by Dave Hughes

Created on: December 02, 2008   Last Updated: December 08, 2008

The automotive industry is much more than assembly plants pouring out cars to dealerships. It is an integrated network of suppliers at many levels feeding the manufacturing facilities with a steady stream of components that are absolutely essential to the timely assembly of automobiles.

Because the cost of inventory directly influences the selling price of a car, great effort goes into a just-in-time system of production at every single level. Tier 1 OEM automotive component suppliers are typically dedicated completely to automotive manufacture, and when the car companies stop making cars, the Tier 1 suppliers collapse immediately.

The "ripple effect" predicted by the media will be more like a tsunami. Within hours of an assembly plant shut-down, most component suppliers also shut down.

Finding a sound investment in automotive is going to prove extremely difficult, and only those with an intimate knowledge of how the industry works will profit.

For years the Big Three have battled imports whose quality and cost discipline fill the domestic market with automobiles that are both reliable and inexpensive. Part of that battle has involved the adoption of inventory control, quality assurance protocols, and process control in manufacturing that had become routine in Japanese plants.

Not only did the US auto giants grab at an alphabet soup of programs such as SQA, JIT, SPQ, TQM, and ISO, they insisted that their suppliers do so as well.

All of this was accomplished at tremendous cost throughout the entire manufacturing chain, but without such disciplines, the US automotive industry would not have survived past the 80's. The combined effect of seat-of-the-pants engineering and the attitude of a stagnant labor force was a poor quality product that was much more expensive than its foreign rivals.

Correcting itself cost the domestic automotive industry, but the result has been remarkable. US autos are on a par with any for quality, style, and dependability.

Unfortunately, the market simply has not supported the changes to the system that has kept it alive. Detroit has always relied on styling changes to generate sales, and every such modification means another start-up, often at every manufacturing level.

Start-ups are expensive at best and mind numbingly costly at worse.

The bad news for investors is that the Big Three have not learned the lesson. In order to rectify its financial crisis, General Motors (GMC) plans nine new models in the very near future, and the other car companies can be expected to follow suit.

Any bailout in any amount will vanish in the blink of an eye. Bank failures will pale in comparison when the automotive industry crashes. Millions will be out of work overnight.

Automotive has learned to compete before, and ultimately, it will do so again, but for now, the smart investor will keep his money in his pocket. For a secure investment, find the Tier 1 suppliers who number Toyota, Subaru, Honda, and the rest of the foreign auto giants who build their products here among their customers, and place your bet on them for the time being. The US automobile manufacturers will in the end be sound again; just not any time soon.

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