magna is one of the few big OEMs still making a profit.)

At the other end of the supply chain, the Big Three aren't doing car dealers like AutoNation or CarMax any favors, either. The past several years of overproduction and over-discounting of new cars have flooded the market with new and used cars alike, hurting margins for the dealers.

Looking at these trends, Elton experienced a "Eureka! moment," noticing that the above companies essentially cover the entire supply chain, from parts production to assembly (see this little buggy, assembled by Magna subsidiary Magna Steyr) to retail.

The truth about cars today, you see, is that no one really "owns" them anymore. None of the Big Three companies keeps its whole operation in-house -- to some extent, they all outsource various manufacturing, financing, assembly, and retail functions to other companies. And if Ford or GM can do this, perhaps anyone can.

Elton's triumvirate
Elton posits the following scenario: Three or more existing outsourcees could team up to design, produce, and sell a completely new car. For example, Magna could build the chassis and drivetrain; Delphi could add the brakes and outfit the interior; AutoNation could sell the buggies.

We would still need someone to make the engine and a company to design and market the new vehicle. Elton notes that Honda (NYSE: HMC  ) already supplies engines to GM. And Toyota has on several occasions licensed hybrid-engine technology to its competitors. So the real key, it seems, is design and marketing.

At this point, I want to go one step further and posit the emergence of a brand-new company to carry the torch of American auto-building. For there's one major flaw in Elton's reasoning: The parts suppliers are nearly as bad off as the automakers, with Delphi and Visteon, for example, both making a recent list of the top 10 underfunded pensions in America. So to make a fresh go of earning profits in this industry, what we truly need is a start-up car manufacturer.

Cowboys wanted
One company that could serve as a model for such a start-up is Motley Fool Stock Advisor pick JetBlue (Nasdaq: JBLU  ) . Founded by an entrepreneur and Southwest Airlines alumnus, JetBlue learned from the examples of steelmaker Nucor (NYSE: NUE  ) , which reinvented itself and broke the rules of inefficient steel production with its use of electric arc minimills in the 1980s, and Southwest, which proved that small fares could yield big profits.

As with JetBlue, the catalyst for a carmaking start-up would likely be a maverick executive at GM or Ford, someone frustrated at his company's inability to turn a profit, who sets out on his own to do things differently and to do things better. Backed by venture capital, this ex-auto major executive sets up his own shop, establishes contracts with suppliers like Delphi and Magna and dealers like CarMax and AutoNation, and resolves to create and market an entirely new product.

The new company would have all the advantages currently benefiting JetBlue. For example, it wouldn't carry legacy costs such as pensions and overgenerous union contracts. It would have a ready supply of experienced workers, already laid off by the money-losing auto majors. And it would be free to build cars that consumers want to buy, with no pressure to market interchangeable Chevys and GMCs, or Fords and Mercurys, just because "that's how it's always been done."

On the other hand, it could steal Detroit's best ideas for its own. Like GM's Saturn subsidiary, it might endear itself to car buyers by setting "no haggle" sales prices. Like GM itself, it could promise that one price will apply to employees and consumers alike.

Bottled lightning
Likewise, such a start-up could steal a page from Toyota's playbook and build nothing but hybrid gas-electric cars. Think Prius and its wildfire popularity among consumers. Combine that electric popularity and pricing power within a small company, undiluted by less popular distractions like Toyota's Echo or T-100 pickup, and you'd have powerful growth potential.

Visionary leadership, freedom from profit-draining legacy costs, and a real focus on satisfying the needs of consumers ... could a new American car company really earn a decent profit in this business? I think it could.

The car company of the future doesn't exist yet, but JetBlue does. If you'd like to learn why we picked it as aMotley Fool Stock Advisorrecommendation, clickhereto try the service free for 30 days. Along with JetBlue, you'll have full access to all of our picks, and the reasons we made them -- 86 recommendations in all -- just for trying the service.

Fool contributorRich Smithdoes not own shares of any company mentioned in this article. The Fool has a disclosure policy.


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