Business (Auto Industry): Worsening Outlook, Improving Peformers, Key Issues
Let's focus on the Auto Industry which is important, and still gigantic, in its' own right but also the exemplar of much that goes on in the business world. Now in case you haven't noticed the US auto market is facing a severe and accelerating downturn which appears to have been somewhat unanticipated, particularly by GM. On the other hand the turnaround team at Chrysler at least claims to have positioned itself for a sharp drop in total demand and a major shift in its' structure. And Ford, who'd have thunk it, actually did pretty well all things considered. In fact we'd argue that Ford, relative to what might have been reasonable expectations, is turning in an amazing performance.
Yet all told all manufacturer's are experiencing a very bad and worsening market (& if you don't think that says something about the economy we need to revisit the Into to Macro discussions...). Below in the readings you'll find an overview from Ghosn, some specific stories (BMW, Daimler, GM, Ford) that support these points including the applause for Ford and some big picture discussions of Toyota's structural and strategic advantage as well as the issues with completely re-thinking the stables of brands that need to be downsized. Those last two should be taken together as they define the Yin and Yang of the Auto Industry. At the end of the day, beyond the Business Model - Strategy - Execution - Accountability mantra we've defined for performance what're the necessary changes ? At their heart Auto companies really do one (two) things. They build cars, which more properly broken down, they design and manufacture cars. And coming from the industry that defined the world's model of manufacturing excellence those roots seem to have been lost.
Let's consider manufacturing excellence and the state of the world using the graphic at right. Where
this is important is that the argument applies to any manufacturer anyplace in the world so as stakeholders in any such, whether the Auto guys, John Deere, Caterpillar, or whomever here's a simple model to think about. When you think about it you can make things as 1-Offs, that is completely to order, like a new prototype or an F1 Racer. Or start with some basics but go thru extensive customization like, for example, the Bugatti Veyron. There's a reason that a Veryron is so expensive or a suit from an English bespoke tailor will look great but cost you. The next alternative is to run in batches - that is invest in some capital equipment and make more than one of pretty much the same thing. Make enough and pretty soon the cost/unit is less, and then far less. Which suggests that if you set up a manufacturing assembly line you can just churn those suckers out for lower and lower unit cost. Finally there's the notion of making things a continuous process, as say, an oil refinery or chemical plant does. Or for that matter, in a way, Intel or TI do. The reasons more don't do that is pretty obvious - not everything's a barrel of oil, a gallon of chemical or a one of a million chips. (admittedly stretching the point). So for most things where market size, product characteristics and manufacturing technology dictate you end up choosing between custom, batch or line processes.
What Toyota introduced many years ago was a manufacturing process that didn't require a giant, rigid, very high volume, inflexible and non-interruptible manufacturing process. Otherwise known as the Toyota Production System or "Lean Manufacturing". What they discovered was a way to organize manufacturing where one could achieve comparable economies thru more flexible and cellular manufacturing. Which by it's very nature was also more flexible in terms of both setup and interrupt and different models. In other words it was profitable to make just enough to suit a particular market and then switch to different models. Now in the first picture what you see is the shift of unit manufacturing cost, that is direct operating cost, as the result of this innovation until a Lean Manufacturer can beat a line manufacturer on direct costs. Sadly we've known about all this for several decades. More sadly of the companies who've started Lean initiatives some 70-80% are abandoned. But the consequences are even more dire.
Because you see we were talking just about direct manufacturing costs. If you're committed to a full-roar line process you keep it pumping no matter what - which means you build as much as possible and stuff the market with stuff the customers may not want so you end up with lower prices. And worse yet because you're running these giant machines you've got these equally huge procurement and distribution operations that are just chock-a-block full of inventory, costs, delays and disruptions. On the other hand a Lean Mfg who's running in much smaller lots, who can stand to be interrupted, who can start & stop, change models, etc. etc. and doesn't mind as much idling his operations enjoys benefits in Total Operating costs and Revenue per unit. The end result is two strategic benefits. One is a much higher unit profit than a traditional manufacturer. The other is a long-term dynamic advantage as and if they keep improving - able to make more and more profit from more and more targeted products that add value and command higher prices.
Now we've argued that the US Steel Industry was a perfect model for what the Auto Industry is going to have to go thru. It looks like Ford and Chrysler have finally realized that and are well-started. But what other industries and companies need to get on this bandwagon. Give it some thought. Better yet ask who's on this journey to a complete re-think and re-work of manufacturing operations. Those will be the folks you want to invest in. Contra wise the ones who aren't, or who abandon these sorts of initiatives, are going to face an increasingly inhospitable world.
Outlook
Nissan's Ghosn Sees Prolonged US Car Market Slump The U.S. car market, the world's largest, won't recover before 2011, Nissan Motor Co. Chief Executive Officer Carlos Ghosn said. ``The U.S. is slumping in 2008,'' Ghosn said today at a news conference in Portugal. ``At best, in 2009 and 2010 we'll see a stabilization.'' Like larger Japanese rivals Toyota Motor Corp. and Honda Motor Co., Nissan depends on North America for more than one- third of sales. Honda leads the pack with a 54 percent contribution last year. An increase in the value of the yen against the dollar has also hurt Japanese automakers by reducing the value of U.S. sales converted back into yen. The European and Japanese car markets will continue to stagnate or decline, said Ghosn, who also heads Renault SA, the French carmaker that owns 44 percent of Nissan.
- Nissan to report 24% gain While Detroit will report another month of steep declines, Japan's auto makers saw April gains, led by Nissan's Altima, Murano and Versa.
Companies
BMW First-Quarter Profit Falls 17% on U.S. Economic Slowdown; Sales Climb ``The international financial crisis worsened and the climate for consumer spending became gloomier,'' BMW said in today's statement, adding that profit was hurt most by the U.S., which accounts for one-quarter of deliveries. Unit sales in the world's largest economy fell 5.4 percent to 27,404 in March, led by an 8.7 percent drop at the main BMW brand. Federal Reserve Chairman Ben S. Bernanke said April 2 that gross domestic product may contract this half. ``BMW is putting on a brave face, but one has to wonder when a turnaround in U.S. sales will be seen,'' said Stephen Pope, chief global strategist at Cantor Fitzgerald in London. ``The margin for a luxury brand is with top of the range models and that's where the bulk of withering demand is seen.'' Pope has a ``sell'' recommendation on the shares.
Daimler Net Drops 32% as Chrysler Stake Weighs On Profit, Truck Sales Fall -- Daimler AG, the world's second- largest maker of luxury vehicles, said first-quarter profit dropped 32 percent, more than estimated, after a stake in former U.S. unit Chrysler dragged down earnings and truck sales fell. Net income declined to 1.33 billion euros ($2.07 billion), or 1.29 euros per share, from 1.97 billion euros, or 1.89 euros, a year earlier, Stuttgart, Germany-based Daimler said in a statement today. Analysts had predicted a profit of 1.46 billion euros. Revenue barely rose to 23.5 billion euros.Daimler's 20 percent stake in Chrysler, the third-largest U.S. automaker, wiped 491 million euros from earnings as a slowing economy hurt sales. Revenue at the truck business, the world's largest, fell 13 percent to 6.33 billion euros as U.S. deliveries plummeted 47 percent. Mercedes-Benz Cars boosted both profit and sales. ``The relatively weak truck sales clearly show that this business is not a one-way street,'' said Juergen Meyer, who helps oversee 1.2 billion euros, including Daimler shares, at SEB Asset Management in Frankfurt. ``The profit development at the passenger cars unit was, on the other hand, quite pleasing.''
Facing reality at GM Truly determined optimists purported to divine good news amidst the wreckage of General Motors' $3.25 billion first-quarter loss. To be sure, the financial results were better than some had expected, GM made money everywhere except in North America, and the automaker is doing better controlling its costs. But what was notable about the earnings announcement, as well as the subsequent conference call with analysts and journalists, was how difficult the quarter really was in North America -- and how hard GM is finding it to face up to that reality. The big news came when newly named president Fritz Henderson more or less admitted that GM markets and distributes cars under too many brands - but can't cut the underperformers because doing so would cost too much. On Wednesday, Henderson let the cat out of the bag, in effect saying that it wasn't the strength of the brands that kept them in business, but the cost of getting rid of them. Several other first-quarter events made a mess out of any immediate plans to return GM North America to profitability. The big one was GMAC, its once-dependably profitable finance arm, which lobbed losses of $276 million onto GM's operating statement, and added to the injury with a $1.5 billion non-cash impairment charge. Sluggish auto finance hurts GMAC, GM posts big loss as U.S. sales hurt
Ford's Profit Shows Mulally May Do for Automaker What He Did for Boeing -- Ford Motor Co. Chief Executive Officer Alan Mulally may be pulling a repeat: Turning around the No. 2 U.S. automaker in the same way that he helped revive Boeing Co., the world's second-largest aircraft maker. At Boeing, Mulally slashed employment as head of the commercial airplane division by more than half, to about 50,000 in eight years. He sped production of a more fuel-efficient jetliner, the 787, and helped lay the groundwork for record orders. In his current post, Mulally has eliminated 46,300 jobs in North America over the past two years as Ford has closed or scheduled to close nine plants to match its shrinking manufacturing footprint. One shut plant will be re-opened. Mulally still hasn't shown that he can boost U.S. demand for Ford products. The company has posted just three monthly sales increases in its home market since Mulally took over. Ford now claims 16 percent of U.S. sales, down from about 25 percent 13 years ago. Kerkorian Buys 4.7% of Ford, Seeks More Shares as He Backs Mulally's Plans
Ford Gets a Big Vote of Confidence This is the first time that Mr. Kerkorian has made a major automotive investment because he actually believes in the company's management and direction.The people who should be concerned are the executives at General Motors. Mr. Kerkorian's latest move might spotlight concern that GM's own turnaround effort, which appeared well underway until last fall, is hitting potholes just as Ford's seems to be accelerating. The turnaround efforts at both companies – not to mention Chrysler, which as a private company no longer reports financial results – still have a long way to go. But the bottom line is that Ford appears to have pulled ahead. Mr. Kerkorian's latest automotive investment is best viewed as proof of that.
Strategic Re-structuring
Toyota's Open Secret of Success Calling Toyota an innovative company may, at first glance, seem a bit odd. Its vehicles are more liked than loved, and it is often attacked for being better at imitation than at invention. Fortune, which typically praises the company effusively, has labelled it “stodgy and bureaucratic.” But if Toyota doesn’t look like an innovative company it’s only because our definition of innovation—cool new products and technological breakthroughs, by Steve Jobs-like visionaries—is far too narrow. Toyota’s innovations, by contrast, have focussed on process rather than on product, on the factory floor rather than on the showroom. That has made those innovations hard to see. But it hasn’t made them any less powerful. At the core of the company’s success is the Toyota Production System, which took shape in the years after the Second World War, when Japan was literally rebuilding itself, and capital and equipment were hard to come by. A Toyota engineer named Taiichi Ohno turned necessity into virtue, coming up with a system to get as much as possible out of every part, every machine, and every worker. The principles were simple, even obvious—do away with waste, have parts arrive precisely when workers need them, fix problems as soon as they arise. And they weren’t even entirely new—Ohno himself cited Henry Ford and American supermarkets as inspirations. But what Toyota has done, better than any other manufacturing company, is turn principle into practice. In the nineteen-nineties, a McKinsey study of companies that had put quality-improvement programs in place found that two-thirds abandoned them as failures. Toyota’s innovative methods may seem mundane, but their sheer relentlessness defeats many companies. That’s why Toyota can afford to hide in plain sight: it knows the system is easy to understand but hard to follow.
- The Machine That Changed the World: The Story of Lean Production-- Toyota's Secret Weapon in the Global Car Wars That Is Now Revolutionizing World Industry by James P. Womack, Daniel T. Jones, and Daniel Roos
- Lean Thinking : Banish Waste and Create Wealth in Your Corporation, Revised and Updated by James P. Womack, Daniel T. Jones, James Womack, and Daniel Jones
Which Auto Brands Should Go? There are too many brands and not enough buyers. Many auto-industry insiders agree weak ones should go, but it's not that easy. For years Detroit kept drivers and dealers happy by offering a range of marques, many of which were differentiated by little more than a grille and a badge. But those days are gone. The growing feeling is that to fix themselves, one of the first things automakers need to do is concentrate their resources on the brands that still resonate and jettison those that are underperforming. Mercury and Volvo are so vulnerable because sales for both brands continue to struggle. Over the past five years the two brands have seen sales decline 36% and 4%, respectively. And even though GM successfully killed off its money-losing Oldsmobile division—not without plenty of caterwauling from dealers, journalists, and customers—and Chrysler ditched Plymouth, there are plenty of other candidates for sale or closure. The problem is that it's not easy to kill off or sell a brand. There are three major obstacles: alienating customers, angering dealers, and incurring substantial costs for laying off workers and shuttering plants.