Can U.S. Auto Industry Make the Switch from Push to Pull?

Last Updated Oct 9, 2009 10:59 AM EDT

It's been painful - in fact, "a descent into hell" - but the U.S. auto industry is finally undoing generations of bad habits and making a credible effort to switch its fundamental business model from "push" to "pull."

That's according to General Motors CEO Fritz Henderson and AutoNation Chairman and CEO Mike Jackson.

In the "push" model, the U.S. auto industry consistently produces too many cars and trucks, which in turn forces deep discounting. That's been the case since the mid-1970s, when Chrysler was the first manufacturer to start writing rebate checks. "Whenever you look at a fork in the road you always overproduce," Jackson said.

This is also sometimes called in the industry, "Losing money on every car and making it up on volume."

Henderson and Jackson held a "town meeting" discussion yesterday, Oct. 8, at the Nova Southeastern University H. Wayne Huizenga School of Business in Fort Lauderdale, Fla. Huizenga is the founder of Fort Lauderdale-based AutoNation, the country's biggest auto dealership chain.

The auto industry has tried in vain for years to switch to a "pull" model, where supply matches demand and prices stay firm.

Henderson laid the blame for over-producing squarely on the need for the car companies to support growing health care and other retirement benefits. He said in the years leading up to GM's bankruptcy filing earlier this year, GM spent as much on retiree benefits as it did on developing new products. "You have to generate the revenues to cover the fixed costs. It's pretty simple," Henderson said.

"Speaking to a group of business students, you could wonder how could an intelligent group of people wind up in that situation?" Henderson said. "How do you get off the treadmill?" he asked.

Bankruptcy was the painful solution that allowed GM to cut its debts, accelerate job cuts, and toss overboard all but four of its brands. GM is dropping Hummer, Pontiac, Saab and Saturn, and cutting back the number of models it offers at Buick, Cadillac, Chevrolet and GMC.

"We didn't have bad people, we had too many. We didn't have bad plants, we had too many," Henderson said.

"Dealing with eight brands when the (U.S.) market was 17 million (annual sales) was tough. Dealing with eight brands when the industry is 10 million is lunacy," he said.

According to Automotive News, North American production this year through early October is down about 41 percent from the year-ago period, to about 6.1 million.

With such a low supply, and with industry costs so low, it won't take much improvement in demand to start generating profits, Henderson said.

"In an abysmal, Depression-like industry, we just need a modest improvement to begin creating the results we need on the business," he said.

Slide: AutoNation