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AutoNation CEO Says Detroit Must Resist Overproducing

“As a capitalist, an entrepreneur and a Republican, it pains me to say that Uncle Sam saved the auto industry,” Jackson says.

DETROIT – A rehabilitated domestic auto industry must resist relapsing back into a destructive practice of overproducing vehicles and forcing them on a marketplace that’s not asking for them, says Mike Jackson, CEO of AutoNation Inc., the largest dealership chain in the U.S.

“As the recovery takes hold, there will be a temptation to go back to the production-push system,” he says. “Why? Because initially it feels good. It’s like heroin shot into the arm, feeling so good at first but being so destructive in the long term.

“We should be thankful for a new chance and swear never to go back to that again.”

U.S. auto makers “ran plants like crazy” in an effort to offset “extremely high fixed costs” stemming from worker wages, benefits and pensions, he says.

Then, in a desperation move to try to counteract the overproduction, auto makers offered costly incentives that reduced transaction prices, hurt residuals and betrayed existing customers who saw the value of their vehicles drop because of a market glut, he says.

“It was slow-motion suicide and it went on in this town for decades,” says Jackson at the Automotive News World Congress here. He likens the practice to “a vampire sucking blood from the industry.”

Then came the recession, a credit freeze and a rapid decline in auto sales. Those events maimed General Motors Co. and Chrysler Group LLC in particular. To survive, they had to take a federal government bailout and enter bankruptcy in 2009.

A federal automotive task force spurred auto makers to cut back on production as part of a reorganization plan.

“As a capitalist, an entrepreneur and a Republican, it pains me to say that Uncle Sam saved the auto industry,” Jackson says.

He urges auto makers to end a “last vestige of production-push” – so-called retroactive incentive programs. Those give dealers big cash rewards if they hit monthly sales quotas, but nothing if they miss those targets, even if by only a few units.

“It is a stairway to hell for dealers,” Jackson says. “Dealers put it in budgets and marketing and then must do whatever it takes to meet those arbitrary sales goals. It undercuts goodwill on pricing. People will shop dealers until they hit one that is trying to get the retro money.”

Here for the North American International Auto Show, Jackson says the mood in the Motor City and at the show is more upbeat than he’s seen in some time.

“I’ve been at funerals where the mood was better than at the Detroit auto show in 2008 and 2009,” he says. “I’ve never been more optimistic about the future of the auto industry than I am today.”

He names a few heroes who helped the industry overcome life-threatening ailments.

One is Bob Lutz, the retired GM vice chairman, whom Jackson credits with “straightening out the development process at GM and giving it a good product pipeline.”

He also praises Sergio Marchionne, the head of Fiat Group Automobiles SpA who also became CEO of a reconstituted Chrysler in 2009.

“I wanted to meet Sergio back then to see if he realized how screwed up Chrysler was and what he could do about it,” Jackson says. “He arrived at his office wearing a sweater and carrying a backpack. For the next two hours, he individually critiqued every Chrysler product.

“He knew if he didn’t do something, Chrysler would be out of business.”

Marchionne ended up executing a “product intervention” rather than waiting for eventual new-vehicle cycles, Jackson says. That decision, after 30 days on the job, “is why Chrysler had 16 product introductions at this year’s Detroit auto show.”

Also on Jackson’s admiration list is Alan Mulally, who became CEO of Ford Motor Co. four years ago.

“Alan came in and said production-push was insane,” says the AutoNation chief. “He said, ‘If we don’t end production-push, we’ll go out of business.’ He resisted the short-term benefits by going for a long-term solution.”

Because of that, “this town should take up a collection and erect a statue of Alan Mulally,” says Jackson, the former president of Mercedes-Benz USA.

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