US car makers- the Big Three to become the "Not-So-Big-Two?"
(The Economist) -- THIS week shares in General Motors (GM), America’s biggest carmaker, fell below $10, valuing the giant firm at little more than $5.6 billion. The last time GM’s share price was this low, the Cadillac Eldorado had yet to grow fins and Volkswagen’s Beetle was a funny-looking novelty on American roads. That was in 1954.
Things are just as gloomy elsewhere in Detroit. Ford has abandoned all hope of returning to profit, as promised, in 2009 and appears to be bracing itself for a loss in 2008 even bigger than last year’s $2.7 billion. And on June 26th Chrysler was led to deny rumours that it was preparing to file for bankruptcy, after drawing down a $2 billion credit line from its owners, Cerberus Capital Management, a private-equity firm (see article), and Daimler.
It was not meant to be like this. At the beginning of the year both Ford and GM were expecting the credit crisis to knock sales in the first half, but they were still cautiously optimistic that they would soon reap the rewards of their expensive and painful turnarounds. Along with Chrysler, they had just secured a big package of concessions from the carworkers’ union that went a long way to closing the cost gap with the “transplants”—the lean, non-union factories operated in North America by their Asian and European rivals.
Independent reports by J.D. Power and Harbour showed that Detroit was also fast catching up with the Japanese on quality and productivity. GM’s new Chevrolet Malibu, declared North American Car of the Year in January, was seen as the first domestic product in years to give Toyota and Honda a run for their money in the fierce market for mid-size saloons.
But the carmakers have been ambushed by the disastrous housing market and, above all, by the soaring cost of fuel. Falling house prices have persuaded many people to put off buying a new car, and petrol at over $4 a gallon is radically changing demand. Detroit is still stuck with model ranges heavily biased towards the big, thirsty sport-utility vehicles (SUVs) and pickup trucks that raked in the profits when petrol cost half of today’s price.
The Big Three were certain that America’s love affair with go-anywhere, do-anything, gas-guzzling trucks would never end—so much so that both Ford and Chrysler pinned their hopes of recovery on new versions of their bestselling pickups, the F-150 and Dodge Ram respectively.
But that conviction has lately been shattered. Figures released this week show that sales of cars and light trucks in America in June fell by 18% compared with the same period a year earlier. Chrysler’s sales were down by a stunning 36%, pushing its market share below 10% for the first time in decades. Ford dropped by 28%. Despite flinging costly rebates at the market, GM’s sales were still down by 18%. Even Toyota, which was widely expected to overtake GM for the first time last month, took a 21% hit, as it struggled both to sell its big Tundra pickup and to keep up with demand for its popular fuel-sipping hybrids. Honda, by contrast, which unlike Toyota and Nissan has never offered Americans chunky pickup trucks, actually increased its sales by 1.1% thanks to a 26% rise in sales of its economical passenger cars.
Unless there is sudden reversal in the price of oil, Japanese and South Korean brands will make big gains in market share both this year and next. Their North American factories are more flexible than Detroit’s are and there is capacity to be tapped back home. Although GM and Ford make some fuel-efficient cars, such as the Chevrolet Cobalt and the Ford Focus, dealers complain that supply is limited and that customers tend to opt for Japanese or South Korean brands when trading down.
GM, Ford and Chrysler are each reacting to the crisis in different ways, but with the same aims—to reduce the speed at which they are burning cash, and to accelerate the arrival of more fuel-efficient models. Ford is slashing its salaried workforce, delaying the launch of the new F-150 by two months because dealers cannot shift the outgoing model, and converting an F-series plant in Mexico to build the relatively tiny new Fiesta, which Europeans will get this summer—more than a year before American buyers.
GM has gone further, closing four truck and SUV factories and putting its Hummer brand up for sale. Analysts reckon GM’s $20 billion cash pile is being depleted at a rate of $1 billion a month, making it a near-certainty that it will have to tap shareholders for new funds before long. And this week Chrysler said it would slash production of the Dodge Ram and shut one of its two North American minivan factories. Chrysler’s minivans have long been regarded as the firm’s “crown jewels”, but sales this year have suddenly slowed.
So just how bad are things for the Big Three? Their survival has been in doubt before. But two things are different this time. The first is that the carmakers’ finance arms used to bring in cash even in hard times. That is not happening now. More buyers are defaulting on their car loans, and the resale value of SUVs and pickups has collapsed so catastrophically that the finance offshoots are losing huge sums on vehicles returned after lease.
The second change is that it seems increasingly unlikely that consumers will eventually shrug off the high price of fuel and return to their old buying habits, which means that Detroit’s old business model is now obsolete. Jim Farley, Ford’s head of global marketing, describes the market as crossing a “watershed”. The problem is that the smaller, more efficient cars that buyers now want, and which will come on stream in a year or two, are far less profitable for both manufacturers and dealers. Denny Fitzpatrick, a GM dealer in California, observes that he makes more money selling ten Chevy Tahoes (a bloated SUV made by GM) than he does selling 50 Honda Civics (a compact car).
GM and Ford can at least take some comfort from their well-run foreign operations, which are benefiting from growing demand in China, Russia and Brazil. But Chrysler has no such cushion. Worse, it is planning to replace only half its fleet in the four years after the 2009 model year (compared with Honda’s 72% replacement and Nissan’s 80%). John Murphy of Merrill Lynch believes this is “an active decision by the new owners to rationalise the product portfolio in advance of a break-up or sale”. It may not be long before the Big Three become the Not-So-Big Two
Things are just as gloomy elsewhere in Detroit. Ford has abandoned all hope of returning to profit, as promised, in 2009 and appears to be bracing itself for a loss in 2008 even bigger than last year’s $2.7 billion. And on June 26th Chrysler was led to deny rumours that it was preparing to file for bankruptcy, after drawing down a $2 billion credit line from its owners, Cerberus Capital Management, a private-equity firm (see article), and Daimler.
It was not meant to be like this. At the beginning of the year both Ford and GM were expecting the credit crisis to knock sales in the first half, but they were still cautiously optimistic that they would soon reap the rewards of their expensive and painful turnarounds. Along with Chrysler, they had just secured a big package of concessions from the carworkers’ union that went a long way to closing the cost gap with the “transplants”—the lean, non-union factories operated in North America by their Asian and European rivals.
Independent reports by J.D. Power and Harbour showed that Detroit was also fast catching up with the Japanese on quality and productivity. GM’s new Chevrolet Malibu, declared North American Car of the Year in January, was seen as the first domestic product in years to give Toyota and Honda a run for their money in the fierce market for mid-size saloons.
But the carmakers have been ambushed by the disastrous housing market and, above all, by the soaring cost of fuel. Falling house prices have persuaded many people to put off buying a new car, and petrol at over $4 a gallon is radically changing demand. Detroit is still stuck with model ranges heavily biased towards the big, thirsty sport-utility vehicles (SUVs) and pickup trucks that raked in the profits when petrol cost half of today’s price.
The Big Three were certain that America’s love affair with go-anywhere, do-anything, gas-guzzling trucks would never end—so much so that both Ford and Chrysler pinned their hopes of recovery on new versions of their bestselling pickups, the F-150 and Dodge Ram respectively.
But that conviction has lately been shattered. Figures released this week show that sales of cars and light trucks in America in June fell by 18% compared with the same period a year earlier. Chrysler’s sales were down by a stunning 36%, pushing its market share below 10% for the first time in decades. Ford dropped by 28%. Despite flinging costly rebates at the market, GM’s sales were still down by 18%. Even Toyota, which was widely expected to overtake GM for the first time last month, took a 21% hit, as it struggled both to sell its big Tundra pickup and to keep up with demand for its popular fuel-sipping hybrids. Honda, by contrast, which unlike Toyota and Nissan has never offered Americans chunky pickup trucks, actually increased its sales by 1.1% thanks to a 26% rise in sales of its economical passenger cars.
Unless there is sudden reversal in the price of oil, Japanese and South Korean brands will make big gains in market share both this year and next. Their North American factories are more flexible than Detroit’s are and there is capacity to be tapped back home. Although GM and Ford make some fuel-efficient cars, such as the Chevrolet Cobalt and the Ford Focus, dealers complain that supply is limited and that customers tend to opt for Japanese or South Korean brands when trading down.
GM, Ford and Chrysler are each reacting to the crisis in different ways, but with the same aims—to reduce the speed at which they are burning cash, and to accelerate the arrival of more fuel-efficient models. Ford is slashing its salaried workforce, delaying the launch of the new F-150 by two months because dealers cannot shift the outgoing model, and converting an F-series plant in Mexico to build the relatively tiny new Fiesta, which Europeans will get this summer—more than a year before American buyers.
GM has gone further, closing four truck and SUV factories and putting its Hummer brand up for sale. Analysts reckon GM’s $20 billion cash pile is being depleted at a rate of $1 billion a month, making it a near-certainty that it will have to tap shareholders for new funds before long. And this week Chrysler said it would slash production of the Dodge Ram and shut one of its two North American minivan factories. Chrysler’s minivans have long been regarded as the firm’s “crown jewels”, but sales this year have suddenly slowed.
So just how bad are things for the Big Three? Their survival has been in doubt before. But two things are different this time. The first is that the carmakers’ finance arms used to bring in cash even in hard times. That is not happening now. More buyers are defaulting on their car loans, and the resale value of SUVs and pickups has collapsed so catastrophically that the finance offshoots are losing huge sums on vehicles returned after lease.
The second change is that it seems increasingly unlikely that consumers will eventually shrug off the high price of fuel and return to their old buying habits, which means that Detroit’s old business model is now obsolete. Jim Farley, Ford’s head of global marketing, describes the market as crossing a “watershed”. The problem is that the smaller, more efficient cars that buyers now want, and which will come on stream in a year or two, are far less profitable for both manufacturers and dealers. Denny Fitzpatrick, a GM dealer in California, observes that he makes more money selling ten Chevy Tahoes (a bloated SUV made by GM) than he does selling 50 Honda Civics (a compact car).
GM and Ford can at least take some comfort from their well-run foreign operations, which are benefiting from growing demand in China, Russia and Brazil. But Chrysler has no such cushion. Worse, it is planning to replace only half its fleet in the four years after the 2009 model year (compared with Honda’s 72% replacement and Nissan’s 80%). John Murphy of Merrill Lynch believes this is “an active decision by the new owners to rationalise the product portfolio in advance of a break-up or sale”. It may not be long before the Big Three become the Not-So-Big Two