Is There Any Hope for the Big Three Auto Makers? 34 comments
Charles Morand
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Two related pieces of news on Monday, one that was the day's headline and the other that drew a little less attention.
First, the big news: auto makers, especially US-based ones, got hammered by their product mixes. As expected, Americans are responding to a rise in gasoline prices by turning away from trucks and demanding cars, especially small ones. Of course, this spells nothing but hard times for the likes of Ford (F), GM (GM) and Chrysler, who are still hung over from a decade-long party fueled by high-margin pick-up trucks and SUVs. Economic incentives, whether state-imposed or market-driven, work after all.
Second, the International Energy Agency, the OECD's energy body, put out yet another gloomy forecast on the medium-term oil supply situation. By 2013, when a good bit of energy demand in the West will have been destroyed by high prices, the emerging world will have more than picked up the torch from us. Throughout this period, the physical reality that consumes ever-growing amounts of a finite resource leads to..well... Its eventual exhaustion should become clear through price signals.
There are two forces at play here pointing toward sustained increases in the price of gasoline. First, the oil supply-demand balance will continue to be skewed as (a) incremental demand from the emerging world will outstrip demand destruction in the West and (b) there are no viable alternatives to oil in the near and medium terms. Second, investors will continue to want the same returns no matter what happens to the marginal cost of oil , which will grow as more marginal reserves are brought into production. Given growing operating and resource costs and the lack of alternatives, prices will naturally trend up so that earnings stay unaffected and shareholder returns maintained, allowing firms to keep capital costs under control.
What does this mean for the so-called "Big Three" - GM, Ford and Chrysler? This means that the gasoline price picture will not drastically change on them, at least in the long run. They can thus safely turn their attention and capital away from gas-guzzlers and get real about small and next-gen cars like hybrids and plug-in hybrids. GM is already doing it.
This also means that they have a chance to start afresh in emerging markets, where their production and value chains aren`t burdened by a long legacy of manufacturing primarily large vehicles. And I'm also talking about image here. When the average American car buyer thinks efficiency, the first corporate logos to pop in his/her mind are T- (TM) or H- (HMC) shaped, and as long as Ford keeps pushing the F Series through primetime TV ads, its place in consumers' mental landscapes will stay right where it is (along with its sales).
I therefore think that, gloomy as they may look, the next few years will offer some interesting opportunities, at least for GM and Ford. In the car sector, companies take a few years to respond to demand shifts, so there may yet be more pain on the way. However, the pain and all the media noise around it could mask smart strategic moves. What would I look for as signs that things are headed in the right direction? Here's three items for starters:
a) Announcements of North American factories being retooled to accommodate car (vs. truck) production. I`m not even talking new models here - just churn out sufficient quantities of existing car models to meet consumer demand.
b) Announcements of next-gen car models to be rolled-out within reasonable time frames, and, even better, proof of execution on these announcements.
c) Growing sales of small cars in key emerging markets like Russia, China, India and Brazil.
Let us hope that 2008 is the year the Big Three wake up to the world Toyota has been living in for the better part of this decade, and that their capital and other resources are mobilized to meet the challenges that $200 oil will bring their way.
As for investors, look for the indicators above, and for other signs the market may be ignoring (e.g. a growing ratio of small car ads to pick-up ads on TV). Many market participants still refuse to see something secular at play here, and this may provide an opportunity to pick up on promising developments early on.
DISCLOSURE: The author does not have a position in any of stocks discussed in this article.
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This article has 34 comments:
In just one week you can go down to your Ford dealer and buy a 2009 Escape which is best in class in both horsepower and fuel mileage. They are also best in class in the reduction of interior noise levels. The Escape is already nipping at the tails of the sales leading Honda CRV. These refinements will put the Escape over the top and allow Ford to raise the transaction prices at the same time. Once again the factory that builds these will need to move to max max capacity and Ford is already putting the folks in place to do that.
In barely a year and a half the Fiesta will arrive and become the sales leader for those truly interested in fuel economy in a classy package. It will be built in Mexico for the U.S. market thus it will be profitable from early on.
Focus supply adversly affected June sales. In July or August Ford's addition of plant workers at the Wayne plant building the Focus should get supply closer to demand and will result in better numbers.
Ford held the line on rebates in June and actually had lower rebates compared to the prior year which means they made more money on each unit sold than either GM or Chrysler. About $1,000 more per unit on average. GM went rebate crazy in order to stay ahead of Toyota and Chrysler has no choice considering their lackluster lineup.
Ford has also already put into motion plans to bring the Euro-Focus, C-max, and Transit van over ASAP. Once these highly regarded European models arrive Ford will be the volume leader on the MPG front.
These are just a few of the reasons that Kirk Kerkorian may have no trouble at all sleeping at night.
But they have a plan for that, too. Led by autos and airlines, they'll simply bail out (...ie. nationalize) the entire transportation sector of our economy. Sounds less and less farfetched as times goes on, doesn't it...?
1. can produce fuel efficient vehicles and sell them well in Europe;
2. the profit margins on the above mentioned vehicles are not as attractive;
3. the above mentioned vehicles are much more technologically advanced and require more specialized equipment and workers than weed smoking Joes with heavy hammers;
4. managment is so resistent to any type of change that they'd rather spend money lobbying (or bribing as it is called in the rest of the world) politicians than retooling factories.
also.
Some Chevy spokesman had said the Volt is going to have an MSRP of $40,000. People are already whining about the price premium of current hybrids like the Toyota Prius, and the Prius costs only $21,500 MSRP. If those prices are true, the next generation Prius is going to absolutely KILL the Volt in sales.
Things look grim for GM.
That's clearly what is wrong with the US auto industry. The job of management and boards of directors is to anticipate future trends and move the companies in the right direction. Can anyone imagine a technology company taking years to respond? If not a technology company or a service company or a retailer, why should an auto company have years to respond? The culture of Detroit has to change and that needs revolutions in the executive suites and boardrooms.
It takes in the region of $4.2 billion (2011 GM Astra world car) to design and tool up for a new model. Consequently it takes time to adjust to new trends even if you are trying to set them because you need to get as much money from the old design as possible.
Despite the missteps of the past you could hardly argue that the auto manufacturers are not painfully focussed on trying to forecast change and demand and meet that challenge.
In the meantime, carry on bashing the US auto industry and maybe eventually the pessimists will be proved right if you allow yourself to be talked into believing that something changed from yesterday with GM.
On Jul 02 01:50 PM jimsep wrote:
> "In the car sector industry companies take a few years to respond
> to demand shifts' " --- What? Why do they get a pass?
>
> That's clearly what is wrong with the US auto industry. The job of
> management and boards of directors is to anticipate future trends
> and move the companies in the right direction. Can anyone imagine
> a technology company taking years to respond? If not a technology
> company or a service company or a retailer, why should an auto company
> have years to respond? The culture of Detroit has to change and that
> needs revolutions in the executive suites and boardrooms.
GM is the worst of the bunch. They are a bureacratic nightmare. They manage their people and their suppliers by intimindation. No one is allowed to make a decision without upper management approval that just bogs everything down. Upper management is inaccessible and won't empower anyone.
Commons sense is not to be found at GM. They move people around so much that no one ever finishes a project they started.
Without a major shake up of upper management they will go down the tubes and in my humble opinion they deserve everything they get.
The bigger question remains... What are they going to do with the rest of our busted economy unless they change their attitude toward domestic energy production, and QUICKLY...?
Considering how the Fed handled the Bear Stearns crisis (arranged for JPMorgan Chase to buy them out), I think more likely Uncle Sam would probably try to arrange for some private equity firm to take over F or GM if they should fail, though I have a feeling a lot of private equity firms have looked at Cerberus's experience with Chrysler and would probably politely refuse. :-P
F does have a takeover candidate lined up though-- Kirk Kerkorian's Tracinda Corp. Uncle Sam would probably guarantee a loan for Kirk to take on the unsavory job of salvaging Ford's collapse if that does come to pass.
Don't know about GM..
When GM and Ford could have been engineering a Prius-beater, they engineered the Escape Hybrid, The Tahoe Hybrid and the goofy oversized alternator 'hybrid-lite' on the Saturn Vue and Malibu. I won't even mention the coordinated killing by the big three of the California ZEV mandate that would have been saving a lot of gasoline by now.