AutoNation CEO: Gas is too cheap
Mike Jackson, CEO of the nation's largest auto retailer, tells Fortune's Carol Loomis that the U.S. needs higher gas taxes, and GM needs to dump its old business model.
NEW YORK (Fortune) -- For most Americans, Topic A in the auto industry right now is the fate of GM. Mike Jackson, 60, the outspoken CEO of the nation's largest auto retailer, AutoNation, has some definite opinions about that subject--and we'll spell them out below. But his own Topic A today is the level of gas prices, which he thinks intolerably low. Here is the conversation that he and FORTUNE senior editor at large Carol Loomis had a few days ago.
Tell me your opinions about the price of gas and what might be done to influence it.
I think we need a revenue-neutral gas tax that puts a floor under the price of gasoline at around $3.50 to $4. The price of gas totally determines the types of vehicles that people buy and how they use them. The fact that America has ignored this reality is the reason why our energy policies have failed for 50 years. With gas now around $2 per gallon, it won't be possible to sell fuel-efficient vehicles. Already, another great migration away from them is underway. I've seen this movie three times in my career.
How would you establish a price floor?
Through taxation. But it doesn't need to happen by next month. If you simply announce that taxes will be put in after the economy recovers, in 2011 or 2012, people will start now to factor that into their decisions.
And how about your revenue-neutral point?
This would be a very painful, regressive tax, which needs to be rebated quickly--maybe through the payroll tax. If there's a rebate, I think the political backlash can be handled.
The biggest lie in American politics is the following combination: "I care passionately about America's dependence on imported oil and we must do something about it, and I'm passionate about global warming--and I strongly believe we should have cheap, affordable gasoline." There's intellectual dishonesty in those assertions coming out of the same brain and the same mouth at the same time. That's what Washington has been saying for 15 years, and that position guarantees you failure.
To switch to something else coming out of Washington--a plan for GM--we're in the midst of this 60-day deadline period. And the odds for a government-sponsored bankruptcy seem to be increasing. How do you see the 60 days unfolding?
I think there will be brinkmanship by all parties. My experience with this type of negotiation is that if there's going to be a breakthrough, it comes at the end.
In the horse-racing world, there's an expression "horses for courses," which means simply that a horse may run better, say, at Saratoga than it does at Belmont. Applying that to managers, you have spoken highly of GM interim CEO, Fritz Henderson. Do you think that he is particularly suited for what's going on right now?
I do, because he's faced intense GM (GM, Fortune 500) turnaround situations, particularly in Asia and Europe where he had to come to grips with reality very quickly, ignore the sacred cows, and decide how to move forward. I think that amply prepared him for what he's confronted with here in the U.S. And I like his stand on bankruptcy: He's clearly signaled that if it needs to be, let it be.
In bankruptcy, or out of it, what is a sustainable business model for GM?
The old business model of the past decade has to be buried once and for all. That model includes sunk development costs, sunk capacity costs, and even labor becoming a fixed cost. Whenever GM looks at whether it should overproduce, it always decides to do it. And then it uses sales incentives to liquidate. Over time, this erodes your brand strength, and you become smaller, and then you have to restructure to that smaller level. GM has to sweep that old model away. Then, when the market does recover--and it will recover--it has to put its costs on a variable basis and not get caught in the fixed-cost trap again.
What does a workable business model imply about the number of GM brands?
It can't afford eight brands. Running the old business model, it weakened those brands, and now it lacks the resources to revive that many. You have to put your resources into the brands you can rebuild. Those clearly include Chevy and Cadillac, and you can make a case for GMC and Buick.
And what about the number of auto dealers?
We need fewer. There's way too much capacity at retail, particularly with the domestics. At one time they had 75% of market share in the U.S., and now they're down to 45%. The number of dealers needs to be rationalized. Darwin is at the door at the moment.
AutoNation's (AN, Fortune 500) sales mix has moved toward imports and luxury vehicles. Can you imagine a day, if GM and Chrysler shaped up, and Ford goes along as it seems to be, when you might move back to a more domestic mix?
No. The year the domestics had 70%-75% market share was before the arrival of globalization. Globally, a normalized share for the U.S. companies is going to be 35% or 40%. When you look at the open markets around the world, you have six, seven, eight global manufacturers who have roughly equal shares. The idea that the U.S. auto companies could ever rebuild their share domestically to 50%-60% is out of the question. The only market in the world where you still have high domestic penetration is Japan, and it's basically not an open market.
You've reduced your debt. Was that quite intentional--to get yourself down to a less leveraged condition?
Absolutely. We felt the credit squeeze leaving 2007 and going into 2008. Our strategy became to optimize cash, both by reducing the amount we needed for operating capital and to pay down debt. And thank God we did! Because when Lehman Bros. went bankrupt on September 15th, that turned a credit crisis into a credit panic with a capital P.