Change in the Auto Business

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The next success in the Auto business might be on Michael Dell's model.

The company that makes itself most like Dell will be the most successful.

What does Dell Computer have to do with the auto industry?  At first glance, besides being the exclusive supplier of computers to the Ford Motor Corporation, you’d say not much.  You would be wrong.

Toyota just announced an initiative a few weeks ago that could change their business.  They set their goal at allowing a consumer to order a car with any combination of colors or options and deliver that car to the consumer within 7 days.  General Motors announced a similar plan a day or so later.  This is a shocking change from the way the business is done today.

I purchased a Pontiac Grand Prix this March.  I needed it for a road trip because my 12 year old Toyota was just too beat up for the drive.  I needed it within a week of placing the order.  My dealer began an intensive search.  I had to give two alternative colors for the exterior of the car to have a fighting chance to get it on time.  The dealer called around the state and checked a computerized inventory system.  The car itself which was my second choice on color had been built for six weeks prior to me taking delivery.

That’s the way Detroit and Tokyo worked.  They build the car and then they match it to a buyer.  Very few of their orders are custom built and those commonly take 8 to 12 weeks at Saturn Corporation. 

Last week, I ordered a Dell Computer for a customer off my web site.  I clicked into the site, choose the basic model, changed the available memory, added an subtracted a series of options.  Then I provided payment information and finally clicked the submit button.

When I hit that button, a lot of things happened.  The order was transmitted to Dell’s information systems and then scheduled by a manufacturing system.  All of the parts suppliers that needed to provide parts for the day the machine was to be built were immediately notified how many parts should be at what plant.  In summary, there was a lot of communication between Dell and its suppliers.  The computer was built and on my customers desk working 5 days after the order.

General Motors and Toyota want to do the same thing?  Are they nuts?  Nope. They have realized that their business is going to change with or without them.  In five years when I finally decide to replace my aging Toyota I am confident that I’ll be able to do it on the web and the process that I go through will be very much like what I just described with that Dell Computer.

Dealers no long make a lot of money on cars.  Price wars and too many dealers have squeezed margins for decades.  Successful dealers are actually the ones that get the customer to come back for routine maintenance.  The real money is coming in at $70-$100 an hour as labor charges.  Look for General Motors to sell directly off the internet and tell the customer which dealer to pick the car up at.  The customer will decide among close dealers which one they will use for maintenance and service.  The dealers that survive in this new world will be the ones that treat their customers the best.  They will transform themselves into service centers.

The automobile company that is most successful at emulating and improving on the Dell business model will be the one that is the most successful in the next decade. Most successful in units shipped and profitability.  That’s what stockholders care about.  I’m going to watch this process as it grows.  Gm has a P/E ratio of about 8.  I don’t think their multiple will ever hit 100, but if they succeed in transforming their business, they will take market share away from others.  Stockholders will be rewarded.

The process is not easy in an established business like cars.  It will be costly and mistakes will be made.  Unlike computers, it is not likely that someone will decide to plunk down $100 Billion and start building cars a new way.  

The transformation of the auto business from its current business model to a Dell type model will be the biggest thing to hit this business since mass production.  Now if Toyota can put a “green” engine in the Forerunner, I’d be very happy.

Nothing in the above story should be construed or understood as investment advice.

Good luck folks.

Shmuel Protter
investmenttool.com

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