Wednesday, July 6, 2011

Good Bargins Present Themselves

When the Japanese first started selling cars in the USA, people quickly dismissed them as tinny junk.  But then a funny thing happened....

When I was a kid, we used to get these cheap toys from Japan.  World War II hadn't ended that long ago, and the Japanese were still trying to make export dollars by selling tin toys in the United States.  As young American consumerists, raised on the TeeVee, we looked at Japanese toys with disdain.   A wind-up stamped metal car looked goofy and was poorly made, compared to our sturdy Minnesota-made Tonkas.  What's more, when we took them apart (and kids always take things apart) we found out the metal, on the inside, was stamped with the name of a Japanese motor oil or some canned fish company.  They re-used scrap metal to make these export toys!  Cheap Japanese junk!

(By the way, reproductions of these cheap tin toys are now being made - in China - to satisfy the nostalgia market.   Original tin toys "made in Japan" from the 1950's and 1960's are now collector's items!).

And for years, in the 1960's, "Made in Japan" was synonymous with "junk" and no one took Japanese manufacturing capabilities seriously.  And today, people are making the same mistake with China and India, after making the same mistake with Korea.  We never learn, it seems.

But things started to change in the 1960's and 1970s.  You may recall the Beach Boys writing a song about their Honda ("First Gear, it's all right!") which was likely about the fabled Honda 305, a nice "little motorbike" as the Beach Boys called it, that you could buy on a teenager's budget.   It went like stink, and didn't break down nearly as often as American iron or quirky British bikes.

Japanese cars started filtering in around that time as well.  For the most part, they were not popular - a tiny fragment of the car market.  When people thought of "imported cars"  they thought of the Volkswagen Beetle - the largest selling import in America.  Toyotas, Subarus, Datsuns, and Mitsubishis just were not on the radar - and Honda had yet to build its 500 cc microcar or its famous Civic CVCC..

But a few adventurous people started buying Japanese cars.  To be sure, they were lured in by the low prices, initially.  But they turned out to be reliable machines, and got good gas mileage to boot.   And since they were small, they handled well and were easy to park and drive.  Word started to spread.

Then the Arab Oil Embargo of 1973 hit, and gas shot up to a staggering 50 cents a gallon!  What would we do?  Small cars were the answer, and Japanese manufacturers had the answer in the showroom.   Sales started to take off.

By the mid 1970's, the market share of Japanese cars was starting to worry the big-3 automakers (there was a big-4, but AMC was shortly to fold into Chrysler).  Many started importing these cars and selling them under American name plates - the Chevy LUV truck (ISUZU), Ford Ranger (Mazda), Plymouth Cricket (Mitsubishi) or Dodge Ram-50 (Mitsubishi again), and so on.  But Americans recognized that these were Japanese cars, and the Big-3 throwing in the towel and selling them was just a tacit admission that they were good cars.  Ironically, the US Automakers gave Japan a big boost - and showroom space as well.

Hard to bash the Japanese and say "Buy American" when you have Japanese products in your showroom and in your catalog, isn't it?

At about that time, a story circulated at GM, which is apocryphal, but nevertheless with a gain of truth in it.  Supposedly, a GM executive asked a West Coast dealer "When are those people in California going to wise up and stop buying those silly little Japanese cars?"

The message of that story was clear:  It is not that GM had the wrong product, but that the consumer was ignorant of their real needs.  The Fremont Assembly plant, near San Francisco, made Cadilliac Sevilles at the time - GM's perception of a Californian's product needs.  Consumers, on the other hand, had other ideas.

And John Delorean, in his book, On A Clear Day, You Can See General Motors, relates how the feeling at GM at the time was "Small cars, small profits" - and the mentality that you can't make money building a small car - so don't bother.

This mentality, of course, left the field open for the Japanese.  American carmakers made "small" cars like the Vega, the Pinto, the Chevette, and the Omni, but these were cheaply made cars, and their cheapness showed through.  Parked next to a Celica, a Vega was a poor imitation.

Of course, by now, the Japanese had enough market share and a dealer network that they could afford advertising campaigns - "Oh what a feeling! Toyota!" and market share increased, particularly on the West Coast.

But another thing started to happen - word of mouth.  While anti-Japanese sentiment was very high in the country (at the GM factory I worked in, they would drag some hapless Corolla to the front of the plant and let the workers hit at it with sledgehammers - if only they put that energy into building better cars!) people were starting to discover that the "cheap Japanese junk" was actually quite well-engineered.

How was this?  Well, after World War II, America sent its best Industrial Engineers to Japan to teach them about automation, quality control, continuous quality improvement, time-motion studies, and all those other Industrial Engineering techniques that America developed in the 1930's and discredited in the 1950's.  While we moved away from efficiency and quality, the Japanese moved toward it, and we gave them the roadmap.

By the 1960's, Japan was known for its efficiency.   In this scene from the 1967 James Bond film, "You Only Live Twice" this "typical Japanese efficiency" is mentioned (and ironically, the chase scene shows many USA made cars in Tokyo).  Japan was acquiring - or nurturing - a reputation for quality.
Tiger Tanaka: [after Tiger's helicopter drops an enemy car chasing Bond and Aki into the Pacific ocean] How's that for Japanese efficiency?
James Bond: Just a drop in the ocean. 
And by the late 1970's, word-of-mouth was starting to spread - that you could drive a Japanese car for over 100,000 miles with few troubles!  Bear in mind that the typical Pinto, Vega, or even Chevy Caprice was headed for the junkyard after 8 years and 80,000 miles, this was a staggering level of reliability.  Of course, Japanese cars rusted like mad in the Northeastern United States - but then again, everything rusted in the Northeastern United States.  And more and more young people were moving to the "sun belt" where rust was not such an issue.

And word-of-mouth sold more Toyotas than all the "Oh, What a Feeling!" ads put together.  Back then, people did nothing but bitch about how crappy their 1979 Malibu was (a car so cheaply built, the rear windows didn't roll down, unless you paid extra for the option) or their 1978 Chevette (a car so cheaply built that the back seat was an option!).   Constantly being recalled, and constantly breaking down after their 12-month warranty expired, no one was very happy with American iron.  Meanwhile their friends driving "cheap Japanese junk" were quietly reporting that they were getting over 100,000 miles on the original clutch!  Hmmmm... Maybe?  Nah!

By the way, a friend of mine was given the car shown above as a wedding present.  Although neither of them worked in any field remotely automotive, they traded in that "cheap Japanese junk" for a Pinto, because they were "Patriotic Americans."   The Pinto lasted four years, I think.  The Celica today is a collector's item.  It also had air conditioning.

By the late 1970's, Chrysler was facing bankruptcy (sound familiar?) as its large, outdated cars were dinosaurs on the highway - barely getting 10 miles per gallon in an era where gas was heading toward a staggering dollar-a-gallon.  Chrysler was bailed out, and came out with a new line of small, front-wheel-drive cars, in part from technology it obtained from Volkswagen and Renault, both partners in joint-ventures.  Ford and GM were facing similar problems, but due to their larger size and better product mix, were able to survive without a bailout.

Of course, by this time, Japanese cars were no longer being sold on price point alone - but as a value proposition - having better quality and getting better gas mileage.   People started paying a premium for Japanese cars.   And while American car makers engaged in the time-honored practice of absurd sticker prices that no one paid (and marked down everything by 20% just by asking) the Japanese were selling cars for sticker price - sometimes over - as they became the "hot car" of the period.  And as a result, Japanese car prices rose until it was the Americans who were selling on price point.

(In the 1980's, at one point, prices of Japanese cars were rising so quickly that you could buy a new Honda or Toyota and pay sticker price and then sell it a year later for more money.   This, of course, didn't last very long and was a product of the inflation of the period as well as the increased perception of the value of Japanese cars).

And unfortunately, the American car pricing structure, which started to go insane in the 1950's, became a huge disadvantage.  When you mark a car with an MSRP of $6000 and then immediately offer to sell it for $4000, our pricing is just stupid.  So Japanese car makers could advertise "lower prices" when comparing sticker prices, as their sticker prices were more rationally tied to actual sales prices.  American car makers started to thin out sticker prices, but dealers resisted - after all, scamming their customers was a time-honored tradition, and there was always some fool who would pay sticker price, like Grandma, for example.

Of course, the odious practices of car dealers only added to American's discontent with American cars.  The process of buying and owning an American car stank from the get-go.    GM tried to fix this with Saturn - trying to actually be nice to the people handing you money - but it was a mixed result.  Meanwhile, at the Japanese car dealer, nearly everyone pays close to the same price.   Even today, the spread in prices between "sticker" and what everyone pays is higher at American car dealers, according to Edmunds.

By the early 1980's, the "Buy American!" movement started taking off, as people started to realize that American car companies were losing market share and closing plants.   In response to this xenophobic trend, foreign car makers started opening plants in the United States.   Most avoided the UAW and its staggering labor rates, benefits, and restrictive work rules.    The only exception was Volkswagen, which foolishly opened a plant in depressed, union-driven Pennsylvania, which it quickly closed again, but not before its quality reputation was permanently besmirched.  The "Pennsylvania VWs" earned a reputation for poor quality and poor durability - about on par with an American car.   UAW= crappy cars, every time, it seems, Engineering notwithstanding.  VW had to offer 100,000 mile powertrain warranties as a result of the Pennsylvania disaster.

And as gas prices eased in the mid-1980's, people started buying more American cars, and in particular trucks.  There was a pickup truck craze in the late 1980's to mid 1990's.  And SUVs started to become popular - ironically due to many Japanese imports, such as the Toyota 4-Runner, which was a poorly disguised pickup truck with a back seat.  Sales of American SUVs, which had largely remained unchanged since the mid-1960's, took off.

Cheap gas and the SUV craze gave the US Automakers a second lease on life, and profits soared.   Profit from a typical large SUV could be $10,000 or more - enough to offset the losses on smaller cars.  It seemed that the endemic problems at the "Big-3" were solved for good - and the solution wasn't smaller cars like the Japanese sold, but big honking SUVs.  And Chrysler retooled their entire lineup to sell nothing but.  Even the compact Neon was reborn as something called the Dodge Cailber, a car that the new CEO of Fiat-Chrysler called "an abomination".

Of course, all it took was one more gas shock to unhinge all of this.  And that is how we got here today.  And of course, today, things are different.    The Japanese have learned the sins of the Americans.    They jumped on the monster Truck and SUV bandwagon, but only after waiting too long.   At the height of the gas crises, they introduced the Tundra and unfortunately named Titan (all it needs is an "ic" added to the end of the name!).  Monster SUVs were introduced, getting under 15 mpg.   Toyota entered NASCAR and decided to whack the Camry with an ugly stick - twice.

And of course, in recent months, a complete lack of inventory due to the Tsunami, has hurt Japanese car sales.  American car sales are soaring, as is market share.   But this is due, in some part, to the complete absence of some Japanese models (such as the Prius) for a month or more - an absence that is being rapidly corrected.

And maybe the torch has been passed to a new generation - the Koreans.  And people buying Hyundais and Kias - once laughed at as "cheap Korean junk" (with people nodding, "and they eat dogs, you know!") are now quietly reporting that these inexpensive cars are today, quite well built.

And just as in 1980, we are being treated today to another round of "Buy American!" as people rush off to the showrooms to buy the same cars they rejected four years ago, still for sale, with nicer interiors.  Frankly, it makes little sense to me.  But it made no sense in 1980, either, when everyone ran off to buy a Chrysler K-car, and then realized, four years later that, yes, Chrysler still makes crap.

Few K-cars still ride the roads.  But in California, an old Celica, like the one shown above, is a highly valued collector's item, as it a Datsun B-210, a 240-Z, or a whole host of "vintage" Japanese Iron (or aluminum).   And again, ironically, you will see more vintage Japanese cars in America than in Japan, due to Japan's inspection laws that result in most cars being scrapped or exported after three years on the road.

And who knows?  Perhaps today, American cars are a good value - the hidden gems and good bargains that spread by word-of-mouth, not through advertising slogans or patriotic jingoism.  I doubt it, though, as most of the cars being sold today are very similar if not the same to the cars they replaced.  GM has some new platforms, but Chrysler is slower to come up with new designs.

And unfortunately, as K-car buyers discovered, you really can't tell if a car is any good until 4 or 5 years down the road, when its track record is established.  So, to say that "the new ACME car is a good car" is really hard to parse, as we really won't know that for several years.  You really understand the quality of Engineering in a car after a decade and 100,000 miles - or more.  Then, its true "bones" become apparent.

So that leaves the consumer to trust the reputation of the manufacturer.  The Japanese were once known as purveyors of crap - but ended up having the best quality reputation around.  Maybe a similar thing could happen to American car makers.  Perhaps.

But if you are going to buy a car, don't rely on jingoism, advertising, or sloganeering.  Many are rushing out right now to "Buy American" which is hard to do, as for example, a Toyota Tundra has more American content than a Chevy Silver-A-Do pickup.  And I wonder, if, four or five years down the road, we will hear from people, just as we did with the K-cars and Chevy Citations (X-cars) about what horrible pieces of crap they were.

Jumping on a bandwagon is never a very good idea - if you don't know where it is going.  And I'm afraid a lot of people are doing just that, today.  Let's hope the bandwagon isn't recalled for safety defects.