The tremendous loss recently reported by General Motors and the filings for bankruptcy of even more suppliers (and the troubled efforts by others, like Delphi, to get out of it) has gotten me to thinking about what seems to be occurring in the industry, something that’s, to put it mildly, counterproductive.  There is an ongoing drive to cut costs.  On the surface, this seems like a good thing, and something lauded by accountants everywhere.  But what isn’t taken into account is that cutting costs isn’t something that in and of itself will make things any better, and if due consideration isn’t given, will actually make things worse.  This leads to a situation where the products or services that have undergone the wielding of the knife—no matter how sharp—will be potentially undesirable or noncompetitive.  Which then creates the proverbial spiral: People don’t buy, which means that revenue is down, which means that costs need to be further cut, which leads to even more feeble products or services, which leads to reduced sales, which. . . .  And let’s not fail to take into account the fact that cost cutting invariably leads to job losses, which means there are fewer people who are in the position to buy, which leads to. . . .

There are plenty of things that people buy without the proverbial green eyeshades on.  This ranges from replacing perfectly good iPods (“Gee, although I still have memory available on the one that I have, I may suddenly decide that I need several hundred more songs, so I’d better buy a new one with more memory. . . .”) to buying prepared foods in supermarkets (“Gee, I don’t have time to cook and I think that the McDonald’s routine is getting rather stale, and that food in the case at the market really looks good, so. . . .”).  Admittedly, these are often things that cost a fraction of what a vehicle does.  But aren’t there instances where people truly do spend more on cars than they would if it was all a simple manner of cost-effectiveness—did anyone ever really need a Hemi?

If the car industry can convince more customers that they’re getting desirable products, then they’ll start getting better margins.  With better margins, they can produce still-better vehicles.  Let’s face it: Although it may not occur for a number of years, when the Chinese auto manufacturers start selling cars in the U.S., the domestic vehicle manufacturers—be they Ford or Toyota or whomever—are going to have a horrible time trying to compete on price.  So they’d better be competing on superior product at all price points.

Only by doing that can there be an upward, advantageous spiral.