With a federal bailout proposal for the Big Three U.S. automakers in tatters as Knowledge@Emory goes to press, many observers wonder if executives at American carmakers—still depending on gas-guzzling SUVs 35 years after the auto industry was first shaken by seesawing fuel prices—have really learned anything. To find out, Knowledge@Emory spoke with Jagdish Sheth, a chaired professor of marketing at Emory University’s Goizueta Business School. Sheth said that a simple handout will not solve the problems faced by General Motors, Ford and Chrysler. Instead, he says, the car companies need to rework the way they do business. Sheth’s published works include The Self-Destructive Habits of Good Companies...And How to Break Them.

Knowledge@Emory: As we speak, some lawmakers still talk about giving $14 billion in short-term loans to Detroit's automakers, and appointing a car "czar" who will be responsible for overseeing how the money is spent. Is this a good idea?

Sheth: It is a reasonable compromise. Appointing someone outside the industry to oversee the process may force the manufacturers, suppliers and dealers to come together in a short timeframe. It is preferable to a Chapter 11 reorganization. But the American carmakers need to become less manufacturing driven and more customer driven, like Toyota and Honda already are.

Knowledge@Emory: Car sales are down, and the Big Three manufacturers say they’re hampered by-high-cost labor contracts. Is that really the issue?

Sheth: Not really. In fact American automakers have achieved higher labor productivity than their European and Asian competitors.

Knowledge@Emory: That’s surprising. Car companies keep saying that their per-hour costs are much higher than Japanese, Korean and other competitors.

Sheth: That is only part of the equation. First, you have to consider costs by output, not just by input charges. For example, compared to emerging economies, U.S. product lines have a lot more automation in place, which enables the companies to be very productive. Also, unions in the U.S. have a lot less clout than they do in Europe, so American manufacturers have a lot more flexibility when it comes to deploying their labor in an effective manner. The problem here, as it relates to labor, is the vast number of retired autoworkers who enjoy very expensive healthcare and other benefits. General Motors, for example, has only one new employee for nine retired employees. If the American auto companies could isolate their pension plan obligation, perhaps with government assistance, it would solve a lot of their cost problems.

Knowledge@Emory: Meanwhile, GM, Ford and Chrysler say they need billions of dollars in federal money to catch their breath and re-tool to make smaller, more fuel efficient cars. Will that do the trick?

Sheth: If the federal government does offer money to automakers, the bailout should be structured in a way that gives the government significant say in the car companies’ decision making. First, the federal government should not take an equity stake in the companies. Instead, it should make short-term bridge loans and one of the conditions should be some significant changes in the structure of the Big Three.

Knowledge@Emory: What sort of changes?

Sheth: To begin with, they need to raise cash by continuing to divest their joint-venture investments with foreign companies. Ford is already shrinking its stake in Mazda, and last month GM announced it will sell its entire stake in Suzuki. Daimler AG, of course, previously sold most of its stake in Chrysler to Cerberus Capital Management.

Then, the car companies should legally separate their international divisions from their domestic operations, so they no longer subsidize the U.S. operations. Many of the automakers are actually doing well overseas, especially in emerging economies like China, India, Russia and Brazil, where demand for vehicles is still relatively strong.

Knowledge@Emory: What about the Big Three’s U.S. operations?

Sheth: The old model of doing business no longer works.

In North America they need to break up their vertical integration of manufacturing, marketing and financing. Right now, manufacturing subsidizes the other parts. Instead, GM, Ford and Chrysler should restructure their manufacturing arms as contract manufacturers. For example, for most of its existence, GM embraced vertical integration, controlling all of the means of production in the car-building process. But in the late 1990s, the company realized that the costs associated with that strategy outweighed the benefits. Eventually, GM spun off its Delphi Automotive Systems so it could produce parts for any company. Other manufacturers need to take similar steps.

Knowledge@Emory: What about their marketing and distribution channels?

Sheth: That’s a big problem. Right now there is a surplus of dealers, primarily because of state laws that make it very difficult and expensive for car companies to end a franchise relationship. But there is a need to rationalize the number of dealers, and restructure them across company lines. There are simply too many dealers with individual franchises, such as Saturn, Chevrolet or other brands. Dealers need to represent multiple manufacturers, as well as multiple brands within a car company. Some “superdealers” already do so, like Nalley of Brunswick and Hennessey Auto Cos. in Georgia [and Reedman-Toll in Pennsylvania], but it is a model that more should adopt. The car companies’ outbound delivery model should also be revisited. There is a tremendous amount of waste that could be eliminated if the logistics were restructured, perhaps to a shared delivery system that would work across companies.

Knowledge@Emory: Earlier you said that fewer car dealers would mean more efficiency. What’s stopping manufacturers from eliminating unneeded franchises?

Sheth: State laws need to be changed, since they are very protective of franchises. There are many roadblocks that can make it very difficult and expensive for a car manufacturer to terminate a dealer’s franchise. The states need to loosen dealer franchising restrictions and encourage Internet-based and national dealers like Car Max and AutoNation.

Knowledge@Emory: Is consolidation among the Big Three a solution? Last month GM was talking about buying Chrysler, but that seems to have died down.

Sheth: Actually, it might be better if a foreign car company—especially in an emerging country where demand for cars is still growing—purchased GM or Chrysler. Another scenario might be if a domestic investment firm bought GM or Chrysler and restructured the companies. I’m not very confident about the current management’s willingness or ability to restructure.

Knowledge@Emory: You’ve previously written about The Rule of Three, which observes that most markets are dominated by three companies. How does that play out in the automobile market?

Sheth: Right now there are too many carmakers. It is necessary to realize that the auto industry has become global, and the Rule of Three will still hold true. Consider tire companies. At one time, the U.S. was dominated by Goodyear, Firestone, and B.F. Goodrich. In Europe, the big three were Michelin, Dunlop, and Pirelli. Now, the global tire market is dominated by Bridgestone, Michelin and Goodyear. Something similar will happen in the auto market, where we will see three brands dominating the industry, while some others operate in niche segments.

Knowledge@Emory: Many suppliers depend on the US auto industry. What will happen to them if the global rule of three prevails in the auto industry?

Sheth: The supplier industry is also becoming global. In fact, tires, electronics, plastics, and other interior components are now being globally sourced. So with the exception of engine and transmission-component companies, the supplier industry is already experiencing the global rule of three.

Knowledge@Emory: For some time, Americans have questioned the quality of U.S. automobiles. What can domestic carmakers do to regain the public’s trust?

Sheth: The only way to gain trust is to under-promise and over-deliver, especially when it comes to reliability and functional performance. Can it be done? The answer is clearly yes as demonstrated by Hyundai and its transformation from being perceived as a cheap, inferior car to one that is highly rated by publications like Consumer Reports.