Once More Into the Breech: 3 Decades of Auto (Industry) Delusions
Now that all the market excitement has gone away it's time to return to our roots and talk about business performance some more. Specifically the Auto Industry whom we don't mean to abuse to much but have done so before and will likely have future opportunities. Actually, all things considered, we hope so. Oh wait...the Industry employs 13 million people and is 4% of the GDP. And Goldman just said sell GM after it, or because or something, reached a 53 year low. We'll leave it to you to graph out the stock prices of the Failing 3 but's pretty scary. We've covered the industry several times before and actually had both good and bad things - good in that they were finally gingerly sneaking up on their fundamental requirements for deep structural changes. Bad in that they were sneaking up, were kidding themselves about the state of the industry and economy and we thought they were going to get body-slammed real bad. Ahem....
After the break we've got our little collection of readings from which there are some primary take-aways. Detroit has finally conceded - knowing and doing are two very different things mind you - that the future is NOT pickups and they need to change their model mix. And they're also willy-nilly converting to the high church of not 16 million in annual sales. More interestingly they're starting to be willing to tackle the kind of revolutionary changes needed to survive. The example being GM's Volt - which could be a real game changer. And is the kind of innovation that made Detroit great. The sad things in all this is there's plenty of talented people who knew what was wrong, know how to fix it but opted for incrementalism because the didn't feel the boiling water. No matter how many dashboards run back how many years. One of our favorite quotes suggests that the Industry can't survive at 14 million cars for two years. Check out the chart - they did just fine for three decades between 13-14mil !!! What misplaced fantasy of lease-financing, discount subsidies and over-production of ancient models nobody really wanted made them think it was graven on stone ?
The problem is that the let themselves get trapped in a corner by their own manufacturing - though admittedly there have been major improvements. Here's one of the things that have gotten them into three decades of up and down. When TOY created (actually borrowed from Westinghouse) their Production System (TPS) the changed the traditional economics of manufacturing. Before the lowest unit cost was from processes, then assembly lines and then batch manufacturing. So you made money by keeping the lines running at any cost and shot for enormous scale. By moving to more flexible, cellular manufacturing TOY could run their lines in much smaller sizes, they got lower unit costs and they kept getting better and better. This may seem a little arcane but manufacturing competence is one of the two core requirements for Detroit's success. Just as much as software development should be Redmond's. In all cases start falling down, or loosing ground big time on those core capabilities, and you're writing out your own death warrent. When Kirkkorian put money into GM a while back I though he was nuts because GM was dodging the issue; contrawise when he put money into Ford this spring I thought he was a darn smart risk-taker because Ford under Mullaly is starting on those changes. Now in a matter of a few months everybody's conceeded. Do they have time ? The need to make money at 12-14Mil cars - in fact they need to defend their turf in much smaller corners than that.
Bear with us on this one - it should be worth your while but amateur graphic artists that we are, using PPT and trying to capture ideas in 3D and then blog 'em leaves some challenges open. Nonetheless with a little imagination and sympathy this may be clear - the Auto Industry (or - we emphasize - any) is driven by the key dimensions of its' ecology and their dynamics. Here the dimensions are vehicle type, customer socio-graphic and car size. Detroit had this space all to itself but the Japanese got in in the econo-box and used manufacturing excellence to expand into the rest of the space while Detroit kept retreating to Pickups. The Japanese even did an end around by attacking the flank and creating their own luxury models. When you give up marketspace you lose economies of scale. If you lose economies of scale you need to change your own processes and economics but Detroit was trapped and kept retreating. When you loose marketspaces to a competitor who can make money in smaller niches thru better products where their profit and returns are higher at any concievable scale they become cash-flow generating machines. And you become profit-sucking machines. Instead of milking SUVs and Pickups for profits, x-subsidizing the rest of their products and brands and fighting rearguard Detroit would have been better off re-investing in development,manufacturing, marketing, distribution, logistics and everything else.
They're smart people who're backed into a corner and if they don't make it they'll take a chunk of our economy with them. Not good. As an investor though these are the strategic issues to consider, unless you want to go back and ride the old roller-coaster with the old Kirk. BtW our two prior posts on the Industry had some interesting charts that flesh out this picture and assessment. (Auto Industry:Boil, Boil, Toil and Trouble)
GM Reacts to Sales Slump GM plans to extend the summer shutdowns at six plants and boost sales incentives to clear its bloated inventory of large vehicles. The auto maker will also raise prices on its 2009 models by 3.5% on average. Expanding its efforts to address a steep decline in sales of pickup trucks and sport-utility vehicles, General Motors Corp. plans to extend the summer shutdowns at six plants and to offer more sales incentives to clear its bloated inventory of large vehicles. The company will also raise prices on its 2009 models by 3.5% on average, equal to about $1,000 per vehicle, to help cover increased commodity costs, additional vehicle content and fuel-economy technology. GM is continuing to revamp its entire product portfolio and production schedule amid the sharp decline in the sale of pickups and sport-utility vehicles as consumers skip the gas-gulping large vehicles in favor of smaller cars at a time of $4-a-gallon gasoline. GM shares, which hit a 33-year low on Monday, were down 6% at $13 in recent trading. GM's production changes come three days after Ford Motor Co. announced plans to further slash production of large vehicles and delay the release of its redesigned F-150 pickup truck by two months. Chrysler, the other major U.S.-based auto maker, has also said it will scale back production of large vehicles. The Big Three Detroit auto makers have long relied on trucks and SUVs to sustain themselves. The recent dramatic decline in sales of large vehicles has heightened concerns that U.S. auto makers could face increased financial pressure as they burn through cash at a quicker rate. Auto-Parts Firms Face Trouble As Car Makers Retool Production
Nissan's Ghosn: Tough Times Nissan Chief Executive Carlos Ghosn sought to allay fears about the company's declining share price Wednesday, saying the damage was coming from soaring oil costs, a U.S. economic slowdown and other factors that were hurting all automakers. Ghosn, who also serves as head of the Japanese automaker's alliance partner Renault SA, told a shareholders' meeting that a stagnant Japanese auto market and rising steel and materials costs were also to blame. Nissan shares have fallen 37 percent over the last year and a half and 14 percent since the start of the year. On Wednesday, they dipped to 895 yen ($8.30). In outlining Nissan's five-year plan through 2012, Ghosn vowed that Nissan would continue to grow in the years ahead by expanding in emerging markets such as China, Russia, India and Brazil. He acknowledged, however, that the same kind of growth cannot be expected in the traditional markets of the U.S., Europe and Japan. But he said Nissan has good strategies that will not be changed because of share fluctuations. He outlined to shareholders some of those strategies, including Nissan's cheap "entry-level car," promised for 2011, to respond to the needs of emerging markets. The company is also working on a zero-emission electric vehicle to address ecological concerns, Ghosn told more than 2,000 shareholders gathered at a convention center in Yokohama, southwest of Tokyo. The cars Americans love best
Electro-Shock Therapy GM, he tells me, is taking an industrial organization designed to grind out incremental improvements and repurposing it for a technological leap. “I spend 20 percent of my time being a psychologist and counselor,” he says. “I tell people, ‘Yes, there’s a lot of risk. And, yes, that’s OK.’ “It’s not a program for the faint of heart.” When one of the world’s mightiest corporations throws everything it’s got at a project, and when it shreds its rule book in the process, the results are likely to be impressive. Still, even for General Motors, the Volt is a reach. If it meets specifications, it will charge up overnight from any standard electrical socket. It will go 40 miles on a charge. Then a small gasoline engine will ignite. The engine’s sole job will be to drive a generator, whose sole job will be to maintain the battery’s charge—not to drive the wheels, which will never see anything but electricity. In generator mode, the car will drive hundreds of miles on a tank of gas, at about 50 miles per gallon. But about three-fourths of Americans commute less than 40 miles a day, so on most days most Volt drivers would use no gas at all. Because it will have both an electric and a gasoline motor on board, the Volt will be a hybrid. But it will be like no hybrid on the road today. Existing hybrids are gasoline-powered cars, with an electric assist to improve the gas mileage. The Volt will be an electric-powered car, with a gasoline assist to increase the battery’s range. With the Volt, GM—battered, beleaguered, struggling for profitability—hopes to re-engineer not just the car but the way the public thinks about cars, the way the public thinks about GM, and the way GM thinks about itself.
- Can the Volt Save GM? Can the new fuel efficient Volt save General Motors? Erich Merkle, of IRN, and CNBC's Phil LeBeau discuss.
Goldman Cuts GM, Other Auto and Parts Cos. Goldman Sachs downgraded General Motors Corp (NYSE:GM - News) to "sell" from "neutral," and added the stock to its "Americas Sell List," saying the main risks for the automaker included likely equity dilution, dividend cut and cash burn. GM shares, which have lost 47 percent of their value since the start of the year, were down nearly 8 percent at $11.81 before the bell on Thursday. Analyst Patrick Archambault, who also cut his ratings on Lear and Tenneco, said he expects GM shares to continue to underperform as market fundamentals deteriorate which exacerbates liquidity concerns. He cut his 6-month price target on GM stock by $8 to $11. "We think GM's automotive cash flow burn this year and next is likely to lead it to look to raise capital, which we believe could lead to significant shareholder dilution and/or a cut to the company's dividend," Archambault said.
- GM at 53 Year Low A look at how the company has been performing in the past 20 years, with CNBC's Phil Lebeau
Detroit's Carmakers Seem to Be Imploding GM led the way, hit hard by a downgrade to a "sell" recommendation from Goldman Sachs. The report set off a chain reaction that pulled down shares of automakers' parts suppliers as well. The entire industry — upon which 13 million jobs in the USA and 4% of the nation's GDP depend — took a beating.But most of the auto anxiety seemed be a reaction to bad news that's been building all week, combined with a kind of anticipatory panic — a stampede in advance of the June sales numbers due Tuesday. That report's expected to be almost unbelievably bad, confirming fears that the spring plummet of the car and truck business in the USA has far from bottomed. Consultant J.D. Power and Associates is predicting June sales will calculate to an annual selling rate of 12.5 million, a breathtaking drop from a rate of 15.6 million in June 2007.
Comments
Business Week told us back in 2005 that GM couldn't survive at less than a 26% share at 17 million SAAR sales.
Currently at 21% and 13.6 million, it looks as though that prediction might well be correct.
Posted by: Michael Donnelly | July 2, 2008 01:51 PM