5/27/07

It's not exactly breaking news that the once-vaunted and venerable US auto industry is now a bit rusty, to say the least. Earlier this month, private equity hellhound Cerberus bought a majority stake in the crumbling Chrysler jalopy for $7.4 billion (http://www.reuters.com/article/tnBasicIndustries-SP/idUSL1455392120070514),
with newly liberated Daimler division happily motoring off into a strong Euro-tinged sunset
(http://www.reuters.com/article/tnBasicIndustries-SP/idUSL1537748220070516).

(The strong Euro may prove a mixed blessing. Legendary automotive gran sasso Ferrari is having trouble keeping up with demand for its fabulously cool, extraordinarily expensive products in nations with currencies trouncing our own [see "How to Slow Down a Ferrari: Buy It" by Gabriel Kahn, Wall Street Journal p.B1, 5/8/07], while the Bavarian bouncer ramps up its US-made production lines to keep Das Overhead down [http://www.reuters.com/article/tnBasicIndustries-SP/idUSL1540108020070515]).

Even the once Jolly Green GM isn't feeling the flush flow, having reported a $1.1 billion Q1 loss this year. In the general motoring scheme of things, said Washington Post scribe Greg Schneider on 4/20, "A generation ago, half of all the vehicles Americans bought each year were made by GM; today it's just over a quarter." (You can get the opening salvo at http://pqasb.pqarchiver.com/washingtonpost/access/824304831.html?dids=824304831:824304831&FMT=ABS&FMTS=ABS:FT&date=Apr+20%2C+2005&author=Greg+Schneider&pub=The+Washington+Post&edition=&startpage=A.01&desc=Industry+Giant+Falling+Behind%3A+GM+Reports+%241.1+Billion+Loss
but you'll have to pay the ferryman at the WP archives to read the whole thing.)

Where did the wheels come off?

Once again, the bunny tries to see the big picture.

In the post-bellum US, trade unionism became a social and economic necessity, to correct managerial abuses. Up to and during WWI, unions (more than government) played a leading role in this struggle.

Following WWII, unions (which by this point represented the majority of big industry labor) deviated from the path taken by European unions (which were more willing to accept lower wages in exchange for a greater spectrum of benefits, such as guaranteed employment, longer vacations, maternity leaves etc.). Stateside, unions pressed industry leaders and politicians into a "get more, give less" position. Given their position of power in US industry, management (along with government) caved in.

The business model created from this dynamic can no longer support the modern automotive industry. To begin with, modern US auto manufacturers are no longer manufacturers in the sense that they build cars from blueprint to turnkey all by themselves. Rather, they function as large-scale assemblers of components made by other companies. These others (Delphi? Navistar? American Racing--what's more quintessentially American than a set of Torq-Thrust Ds on granny's Maverick?), having built plants around the Big Three auto makers, face the same labor problems as they do, and consequently must pass on the related costs.

Another problem was the Big Three's egocentric thinking. They didn't go overseas looking for new markets (like,say, those in the oil industry). Foreign plants making American cars (to exploit lower local labor costs) were built primarily to export back to the US. It was an "all about us" mentality, a corporate hubris that considered itself above the pit of collapse lurking beneath all companies that don't make the cut.

For GM, the latest body blow came from within. Its financing arm GMAC (of which it owned 49%, the other 51% held by mortgage company Ditech, a large supplier of ARMs and annoying television commercials) was yet another casualty in the subprime lending fiasco.

American car makers have become bloated bearers of ballooning insurance costs, pension liabilities, and IOUs that will never be collected (and incidentally also make cars). How will the automotive industry, once a pillar of the US economy, survive the 21st century?

Enter Rick Conte and Jim Kaplan, a couple of engineering grads from Clemson University. They are the president and CEO (respectively), of a bold start-up called the Southern Motor Company, based in Liberty, SC (http://www.southernmotorcompany.com/).

Kaplan (who is president of electronics manufacturer Cornell Dubilier [http://www.cde.com], a maker of capacitors nearly a century old), saw the trend in retro car design of recent years as falling short of the mark, and so decided to make his own clean machine, one which would be fully compliant with all Federal safety standards as well as those for emissions (with both California and Canada providing the benchmarks--nothing on the EU as yet).

To do this, Kaplan devised a plan whereby a small facility seeded by his capacitor company would design and build the tools necessary to produce a custom superstructure (cab, panels, bed, and exterior parts), to be grafted onto aftermarket running gear. The entire production procedure would be supervised by another American startup, Panoz Auto Development (http://www.panozauto.com), a maker of high-performance sports cars, to insure a vehicle that's fully compliant for US roads.

Just like that? The bunny was dubious. So he called the good Mr. Conte, who was gracious enough to school him on Southern's genesis and its pilot product, the 358 truck (pictured at top).

"The real strength in this whole company is its business plan," he said in a telephone interview. "Jim Kaplan came up with the concept. We’ve been working on this for over two years now, so he’s put a lot of thought and energy into the program. We’ve identified not only a product that has a huge demand, but taken it through the whole development phase, doing the marketing research, building the prototype, and designing the facility."

Kaplan and Conte's vision of the 358 derives from an existing 1954 Chevy 5-window pickup, tweaked by computer for the 21st century. "We stretched the cab to give more legroom, we tapered the hood to give it a sleeker look, we redesigned the grille, we raised the bed, other subtle changes here and there," he explained. "The exterior will be custom designed and tooled. We’re going to the expense for the body panels, the cab, all the exterior body parts, the bed—all of that will be tooled from the ground up custom for this program." The equipment or "tools" used at this stage will serve throughout the 358's low-volume production, which Conte reckons will be a large savings over the life of the program. The truck's running gear will be based on Ford's aftermarket S-197 platform and 330-horsepower small-block V8 (the heart of the current Mustang GT).

Since Southern Motor has only four employees including Conte, the 358's production will be entirely outsourced to Panoz, which will put the pre-production prototypes of the 358 through their paces. "We contracted with them to design and certify our vehicle," Conte said. "They’ll help us build the pre-production vehicles, and take us through the full safety and emissions certification program. There’s a lot of give and take with them on the design, but they have total responsibility to take this vehicle to full compliance. There are literally hundreds of Federal regulations that have to be satisfied. So we’ll take our prototype and build about six pre-production vehicles, and they’ll take them through all the tests, from EPA to front, rear and side impact, rollover, fuel leakage, visibility, lighting, they’ll take those pre-production vehicles and use those to get us through the certification process."

That satisfied the bunny's perennial paranoia for safety, but why build a new vehicle now, in this climate?

"Because the timing is right," Conte said without hesitation (really, check the tape!). "One, the technology is there, you can design efficiently both the vehicle and the tooling. There’s simulation programs that let you do a lot of the work up front without actually having to build and test. Secondly, there’s the aftermarket. Ten years ago, you didn’t have the aftermarket you have today. You can purchase components, you don’t have to design and build them yourself. You can piggyback on existing technologies."

Kaplan and Conte looked before leaping, a most rabbit-like reflex. They commissioned market research from Automotive Insight, Inc. (http://www.automotiveinsightinc.com) to test consumer response to the 358. "At first we thought it would be mostly male baby boomers with excessive income," Conte said (Arlene Brunner, president of Automotive Insight, specified heads of 3-car households with six-figure incomes). "We're learning though the segment is much wider. 10% of our pre-sold vehicles are from women, 10% from retirees, and another 10% from under the age of 40. We're also finding at that we are seeing a large segment from individuals who aren't necessarily into classic vehicles, they simply love the look of our truck."

The Liberty, SC facility was designed to keep two vehicles in production over their respective sales cycles, which will pay off the cost of tooling and design. "That’s what makes the program feasible. We’re going to produce the same truck over and over, we’re not going to have an extended-cab version, four-door version, or multiple engine choices. Every vehicle gets the same options." Said options are primarily color (which spans a glorious PPG spectrum, viewable on the SMC website). Most of the "options" will actually be standard--no plastic on the interior, unlike the Big Three's heaps, just leather and sheet metal, the way the hot rod god intended. Automatic or manual (6-speed stick) about covers it.

According to Conte, the company has pre-sold 58 vehicles at a cost of $55K apiece. A truck purchased today would be delivered in 2009. "We’re going to start off real slow," he continued. "We’re only going to produce about 40 vehicles in the first six months, to make sure we get it right, make sure we can track new vehicles in the field, evaluate their performance, resolve any issues we may have, feed that back into the process. In ’09 we’ll start focusing on increasing our capacities." Conte said the company aims for a target of 1500 vehicles over a 5-7 year sales cycle, during which another vehicle prototype, possible a sedan, will be explored as Southern's next possible product line.

All this does not exactly make Southern Motor a threat to the Big Three, although the bunny considers it an intriguing alternative. "We consider ourselves a niche, low-volume producer," Conte said. "We’re targeting about 1500 vehicles per year, which is a very small number, when compared with the larger-volume programs that have to sell hundreds of thousands of vehicles per year to make a profit. We’re going after a small niche of semi-luxury vehicles (it’s not too high priced), there’s a demand for the product, we did our marketing analysis, and the results proved that even if this were a full-volume project, the demand would be there. American auto manufacturers may be struggling, but they’re still selling millions of vehicles. We’re just a blip on their screen."

(For readers interested in more on the Southern Motor Company and the 358 truck, the bunny recommends reading Dan Carney's fine feature "Retro Miracle in the Making: Southern Motor 358 Pickup" on Edmunds.com Inside Line (http://www.edmunds.com/insideline/do/Features/articleId=116863), as well as Mark Krzos' News-Press.com business article "New High-End Automaker Seeks Investors in Bonita Springs" (http://www.news-press.com/apps/pbcs.dll/article?AID=/20070328/BUSINESS/70327077/0/SS08)