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R. J. Eaton, Keynote Speech, National Automobile Dealers
Association
31 January 1998
Good afternoon.
It's a pleasure and an honor to keynote
this meeting.
It's the job of the keynoter to set the tone
and acknowledge the environment. If I tried to
acknowledge all that's going on in the world
around us today, I'd be here for hours and we'd
probably never get around to cars and trucks.
No question about it, it's been an
interesting and unusual couple of weeks!
So let me stick to the auto industry,
and I intend to be blessedly brief.
#
One of the hot books last summer was
"The Perfect Storm." It's been on the New
York Times Best Seller list for 33 weeks.
I'm sure some of you have read it.
For those who haven't, it's a true story
about some fishermen who set out from
Gloucester, Massachusetts on a pleasant
October afternoon six years ago for the
Grand Banks off Newfoundland.
But heading for the same area from the
south was Hurricane Grace . . . and from the
west, a cold front that had formed over the
Great Lakes . . . and from the Arctic,
a nor'easter. All three came together in the
same spot in the ocean and formed the kind of
perfect storm that might happen every hundred
years or so.
Read that book and you learn that when a
72-foot boat tries to climb a 100-foot wave and
doesn't make it, it slides back down the face of
the wave, out of control . . . plunges into the
trough, stern-first . . . and then the wave breaks
over it and buries it under tons of water.
Sometimes the boat bobs back up.
Sometimes it doesn't.
I think there may be a "perfect storm"
brewing around this industry today. I see a
cold front, a nor'easter and a hurricane
all converging on us at once.
One is the overcapacity blowing across the
global auto industry. Another is the tempest
going on in the retail sector of the industry --
your sector. And the third is the wave of new
technology that will profoundly change cars and
trucks in the future.
Let me start with overcapacity, because
that's where the heavy weather always seems
to start in our industry.
Worldwide automotive capacity today
stands at 66 million units. Demand, on the
other hand, is only 51 million units.
In North America, capacity is 18.5 million,
with demand at 16.7 million.
That's today. And we all understand what
pressure that brings.
But in the year 2002, just four years from
now, worldwide capacity is expected to be
79 million units chasing demand of only
61 million.
And in this market four years from now,
we expect 19.5 million units of capacity with
demand for only 16.8.
We have 15 million units of excess capacity
in the world right now, going to 18 million in
four years.
It's a buyers' market today. Think what it
will be like in four years with demand lagging
production by the equivalent of 80 assembly
plants worldwide, or six Chrysler Corporations!
Everybody, of course, is betting that their
product line is going to be strong enough to
justify their new plants. Some of us are going
to be right. Some are going to be wrong --
very wrong!
Now add the impact of the bird flu that's
hit all the Asian economies, and you have
an even more serious problem because it makes
their extra capacity easy to export to the U.S.
It's not their inability to buy from us that
can make their troubles ours; it's their ability to
sell to us.
American companies actually sell more each
year in Italy than they do in China, Indonesia,
Thailand, Malaysia and the Philippines
combined! So it's not the loss of Asian markets
that is a problem; it's how easily they can sell
into our wide open market. We're their safety
net, and that factor, not the funds we furnish
them through the International Monetary Fund,
is likely to be the real "Asian bailout."
Alex Taylor made a good point in
December's Fortune Magazine, however.
He said:
"All manufacturing capacity isn't equal,
and it certainly isn't interchangeable. Cars
aren't pork bellies or barrels of oil."
He's right. Not all of the Asian
overcapacity, for example, is a threat to our
market.
And much of the U.S. overcapacity is
in passenger cars when the hot market now
is in light trucks where there isn't much
extra capacity.
Overcapacity isn't going to bury us under
a pile of vehicles with no margins left to them.
But it is making our market a lot more
competitive -- for us who build the vehicles and
for you who sell them.
That's one storm front.
Another is the revolution going on at retail.
I think it's the biggest thing happening in the
industry today, and to some people the most
frightening.
For the first time in the hundred years of
this industry, there are some fundamental
changes taking place in the way a car or truck
goes from the factory to the customer.
Let's face it, the factory and the dealer
have controlled that process for a century.
We've prospered with it. It's been good for the
customer as well.
But now along comes the Internet . . .
buy-by-phone organizations . . . superstore auto
retailing . . . public companies buying up the old
mom and pop stores . . . and who knows
what's next?
I can understand the confusion and the
fear, but I think too many people may be
overreacting.
One thing to keep in mind is that nobody
is likely to come along and displace a dealer
who's been keeping his customers happy for
years. At least if that dealer is smart enough to
adapt to all the new technology and the new
ways of retailing.
A vehicle is a major purchasing decision,
and the customer will always want to close
that deal, face to face, with somebody he or
she trusts.
Customers need the infrastructure. You
can't stuff a new car (or a trade, for that
matter) through a fiber-optics cable.
At Chrysler alone, it takes 4,600 dealers
directly employing almost 200,000 Americans
to sell, service, finance and trade just
15 percent of the car and truck business in
this country.
You are a huge part of the nation's
economy, and the public needs you!
That's not to say, however, that all the
developments we've been seeing in the past
few years won't drastically change the way the
customers buy cars and trucks. They will.
Ignore them at your peril. But remember what's
made you successful in the first place, and
you'll adapt to these developments and be
successful in the future.
In a nutshell, what's happening is that for
the first time the customer is going to control
the retail system. Not the dealers. Not the
factory. The customer.
Everything will be out in the open.
The customer will have all the information about
the vehicle and its price before she walks into
your dealership. She's not going to be
intimidated anymore because of what she
doesn't know. With a few strokes of a
computer keyboard, she'll know everything that
your salesman knows.
And she'll have more and more options
when it comes to actually making the purchase.
She'll have the traditional neighborhood
dealer . . . the superstore . . . the dealer
three states away selling on the Internet . . .
and probably a half dozen more options that
we haven't seen yet.
She's now in charge. We'd better all get
used to that.
I don't believe this marks the end --
or even the beginning of the end --
for the traditional franchise system, though.
That system has worked too well for too long.
We want it to remain the foundation of our
connection to the customer. So do you.
And I'm confident that it will.
But it will require some changes.
The whole retail process, which has always
had lots of murky, hidden areas, is going to
become totally transparent. The customer is
going to grab control of the process, and we're
all going to salute smartly and do exactly what
the customer tells us, if we want to stay
in business.
And I think this is not only inevitable,
but healthy. Finding new ways to reach the
customer and then to satisfy the customer will
stretch all of us. We are all going to get better
at what we do for a living.
At our end, we've spent millions on new
technologies -- from kiosks in shopping malls to
Internet web sites. We're always looking at
new ways to get our message to the customer.
You have to do the same. What we're
finding is that -- throughout the whole
process -- we now have a better opportunity to
get in touch with the customer, find out what
he wants and what he's thinking, and then
deliver it.
In the end, though, there is one thing that
none of this will change. The personal attention
and service that's tied to a $20,000 or $30,000
purchase will always be the most important
element of the whole retail process.
It all comes down to taking care of the
customer. No computer can do that.
Only people can do that. Professional people.
That part of the old way of doing business
will always survive, and so will the people who
know how to practice it.
#
Now, there's a third storm coming.
It's building slowly, but when it hits, it will be
unlike anything we've ever seen in this industry.
I'm talking about fundamental changes in
the vehicles we sell as a result of society's
environmental concerns and the regulations
those concerns will produce.
At the Detroit Auto Show this year,
Chrysler unveiled the Dodge Intrepid ESX 2.
It's a diesel-electric hybrid. There's also
research going on with fuel cells. All the auto
companies are doing serious R&D on new
propulsion systems, and somewhere in the
not-too-distant future, we're going to have
completely different power plants in our
vehicles, even if we don't know for sure yet
what they will be.
Never before has it been more difficult for
companies to make investment decisions.
For example, we recently announced that we're
building a new V-6 engine plant in Detroit to go
into production in the year 2002.
An engine plant today costs up to a billion
dollars. Traditionally, we would expect that
engine to stay in production for 15 or 20 years,
and the plant itself to last about 50 years.
What happens if internal combustion
engines are obsolete by the year 2005?
Then we'd have to gut the plant years before
we earned the investment back.
This will obviously have an impact on
your businesses, too, because you'll have to
tool your facilities and train your people to
service vehicles very different from the ones
they see today.
We really have no idea how fast technology
will come along. Or new regulations, for that
matter. But we're assuming that both are
coming, and coming fairly soon.
The major hurdle right now is cost.
Customers can't afford these new technologies
yet, but the cost is coming down.
A few years ago, we estimated that a
customer would have to pay a $60,000 penalty
for our ESX hybrid.
Today, we think that penalty is down to
about $15,000. That's still more than
customers are willing to pay, of course. In fact,
it's still questionable whether customers are
willing to pay any penalty for green vehicles,
so the challenge remains to get the costs in line
with current products.
The vehicles currently most vulnerable to
environmental pressures are the sport utilities.
We and the other companies are working hard
to make those vehicles more environmentally
friendly, and very shortly SUVs will be cleaner
than many passenger cars now on the road.
But SUVs are also under attack from a
safety perspective. The New York Times has
been running a series of articles contending that
SUVs pose a threat to people who drive
small cars.
Well, government data for the last
five years show the number of SUVs on the
road have increased two-and-a-half times while
occupant deaths in compact cars in collisions
with these vehicles have not increased.
Overall, highway deaths continue to drop.
Whether you look at deaths per 100 million
miles traveled or deaths per vehicle no matter
what you looked at, the death rate declined
because we've improved the safety of all
vehicles.
And that will happen going forward.
One thing we know for certain is that the
customers want SUVs. The vehicles are out
there because the customers demand them.
And no matter what the government decides
to do about SUVs, either from an environmental
or a safety perspective, they are going to have
to deal with the customer.
We, collectively, need to make sure the
customer understands that these vehicles are
in peril, and enlist their help in defending them
against the coming assault.
We need to stick together on other issues
as well, if we are going to protect our interests
and those of our customers.
One is tort reform. Our courts have
become casinos as unscrupulous lawyers try to
separate the companies and the dealers from
their cash through frivolous liability and class
action suits.
Another is the wacky world of state lemon
laws that result in such incomprehensible
situations as the one we have in Florida where
a $100 repair instantly turns a new car into
a used car, by law.
Over-regulation is a fight we'll be in
on many fronts for a long time.
#
Now these three weather fronts are
coming, but that doesn't mean we have to get
caught in the wrong place at the wrong time.
In the book, the lesson was that there's only
one way to survive the "perfect storm. Don't go
there! Don't be at that place in the ocean where
the three storms come together. Think ahead.
Heed the warnings. Be somewhere else.
Sure, overcapacity is likely to create more
product than the market can bear, but
competition will sort that out. It will put
pressure on all of us, but sooner rather than
later, the customer will determine which
products will survive and which won't.
And I don't think that decision will be made
entirely on price.
And there's no question that major
developments are taking place that are changing
the whole face of auto retailing in this country.
If we hunker down in fear of them, they will
overtake us. But if we see them for what they
really are -- new ways to serve the customer --
then we can welcome these changes, adapt to
them, and prosper like never before.
I'll say it again -- nobody is in a better
position to take advantage of these changes
than the traditional franchise dealers. Nobody
knows the market better. Nobody knows the
customer better. And the customer, remember,
is now the boss.
And, by the way, the customer is also the
key to dealing with the regulatory threat to
sport utilities, minivans and pickup trucks.
When the government comes to take away
the customer's sport utility because it
supposedly is not environmentally friendly
enough or supposedly poses a safety threat to
people in small cars, we may suddenly find we
have the strongest possible ally.
Maybe Washington won't listen to us,
but Washington will definitely listen to our
customers.
Predicting the storm is easy. Predicting the
timing is tougher. At Chrysler, we're coming
off back-to-back-to back all-time record sales
months, and we're expecting plenty more in the
near term.
But while we're enjoying the nice weather
today, we have to plan for the bad weather
we know is coming.
I don't see this industry getting caught in
the open when the sea gets rough. I don't see
us slipping under any hundred foot waves.
I think we're too smart for that. Our future is
as bright as our past.
Keep that in mind here in New Orleans.
And have a great meeting!
# # #
R. J. Eaton
National Automobile Dealers Association
New Orleans, LA
January 31, 1998
