Auto Industry: Pressures, Changes & Outlook - Finding V1
When Lee Iaccoa was booted to Chrysler he managed to save them with a combination of an innovative nwe product (the Minivan - which Ford had turned down), draconian cost controls and product manufacturing rationalization on shared platforms. In the process the US gov't actually made a profit on its' bailout funds. Yet over the next three decades Chrysler has cycled in and out of profitability depending on whether or not it had a hit for a few years. From the auto company known for the sustained excellence of their engineering and product they became the boom-n-bust kids. And that's despite several extremely innovative transformational efforts that deservedly made the Harvard business case files. This includes a revamp of the design process using CAD/CAM technology, re-structuring the inbound supply chain and supplier relationship management processes and similar major innovations. What it didn't manage to do was change the fundamental DNA of the company - the processes, culture, decision-making processes.
In a way Chrysler's story, suitably modified, is the story of the Detroit auto industry - once the examplar for manufacturing excellence, product design and development, quality and customer focus. How long has it been since any of those have been true, at least generally ? So after "coasting" for those same three decades on its' historical legacies the industry is facing a huge amalgamation of challenges: inefficient and broken processes, cost pressures, lack of manufacturing quality, products that customers, shall we say, don't love and nearly tonedeaf marketing, sales and service. The greatest irony of all is that the Industry knew and knows all this but could't find ways and reasons to change.
Well those reasons, and the decades of denial, have been presented. Not only the contininuing challenges from the Japanese, e.g. TOY, and some reborn European manufacturers but a change in the global car market and rising worldwide competition. All of which is reflected in the readings excerpts. NA sales are in the tank and the product mix was wrong for this energy inflation environment. It turns out that Europe, ha for decoupling is in the same boat, and even companies like TOY are facing major challenges.
Yet Mullaly at Ford, the Nardelli team at Chrysler and Waggoner and the GM team have made major strides by trimming costs, downsizing to the markets and starting to revamp operations, development and go-to-market. The real question is whether they'll get enough speed to lift off before they can lift off. Pilots talk about V1 - the speed going down the runway where you start to get enough lift to rotate the nose up. Mullaly in particular is doing all the right things at the sickest of the Big Three but V1 is coming up awful fast and it's not clear they'll get the speed they need.
Someday we'll try and go into a broader assessment and diagnosis but for now let's look at one of the most fundamental problems that's just beginning to be addressed - the vast differences in cost structure between world class and the Big Three. Short-trimming, even the major surgeries performed, only help. This requies fundamental re-thinking and re-engineering. When you face a competitor who's cost structure is innately, organically lower than yours they can make a profit while you loose money at any scale of operations. When costs rise or the market shrinks then the superior operator has a long-term DYNAMIC advantage. Worse, in shrinking AND more finicky markets a manfacturer can no longer appeal to economies of scale to survive but must learn to make money at smaller scales in each market niche it serves. Oh my aching head....
Automotive: General Conditions
Detroit automakers in the ditch This was supposed to be a good year for Detroit's Big Three. General Motors (GM, Fortune 500), Ford Motor (F, Fortune 500) and Chrysler LLC all struck new labor pacts with the United Auto Workers union last year. That was expected to help the automakers cut billions of dollars in costs and move them back towards profitability after years of losses. So much for that. Instead, sales have been battered by a combination of high fuel prices and a slowing economy. Ford will report its first-quarter results Thursday and is expected to post its seventh loss in the past eight quarters. GM is forecast to report its second largest operating loss since the start of 2006 when its results come out. Both companies are expected to bigger losses this year than last year. Privately-held Chrysler LLC does not report results. Overall, U.S. auto sales in the first quarter tumbled 8% from a year ago and the Big Three continued to lose market share as their sales fell even more than their competitors. Bob Schulz, the senior automotive credit analyst for Standard & Poor's, said the downturn is "gathering speed" and warned that sales could fall as much this year as the combined 7% decline from their peak in 2000 through last year. The automakers and most forecasters have slashed their sales targets, with several now forecasting sales to fall 15 million vehicles for the first time since 1995. And research firm CNW said that its figures show new vehicle deliveries in the first half of April trail year ago deliveries by 10.6%.
Toyota, Peugeot, Volkswagen Lead 9.5% Decline in European March Car Sales Toyota Motor Corp., PSA Peugeot Citroen and Volkswagen AG led the biggest drop in European car sales in more than four years as consumer spending slumped and an early Easter cut the number of selling days. New registrations in March fell 9.5 percent to 1.65 million cars from 1.83 million a year earlier, the Brussels-based European Automobile Manufacturers Association said in a statement today. First-quarter deliveries declined 1.7 percent to 4.15 million. Sales fell 17 percent last month at Toyota, 13 percent at Wolfsburg, Germany-based Volkswagen and 14 percent at Peugeot. European retail sales fell in March and consumer confidence dropped across the region as inflation, higher credit costs and declining house prices sapped spending. The Easter holiday also led to two fewer selling days. The weekend fell in April in 2007. The drop in car sales was the biggest since the association began compiling figures for an expanded European Union in January 2004. ``What is most shocking is that the percentage sales declines for all manufacturers are deep into the teens,'' said Stephen Pope, chief global strategist at Cantor Fitzgerald in London. ``This reinforces my negative stance on auto companies. Good companies. Good products. Just an empty marketplace bereft of customers.''
Detroit's Bold Goal: Exporting Cars Last year's landmark labor deals and the weak dollar are breathing new life into U.S. auto plants, leading Detroit's auto makers to plan sizable exports of U.S.-made vehicles to markets around the world. For years the U.S. has been one of the most expensive places in the world to make cars. But the new contracts with the United Auto Workers union signed last fall significantly improve the global competitive position of Big Three plants. The weaker dollar, which makes production in the U.S. less expensive, is also helping to turn the economics of domestic production upside down. The new UAW contracts create a new generation of U.S. auto workers with wages and benefits more in line with what Toyota pays its U.S. workers, with wages for new hires at $14 an hour instead of the previous $26. It also offloads billions of dollars in retiree health-care liabilities hobbling the Big Three to outside trust funds. To stay competitive, Toyota has stopped pegging its wages to UAW rates when it builds new plants, company executives said. It won't cut wages of current workers, but new hires will be paid no more than 50% above the prevailing manufacturing wage in the area where a plant is located, they said. Exporting a large number of U.S.-made cars could go a long way in helping the Big Three turn around their unprofitable North American operations. It could also help them tap faster-growing overseas markets, especially at a time when U.S. sales have been hit by economic worries. Exports could help lower costs per vehicle and use up excess manufacturing capacity.
Volkswagen May Pass GM as China's Top Automaker This Year With New Models Volkswagen AG may retake the title of China's biggest overseas automaker from General Motors Corp. this year as new models help the German company grow four times faster than its U.S. rival. Volkswagen started building five new or revamped models in the country in the first quarter. It plans to display another five at the Beijing Auto Show, which starts on April 20. The tally includes three cars making global debuts, the most for any overseas exhibitor. GM, which started making four new models in China in the first quarter, plans to unveil one car at the show. The Santana Vista, a new version of China's bestselling car, helped Volkswagen boost first-quarter sales 33 percent in the world's second-largest auto market. Competition from Volkswagen, Toyota Motor Corp. and Ford Motor Co. held sales growth to 7.4 percent for GM, which is counting on China as the U.S. market shrinks. ``Volkswagen has learned its lesson from lagging behind in product launches,'' said Matthew Kong, a Fitch Ratings' associate director in Beijing. ``GM is losing to Volkswagen in China because it's adding appealing volume models at a much slower pace.'' GM had 16 percent of China's locally-built passenger vehicle market in the first quarter compared with 15.5 percent for Volkswagen, according to Bloomberg calculations based on figures released by the China Association of Automobile Manufacturers.
Nissan, Chrysler Produce for Each Other Nissan Motor Co. said it will make a new small car designed by Chrysler LLC and Chrysler will make a full-size pickup truck designed by Nissan.The agreement is part of a growing relationship between Chrysler and the No. 3 Japanese automaker as they attempt to adapt to a U.S. market buffeted by the economic slowdown and rising gas prices. Both products will be sold in North America, and the new Chrysler subcompact will also be sold in Europe and other global markets starting in 2010. No financial details were disclosed on Monday. The new Chrysler small car will be made at Nissan's Oppama plant in Japan. Chrysler will make the pickup truck at its plant in Saltillo, Mexico, and it will go on sale in 2011, the companies said. The Nissan Titan, Nissan's current full-size pickup, will remain on the market until the new pickup goes on sale, said Dominique Thormann, senior vice president for administration and finance at Nissan North America. The Canton, Miss. plant that makes the Titan will start producing commercial vehicles for Nissan and no jobs will be lost, Thormann said. To clear room to build the Nissan pickup in Saltillo, Chrysler will shift production of its own pickup trucks from Mexico to truck plants in St. Louis and Warren, Chrysler President and Vice Chairman Tom LaSorda said.
Demand in Asia, Europe lift Toyota global sales 2.7 pct Japan's top automaker, Toyota Motor Corp., said Wednesday its global sales rose 2.7 percent from a year ago in the three months through March on the back of steady demand in Asia. Toyota -- which is battling U.S. auto giant General Motors Corp. to be the world's No. 1 carmaker -- said strong demand in Europe also supported its worldwide sales. Toyota's global sales for the quarter stood at 2.41 million vehicles, it said. Its worldwide production expanded 7.0 percent from a year earlier to 2.54 million vehicles. Output of popular, fuel efficient small cars such as the Corolla model grew strongly in China, the company said, while production of pickup trucks rose steadily in Thailand during the quarter. Toyota overtook General Motors as the world's top automaker in global vehicle production last year, but its U.S. rival still retains the top spot in annual global vehicle sales. GM was to release quarterly sales and output data later in the day. Some analysts say it's a matter of time before Toyota -- which built its business in the decades after World War II by imitating American automakers -- overtakes GM.
Automotive: Key Players
Toyota reportedly facing big bottom-line drop World's second-largest automaker expecting 22%-26% drop in operating profit in the current fiscal year ending next March. Toyota, the world's second-largest automaker by output, is expected to post an operating profit of 1.7 trillion yen ($16.7 billion) to 1.8 trillion yen, or 22% to 26% below what's expected to be a 2.3 trillion yen operating profit for the recently-ended fiscal year, the business daily Nikkei reported Thursday, without identifying where the information came from. Toyota shares rose 2.9% to 5,020 yen at midday in Tokyo Thursday. Toyota is expected to release its forecast for the current business year, which ends March 31, 2009, on May 8 when it releases results for the past fiscal year. Toyota's total unit sales are expected to rise this year, as demand in emerging markets helps offset declines North America. The pace of growth in sales revenue, though, is expected to decline from the 10% gains that are expected to be reported for the recently ended fiscal year. Sales for the 12 months ended March 31 are tipped at 26 trillion yen. Among the emerging markets, growth is seen as particularly strong in China and Russia. Toyota's North American sales have fallen for four consecutive months through March, with consumer demand for its costlier sport utility vehicles and pick-up trucks off sharply. The stronger yen is expected to shave about 600 billion yen off Toyota's profit this year, assuming recent gains against the euro and dollar hold throughout the year, the report said. Toyota is likely to make cuts in research and development and capital investment to help offset the slowdown. The automaker is expected to boost prices in some regions, though not enough to offset soaring costs of steel and other materials, the report said.
Wagoner's worst nightmare What Wagoner had in mind were issues that affect the whole economy: oil prices, commodity and steel price inflation, the possibility of a recession. Those headwinds, which GM (GM, Fortune 500) can do little about, are blowing just as hard or harder than Wagoner expected. Add the housing meltdown, subprime crisis and credit crunch and you've got a witch's brew of malevolent ingredients that could stymie even the best prepared of chief executives. Learning how to cope with the macro economy, though, is part of the CEO's job description and Wagoner is no whiner. What must be giving him fits, though, are other events that he couldn't have predicted and he can do very little to fix. These are not trivial matters. Taken together, they are potent enough to jeopardize GM's fragile recovery. Parts maker Delphi has remained enmeshed in bankruptcy for some 30 months. The strike at American Axle (AXL), another big GM supplier, continues into its second month. Customers seem unwilling to cross the threshold of Saturn dealerships. Despite a total overhaul of its product line, Saturn's sales have been worse than bad, down 28.8% in March.Wagoner and other GM executives have been adamant about their intention to keep all seven of GM's North American brands alive despite the automaker's shrinking market share. They may have to reconsider the case of Saturn. Combine those gusts with the other ill winds blowing through the economy, and you get a miserable storm that would make navigating difficult for even the healthiest of companies. For a company like GM, they could be life-threatening.
FORD
Ford Motor Co., long considered the sickest of the Big Three U.S. auto makers, is showing signs of a surprise turnaround.When Chief Executive Alan Mulally took over in 2006, Ford was barreling toward the worst one-year loss -- $12.6 billion -- in its 105-year history. A frail U.S. economy and high gasoline prices were ripping into sales. But in the past year, Mr. Mulally, a former Boeing Co. executive with no auto experience, has improved year-on-year earnings each quarter. In 2007, Ford startled the industry by reporting $400 million in positive operating cash flow, something General Motors Corp. and Chrysler LLC have been hard-pressed to match. At the same time, the quality ratings of Ford vehicles spiked (a trend that started before Mr. Mulally arrived) and now approach the lofty levels of Toyota Motor Corp. That chopped $1 billion off Ford's warranty costs last year. The firm isn't done cost-cutting. According to people close to Mr. Mulally, he is looking at selling Volvo despite Ford's repeated statements that it intends to hang on to the brand. Similarly, he hopes to shutter the ailing Mercury brand. Interactive Charts: Key Dates in Mulally's Career
A Star at Toyota, a Believer at Ford But it’s not easy to believe in Ford these days. The auto giant, based in Dearborn, Mich., lost a combined $15.3 billion during the last two years, slashing tens of thousands of jobs and shutting factories to balance its shrinking share of the American market. Last year, Ford ceded the No. 2 position in sales in its home market to Toyota, and its domestic sales have slid a further 9 percent so far in 2008. Moreover, the company has been forced to sell off prized assets like its Jaguar and Land Rover units, to raise cash for its nascent turnaround. “Ford is at a crossroads,” said John Casesa of the auto consulting firm Casesa Shapiro Group. “The business has been declining for 30 years, and the competition is only getting tougher. They need to change to the core.” Mr. Farley says he grasps that reality quite fully, as well as the tortured path that Ford has been on over the last decade. “Some cuts leave a little scar, and some cuts go to the bone,” he said. “Ford’s experience in the last 10 years went to the bone. My hope is that everyone at Ford never forgets what we went through.” Moreover, the Ford brand and its “blue oval” badge have lost their appeal to American consumers. Ford’s own research shows that while nearly 90 percent of vehicle buyers have a favorable view of Ford as a company, less than 50 percent actually consider shopping for its products. The truth, as he saw it at Toyota, was all about the customer — unlike at some other automakers that let executives dictate what cars to build. “One of the many things that Toyota does really, really well is that it can put the voice of the customer right there at the table in front of the chairman of the company, in a way that even he can’t change it,” he said. For his part, Mr. Farley appreciated Mr. Mulally’s plan to streamline and stabilize Ford, then expand the business with new cars and crossover vehicles that consumers really wanted. “What Alan showed me was confidence that there was a plan, that he got the fact that product was the key to the whole thing,” said Mr. Farley. “Every time I asked him a question, that we peeled the onion, it got more interesting.” The Toyota cocoon, with its reputation for quality, safety and reliability, had insulated Mr. Farley from the harsh reality of the American car market. “I remember telling my wife that in all those years at Toyota when we were gaining market share, I didn’t know anyone lost,” he said. “I did know, but I didn’t know.”
The car Ford is betting its future on What makes a Ford a Ford? The question is simple, and a 105-year-old company should know how it wants its cars to look, feel, and drive: the resistance in the steering wheel, the spring in the seats, the rumble from the exhaust. But Ford is still struggling to find an answer. So on a blustery spring morning, CEO Alan Mulally and 25 top executives from the United States and Europe meet at a test track near company headquarters in Dearborn, Mich., to tease that question out, one component at a time. Feature by feature, the meeting goes on for another 90 minutes. This kind of obsessive attention to detail is new to Ford and it comes after years of strategic confusion and operational indecision. During the 34 months of CEO Jac Nasser's reign, which ended in October 2001, Ford tried to reshape itself through acquisitions but neglected its day-to-day business. "We kind of lost our core focus five or six years ago," says Barbara Samardzich, who runs Ford's global powertrain operations. "Alan has refocused us on one Ford."
One Ford: That is the subtext of all those discussions at the track. The idea has several dimensions: to emphasize the Ford brand, to figure out the critical ingredients that make a Ford a Ford, and then to create great products on a global scale using those ingredients. The idea of integrating design, engineering, and manufacturing is not exactly revolutionary. GM went in that direction in the late 1990s, and European, Japanese, and Korean automakers have never done it any other way. Later this year that DNA will take tangible form in the shape of the new Fiesta - a four-wheel advertisement that Ford is committed to making great small cars again. The Fiesta will debut in Europe, and the same basic model will roll out in North America in 2010. It is the first vehicle developed under the "one Ford" philosophy. This kind of global product development simplifies engineering requirements, reduces time to market, and costs less. Complexity is reduced, and purchasing becomes more efficient. Ford used to use 28 different seat structures around the world, involving frames, springs, and so forth. Now it has two. By 2012, Kuzak says, eight basic car architectures will supply 70% of the company's volume, vs. 30% today. Fiesta product development graphic.
