Automotive Industry - Global and Big 3 Bailout Update 2|
April 23, 2009, Todd Jaspers
A lot has transpired since we first came to terms with the possible demise of one (or even two) of our American automotive companies. I think this update is best served by breaking up the information by origin, and by company.
U.S. auto sales have really taken a hit during this recession and it has had a significant negative impact on the Big Three. To recap, President Obama laid out the groundwork for "saving" the Big Three, and set a deadline of June 1st. He expected several conditions to be met by that time. In an effort to meet these conditions, a number of changes have been necessary. Below is an outline of the current condition, and the prediction of the Big Three and other auto companies with sales in the U.S.
1 - FORD is no longer in danger of losing it's business. They are financially stable enough that the CEO has stated that the bailout money is "unnecessary". With that, Ford has dropped off the radar and their stock has more than doubled. Ford continues to close plants in the US and open new plants in Mexico to reduce it's union (UAW) workforce and to improve profits. One of these plants is said to be producing the new 53mpg diesel powered Ford Fiesta.
2 - GENERAL MOTORS has not fared as well, unfortunately. GM submitted a restructuring plan back in December 2008, which was promptly rejected by the White House. They stated that more cutting was needed. This led to the firing (by the White House) of the CEO Rick Wagoner, and the creation of a new Car Czar position by President Obama. This new position was filled by Steve Ratner. However, recent information has surfaced that Steve has been involved in a potential pension scandal in NY (but that's another blog post, for another day). Shares of GM have plummeted to an all time low of $1.27 a share. This is a number not seen since the early days of the stock market. For the first time in a long time, Ford has now surpassed GM's valuation. GM has been forced to take even more drastic measures and has been asked to cut more brands. An e-mail was circulated early Monday morning from North American CEO that at least half of the 3,400 white collar jobs would be cut by the end of this week. As if it couldn't get any worse, it now looks like GM will miss their June 1st payback payment of 1 billion dollars. With mounting pressure from the White House, Bankruptcy is more a reality than speculation. Here is GM's current plan for bailout with respect to it's individual divisions:
- Chevrolet - The Chevy brand will remain the leading brand for General Motors. While Chevrolet has not always been the sales leader for the company, it has been deemed the "primary" brand by political figure-heads and general consensus. Little, if any, will change with Chevrolet.
- Cadillac - Little is expected to change for Cadillac. This brand is GM's luxury division, and it will continue to assume it's role at the top of the totem pole.
- Buick - In my opinion, Buick would likely be a candidate for being cut if it wasn't for their strong leading sales role in China. Buick is currently the most popular brand in China and is widely successful as fledgling capitalists flock to it in hopes of living the "American Dream". They continue to be a sales leader. They are considered the Rolls Royce of automotive brands in China.
- Pontiac - Unfortunately, Pontiac is likely to get cut. Initially GM had reported that they would turn Pontiac into a "niche" brand that would be sold through Chevrolet dealerships. It's possible this may still happen, but recent reports have suggested that GM may simply cut the brand all together. It's worth mentioning however, that Pontiac has been the GM sales leader at least three times in the history of the company.
- GMC - Most people are unaware of exactly what the GMC brand is, so it's worth detailing what the division is before we discuss it's future. GMC is a company that predominantly exists for commercial sales. Most people (including politicians) assume that GMC is nothing more than a duplicate of the Chevy Truck brand. For most people, all they visibly see are GMC pickups, SUVs, and vans which are also sold as Chevrolet vehicles, and only make up their small light duty commercial line. However, GMC produces a massive number of heavy duty and large commercial vehicles, and not just pickups. They produce the platforms for tow-trucks, cement trucks, dump trucks, box trucks, as well as people carriers (city transportation vehicles). It's suggested that GM will also cut this brand. The brand will likely be absorbed into the Chevrolet name plate and all heavy duty vehicles will simply become Chevrolet vehicles. I believe that GM must have seen this coming as they've already started branding those vehicles optionally as Chevrolets. Quite literally, the only difference between a GMC and a Chevy heavy duty vehicle now is option packages, and badging (which consists of front and rear badging, and steering wheel emblem).
- Saturn - The Saturn brand started off as a means to fight back the small import (note, Japanese) vehicles. While it's implementation was pretty well received, poor decisions have caused the brand to lose focus and is now a drain on GM. Saturn was made popular by it's use of enduraflex paneling first seen on the Pontiac Fiero. Recently however, Saturn has done a 180 (in perceivably the wrong direction) and the vast majority of their models are nothing more than rebadged vehicles from GM's European divisions. GM has stated that they WILL cut the Saturn brand, and they are seeking buyers at this present date. If they do not seek a buyer by their June 1st deadline, they will simply liquidate the entire brand. There are a few companies which are interested in Saturn, one of which has determined it would like to continue it's current market plan, and introduce not just rebadged GM European vehicles, but more fuel efficient vehicles from other brands as well. The clock is ticking however, and no definitive sales plans have been made.
- Hummer - This widely popular brand took a massive sales hit in early 2008 when oil futures hit a record high. Sales have dropped to levels never anticipated. This is a massive hit on many dealerships which, in an attempt to glamorize the brand, built Hummer specific dealerships. The Hummer brand WILL be cut, and GM is currently seeking a buyer. GM has stated they will close Hummer all together if a buyer is not found by the June 1st deadline.
- Saab - Saab originated as a Swedish brand. When the American economy was really soaring, Ford bought Volvo, and GM bought Saab. This was GM's attempt to get into the European luxury car market. Although GM arguably greatly improved Saab, including it's sales in the US market, it's become a constant drain. GM recently spun off Saab and filed for restructuring bankruptcy. GM is currently awaiting a buyer for Saab and hopes that the Swedish government will buy it back.
- Vauxhall - Vauxhall is one of GM's European brands. Originally a UK automaker, GM has owned this brand since 1925. The economic situation of this division is pretty solid, and GM has no immediate stated plans to sell it. However, there have been rumors that Chinese manufacturer SAIC has expressed interest in purchasing Vauxhall. SAIC states this isn't the case.
- Opel - Opel is another of GM's European brands. Opel started life as a German manufacturer, but was wholly purchased by GM in 1931. It had also been rumored that SAIC was interested in Opel, but this was also derided as nothing but rumors. GM expressed today however that they are seeking to sell their "controlling stake" in Opel with the understanding and agreement by the buyers that they have the option to form a new company. This new company would be supported by the existing dealer network.
- Holden - Holden is GM's Australian brand that was purchased in 1931. There is little new information or news related to this division. This division has been relatively successful and maintains a leading sales role in Australia. It is likely that this brand will remain in 100% control by GM.
To put this all into perspective, GM will likely shed half of it's brands. The bankruptcy / restructuring plan has been said to be nothing more than a means to break the UAW contracts. Although Obama owes his presidency in part to the unions, it's become an almost equilateral agreement among both Republican and Democrat lawmakers that this is the only way to solvency for GM. Although Democrats normally support unions, they've remained almost completely silent in their support for the UAW in the past few months. My prediction is that GM will in fact file for bankruptcy, emerge from the rubble with half of it's brands, and exist as a company that is the same size as Ford Motor Company. In the mean time, GM will continue to cut spending by selling prototypes from their Heritage Collection at Barrett Jackson, and shutting down the majority of their plants for the summer to reduce inventory and operating expenses.
3 - CHRYSLER: If you thought GM's news was bleak, then you'll be even more dissappointed in Chrysler. With mounting debt and decreased sales, the Obama administration has set a deadline of May 1st for a "shotgun marriage" with Fiat. Unfortunately for Chrysler, talks with Fiat have stalled and, with Fiat's own massive debt problems, it seems like a poor fit. Fiat would likely do well to buy Chrysler, but in the mean time, there's significant risk for them to do so. Fiat originally expressed interest in Chrysler as a means of utilizing it's dealer network to re-introduce their own Fiat vehicles back into America. Fiat largely left the American market in the mid-1980's with the only two vehicles (at that time) being the Fiat 124 Spyder and the Fiat X-1/9 Bertone. Although I have personal hope that Chrysler will see solvency in a Fiat marriage, it's unlikely at this point that they will, in fact, seal this deal. The Obama administration has not made any additional comments as to what they would plan to do, but if Serberus corporation cannot get additional funding, it's likely that Chrysler would be liquidated and pieced apart like AMC was many years ago. Although none of this is definite, here is what I speculate will happen to their brands:
- Dodge - The Dodge brand has little in terms of profitable vehicles. The two most prominent or successful models (not necessarily both) is their Dodge truck line and the Dodge Caravan. Personally, I would expect that someone would buy up the tooling for the truck line. I would expect possible suitors to be Mitsubishi (which currently lacks a solid truck line), or potentially even Mazda. My bets are on Mitsubishi as Dodge has had a long standing platform agreement with them for many years. Examples of this in the past include the Dodge Raider / Mitsubishi Montero, Dodge Conquest / Mitsubishi Starion, Dodge Stealth / Mitsubishi 3000 GT, and their drivetrain agreements. As for the Dodge Caravan, this vehicle is currently being sold by Volkswagen as their primary US market minivan. I would expect (considering their immediate interest in this model) to buy up the tooling (as well as the plant). As for the remainder of the models... although the Challenger and Charger are certainly cool, it's unlikely that anyone will have any interest in them. I do suspect, however, that the powertrain will be of some interest to any number of companies, possibly even Honda who currently does not have a viable production V8 engine. Another indication that this will likely come true, is a new contract between Ford and Cummins Diesel. Cummins has produced the diesel powerplants for Dodge Trucks for decades, and this new 2010 contract proves to be another indicator in their own fears of Dodge solvency.
- Chrysler - There is little of value in this brand. Chrysler has done a very poor job of distinguishing exactly what this brand represents. In my opinion, and that of general consensus, It no longer matches that of Ford's Lincoln or GM's Cadillac... of which it was originally meant to compete with. Their vehicles are more along the lines of Buick, or luxury versions of the Dodge vehicles. I would expect this brand to fade into oblivion.
- Jeep - Jeep is a very old and valuable brand. It's interesting to note that "changing hands" is not a new experience for them. Jeep was originally the name of it's first model, made specifically for the US military in 1941. This model was produced under the Willys brand. The Jeep vehicle was then sold to Kaiser in 1953 where the Jeep "brand" was first officially formed. After Kaiser's own troubled times, the Jeep brand was purchased by AMC (American Motor Company) in 1970. By the mid 80's, AMC had it's own problems and filed for bankruptcy. Chrysler purchased the Jeep brand from AMC in 1987 as the company was liquidated. With this storied history, and the significance that is the Jeep brand, it's unlikely that Jeep will dissolve. I expect Jeep will go on either as it's own brand, or as a subsidiary as any one of the other auto companies in the US market.
4 - Japanese Auto Makers - Although the Japanese auto makers deserve their own break-down, they came into this recession in relatively good shape and therefore little will likely change.
- Toyota has been the hardest hit with a significant sales drop in their own domestic sales (sales in Japan). The sales in Japan have dropped an astonishing 58% with a decrease in export by 68% in the face of cheaper competition. In total, Toyota sales (global and domestic) have dropped 51%. They have seen an increase in China sales. These percentages are major, however, and I feel that we're only seeing the beginning of a much larger issue. More to come as the events unfold.
- Honda has also seen a significant decrease in sales, although in terms of percentages they have fared better than Toyota. Honda has made significant cuts in all non-essential departments. One major change for Honda was their dissolution of their Formula-1 racing team. Honda has been involved in Formula-1 since 1964. Sadly, 2008 was the last season for Honda racing, bringing their 44 year tradition to an end. Their non-factory team pulled out half way in the season last year, and they pulled out their 2009 entry before this season.
Note: Other Japanese makes are not mentioned either because they are too small to have any major impact, or are subsidiaries of other companies (e.g. Nissan is owned by French Renault).
5 - European Auto Makers - Little has changed with the European auto makers. They've fared much better than the rest, honestly. Volkswagen is poised to knock Toyota off it's 6 month global sales leader position (recently taken from GM). Porsche has fared the worst of the European auto makers, and it's been suggested that Volkswagen may buy a significant stake in Porsche. It's interesting to note that this wouldn't be the first time, and in the recent past, it's been the other way around.
6 - Other Manufacturers: Little else has changed in terms of the other manufacturers. Korean manufacturers Hyundai Kia Automotive Group have been relatively untouched and are probably in the best shape of them all. TaTa Motors (India) is still pushing to potentially release it's new $2,000 vehicle in America, however no agreements have yet been made. Its likely that in order to pass all the stringent US CAFE and EPA standards, the price of the vehicle would significantly exceed $2,000.
In summary, the automotive global landscape is going to undergo significant changes. For the most part, Chrysler and GM will change forever, while Ford seems to be making major improvements. I would expect we may see Ford surpass GM as the major U.S. player. The dissolution of the UAW contracts will be a huge improvement for the bottom line of the Big Three, although as I mentioned, it looks like it might be too late for Chrysler.
Wow, that was an interesting and insightful article. Thanks for going to all the work to put this together. Just out of curiosity, though, I would be interested in your take on the so-called "Little Eight" automobile makers; those foreign companies that have based manufacturing plants here in America, mostly in the South.
I haven't heard much of anything about them in terms of the recent bailout negotiations. They have seemingly not asked for any federal money and I haven't heard anything about them except they are doing fine. Do you see this situation continuing.
Car makers from VW and Mercedes to Toyota and Hyundai and a lot in between seem to be able to produce dependable cars that people want and under conditions that allow them to make a profit. Are these companies the future of the American automobile manufacturers?
I would appreciate your take on this seemingly recession proof segment of the industry.
Thanks again for all you wrote about above. - Newton (04/23/09 8:07 PM)
Todd, excellent report!
One thing that I find so weird is that just a couple of years ago Hummers were the thing to own and drive. Now they might be completely dissolved. GM is a sad case. Once the most dominant auto company in the world, now they are all but irrelevant.
Thanks for the update. - Matthew Cochrane (04/23/09 8:16 PM)
Newton, I actually didn't know what the phrase "Little Eight" referred to. I just did a search and realize that you're talking about the manufacturing plants here in America that are operated in "Right to Work" states.
As you already know, these factories are managed and in most cases, owned by the companies of the cars they produce. A prime example is the BMW X5, which I believe is made in South Carolina. There are a couple of aspects on which I would like to respond to this. I'll start off with the finances. These factories are profitable, which is the reason why they are in the United States and not overseas. What makes them profitable is their lack of union costs. I'll go into that more in a minute, but I'd like to focus on factories themselves first. The cars that are made in this factories almost exclusively make cars which are sold predominantly in the US. In the exception of a few cases, these cars are sold exclusively in the US. The BMW X5 for example is an American market only car. It's available in Europe, but only under special order (which does get exported from the US). Some of these cars are also shipped to Canada.
Now, as far as hem asking for bail-outs... in most cases, these factories are not independant or "leased", they are owned, so it would be the manufacturers themselves who would be asking for bailouts. Since these import manufacturers are not American companies, they would likely seek bail-outs in most cases from their native land. In the case of Toyota, they HAVE actually asked for a bailout. They've tried desperately to play it off as if they're merely looking for the most equitable financing available, but they ARE in desperate need of help. The sales figures from back home are the worst they've had in 59 years. Toyota is seeking 2 billion in bailout money from the Japanese government.
Despite the fact that these factories are in America, the profits end up in Japan. It's effectively American capital that's funneling into Japan (or Europe, or Korea for that matter). Certainly, they do provide jobs to hard working Americans, but it's not financialy the same for our government and our country as it would be if the net capital resided in America.
Now, as far as the solvency of these factories VS the Detroit big three factories... well, this almost goes without saying, but the union costs are considerable. Detroit as we've known it in the past, will likely never again be the same. The unions have utterly destroyed the industry for themselves. The unions have flat-out prevented them in many cases from building factories in right to work states. The legacy costs, and current financial structure of the union will prevent any kind of reasonably successful manufacturing. Ford however, amazing as it sounds, is actually quite on the ball. By 2010/2011, they expect to have ALL of their North American plants (aside from suppliers) completely closed. The exception to this will be their Ford F-150 plant. That will remain the only union plant in America. Ford is looking to produce the majority of it's cars in Mexico. They already have a number of plants in Mexico, and have already invested several billion in three new plants. These plants are slated to produce the new Verve and Fiesta... as well as potentially the next generation of Taurus, etc.
Quite honestly, if Chrysler collapses, and GM files for bankruptcy (both of which are basically the way it will likely go), and Ford having only a handful of supplier factories and one car plant in America... the UAW is essentilly finished. This would in turn give freedom to what's left of the big three, to produce factories in "Right to Work" states in America.
It would be very unlikely that Ford would move their plants back into the US with the relatively inexpensive labor force that Mexico has. I'll respond about the unions themselves in a seperate e-mail... because it's going to be LONG and I'd like to break it up to make it easier to read. - Todd (04/23/09 9:19 PM)
Ok, Newton, as far as the unions themselves go, I've talked to a number of GM workers, as well as union employees from a variety of other unions. I have family, and some friends that were either union workers, or worked for GM, or worked for one of UAW's subsidiaries. I kind of understand the union society and how it works.
Most of us are led to believe that most union workers are lazy and good for nothing. On the contrary however, MOST union workers are actually hard working Americans seeking the "American Dream". The problem with the unions is in the structure with which they operate. Basically, the unions function on "seniority". Seniority of course is the amount of time you've been with them, and that automatically makes you:
- More important than someone with less seniority
- Closer to promotions than someone with less seniority
- Higher paid than someone with less seniority
- Better options for vacations, benefits, etc.
Now, it's really interesting to note, (pay close attention here) the preceeding things mentioned have absolutely NOTHING to do with how hard or strong your work ethic is. As a union employee, you CANNOT be fired unless you do something which would otherwise be considered completely illegal. Even at that point, most unions have a three-strike rule (UAW is one of them). If you steal from the company, you get a strike... etc.
Now, I'm going to try my best to explain why this system doesn't work, so I hope I come off as clear as possible. The REASON why this doesn't work is because most people who have a strong work ethic, well... they want to be rewarded for what they do. They quickly realize however, that in a union, you are NOT rewarded based on merit, but on time (seniority). So no matter HOW HARD YOU WORK, you will not make any more or less than the guy at your same seniority level... regardless of how hard or weak his own work ethic is. So one of two things will happen here:
- The person realizes he's not going to get ahead by working harder, so he quits and finds another job that WILL reward him. (Note, the excellent employee is now gone and production quality decreases)
- The person again, realizes he's not going to get ahead by working harder, and decides there's no point, so he does the absolute bare minimum to not get a warning. (again, the production quality decreases).
Here's the real problem though... since all the higher-end union worker positions are filled by people with seniorty, you're almost guaranteeing that the person that gets hired is going to be lazy, and a slouch. Make no mistake about it... you CANNOT work hard and get a promotion. You ONLY get a promotion if there is an opening (note, someone retires) and you have senority. But this is the BIGGER problem... anyone who DOES work hard, will constantly get berated by the people who don't. It's not uncommon to hear "You're making us look bad.", or "Why do you try so hard?". If you do work hard, you're immediately at odds with most of your co-workers. This becomes a huge problem for you if that co-worker has seniority over you and becomes your shift manager down the road.
So, ultimately, what you're left with, is a bunch of people who KNOW that they can't get fired and won't benefit from working harder, so they do the absolute minimum possible to get the job done. Unfortunately, this means that they have to hire additional people to do the same work that a single hard working individual could accomplish. Now, I don't want to state outright that all union employees are lazy, because they aren't. There are employees who still have excellent work ethic, and believe in working an honest living. Unfortunately, that's become the exception, rather than the rule... and in a union environment, any animosity or disagreement with the union mentality is highly frowned upon.
Just to finish on this point however... nearly every worker in the Mexican plants is eternally greatful for the job they have. They realize FULL well that if they do NOT work hard and give it their best, they can and WILL be replaced that someone that does. In retrospect, it sounds tough... but this is what the American dream is all about. People have lost sight of this. The American dream is about working your butt off and making a great life for yourself from the fruits of your label. The idea that someone "deserves" a decent paying job with little or no effort is simply ridiculous.
I for one 100% fully support what Ford is doing. When the UAW has been completely crushed, I say we beg the company to bring back the factories by giving them tax breaks. - Todd (04/23/09 9:35 PM)
Matt, quick reply with respect to Hummer. I can't really blame GM for their decisions on the Hummer brand. No one could really forsee the commodities bubble that would happen with oil. At the time GM proposed the initial H2 model, gas was still cheap (2003 was the introductory year). What really helped sales figures was due to the Iraq War. It was the most commonly used vehicle, and people wanted to feel like they were apart of it. Famous actors and athletes were buying thm and the vehicles were very popular. Sales figures remained strong (in the range of over 30 thousand) each year through 2005. It wasn't until late 2006 that figures started to drop with increased fuel prices. GM immediately responded to this by introducing a smaller Hummer, the H3 model built off their smaller truck platform. Co-incidentally, it's the same transission in the H3 as I have in my Pontiac Solstice. (Borg Warner T5)
The Hummer has become the whipping boy for the press because of it's big image and hard-core roots to the AM General's H1 model. But to be quite honest, every manufacturer had a vehicle of equal excess and lack of fuel economy. Nissan came out with their "Armada". Ford had their Excursion, Toyota made the Sequoia, even companies like Mitsubishi and Honda who had never built anything of any substantial size... made their own large SUVs and pickups. Mitsubishi's Montera nearly doubled in size from it's previous generation, and Honda produced it's first pickup.
You really can't blame GM for going where the money was. It's really because of their situation with the unions which has caused them to be in such a poor situation that made them less able to recover during harsh times like this. The media still avoids making any real negative press towards anything other than the Big Three... but Toyota currently sells THE MOST NON-FUEL efficient pickup in it's class. The Toyota Tundra pickup gets the worst fuel economy of ALL "non-hybrid" full sized pickup trucks in America. 18 on the highway is what they list on the EPA sheet, but it's more common to get slightly less than what the EPA standard claims. While the Chevy Silverado (same size class) gets 21 on the highway. The XFE model (hybrid) gets 22 miles per gallon in the city. - Todd (04/23/09 10:03 PM)
Great analysis. Thanks. - Newton (04/24/09 4:05 AM)
Todd, I absolutely agree with your take on the unions. The unions create an atmosphere where hard work is not cultivated or encouraged and, instead, drains loyal and industrious employees of their desire to go the extra mile for their company. The unions are discoverig that this work environment that they created, coupled with their demands for increasing money for less work, is simply a losing proposition. The company's executives lose, the employees lose and the customers lose. Detroit is now a sad shell of what it used to be.
To clarify an earlier comment, I did not mean to blame GM for pushing the Hummer brand so much in years past. Simply, that I found it amazing that Hummer fell from grace so quickly. They went from the trendiest car on the market to virtual irrelevance overnight. Amazing. - Matthew Cochrane (04/24/09 6:25 AM)
Matt, yeah, exactly... many people are even emberassed to drive them. I used to see them ALL OVER the place just a couple of years ago. I mean, there are literally over 100,000 of them on the roads, many of which ended up in South Florida. But now, it's almost impossible to see an H2? It's a ~$65,000 car, so I know they haven't hit the junkyards yet... so people must be keeping them in their garage. You can pretty much thank the media for the animosity towards them.
It's interesting to note however, that Hummer has actually become fairly successful in terms of their global sales. This will come as a shock, but GM has a plant in South Africa that builds Hummer H3s specifically for export around the world. It currently exports to Asia, the middle east, and Europe.
So... you might find this even MORE interesting. GM currently ALSO makes the Hummer H2 at a shared plant... guess where? In Russia. All the Hummers you buy in America are BUILT in America, but for overseas, they make them in plants elsewhere. It's amazing to me that we build the H2 in Russia... something just seems inherently wrong about it... hah. - Todd (04/24/09 8:18 AM)
Here is a good article that kind of cover's Chrysler's current situation:
money.cnn.com/2009/04/23/news/companies/chrysler_deadline/index.htm - Todd (04/24/09 10:49 AM)
"Unfortunately, Pontiac is likely to get cut." - Todd
Looks like General Motors was just waiting for your prediction, huh? Today, Friday, April 24, it was announced that GM was cutting the Pontiac brand from its fleet of cars. Sad, in a way, I guess, but at least it confirmed rather quickly your prediction. Good call.
- Newton (04/24/09 5:58 PM)