Saturday, May 24, 2008

Can The Big Three Auto Makers Make It To 2010?

In March, I seriously questioned the viability of GM and Ford given their overly optimistic projections and declining economic conditions. Now, after months of denial, Ford has finally come clean and admitted that they would not be able to meet their profitability projection for 2009. GM had already stated in their FY 2007 financial results that they are looking to 2010, having written off 2008 and 2009.

“Ford said Thursday that it would drastically scale back production and step up cost-cutting efforts in response to a sharp drop in sales of pickups and sport utility vehicles. Ford executives also retreated from their pledge of delivering a full-year profit for 2009.” - NY Times

A surprising turn of events after Ford announced a first quarter profit? Not at all. Rather, the first quarter profit is the surprise. With the Big Three U.S. automakers (GM-Ford-Chrysler, a.k.a. the “Big-3”) still producing larger SUVs and trucks instead of fuel-efficient cars that consumers are demanding, it will be a very difficult future for the Big-3.

Simply put, the high fuel prices changed the rules of the game and the Japanese automakers making further changes with their hybrid cars. Honda has its hybrid Civic and Toyota has its Prius – the tope selling hybrid cars in the U.S. For the Big-3, only GM and Ford have hybrids in their current lineup. GM has hybrid SUVs, GMC Yukon and Tahoe, that get 20 city / 22 hwy MPG. GM has hybrid Chevy Malibu and Saturn, a part of GM, has two hybrid cars, Aura and Vue. However, their MPG is no better than a small block 4-cylinder engine’s at 25 city / 32 hwy MPG. Ford has only the hybrid Escape that is rated at 30/34 MPG. (Source: Yahoo Auto)

How Much Worst Can It Get?
“Ford is now forecasting that industry demand for cars and light trucks will be 14.7 million to 15.1 million vehicles — the lowest point in more than a decade.” - NY Times

According to BTS, the total figure for new vehicles sales and leases for 2007 was 17,129,000. So Ford is forecasting 2008 sales to decrease by approximately 11.8% to 14.2% from 2007. According to Motor Intelligence’s New Car Sales report as of May 5, 2008, the total light truck sales dropped by 17.6%, year over year, from 715,730 in April 2007 to 589,989 in April 2008. On a year-to-date basis, the total light truck sales dropped by 13.5%, year over year, from 2,817,280 for January-April 2007 period to 2,436,375 for January-April 2008 period. For cars the total year-to-date sales dropped by – 0.8%, year over year, from 2,409,394 for January-April 2007 period to 2,389,234 for January-April 2008 period.

With the fuel prices well over $4 in many cities, the potential for regular mid-size to large cars, SUVs, wagons, and light truck sales to drop even further than 11.8% to 14.2% in 2008 is quite high. With GM, Ford, and Chrysler not having much to offer to panicked buyers seeking high MPG cars, it will be the Japanese auto makers, once again, taking more market shares away from the Big Three. The shift of market shares to the Japanese auto makers have been very sharp in the first few months of 2008 with buyers scooping up hybrid electric-gas cars made by Toyota and Honda.

Further adding sting to the pain, is the news that Honda is on a mission to bring a hybrid Honda Fit to the U.S. market in 2009 and plan on adding new models to the hybrid lineup in the next three years. The Honda Fit is already a very fuel-efficient car at 28 city / 34 hwy MPG. Imagine what the hybrid engine will do. I am guessing at least 50 MPG. Oh, the new hybrid Fit will be only about $1,900 more than the standard gas model. The Big-3 is in big trouble.

Toyota is not standing pat. They announced plans to expand their battery producing capacity and plan on selling 1 million hybrids by 2010. With Toyota and Honda eating Big-3’s lunch, what are the Big-3 doing? It is not like they didn’t know that this was happening or lack the technology. GM and Ford have their international divisions that are experienced in building small cars such as the popular Ford Ka and GM Matiz / Spark. Why didn’t they look to building them in the U.S.? Even the Japanese, Korean, and German automakers are building cars in the U.S. and exporting them out.

Are the Big-3 officers so dense as to not realize that the oil prices will go up and quite soon? Have they not learned their lessons in 1970’s with the OPEC oil embargo and Japanese car invasion? How is it that the international automakers are able to build vehicles that consumers want on a timely basis while the Big-3 cannot seem to make substantial changes even when given a head start with the Freedom Car Project that launched in 2002?

For those naysayers that think that we cannot bring the extreme subcompact cars such as the Ford Ka and the GM Matiz / Spark to the U.S., please look at other extremely small cars that have passed the necessary federal standards and are selling in the U.S.: Smart Car and the Cooper Mini.

Finally, if any of the readers think that I am bashing U.S. automakers, dissuade yourself of that thought. All automakers are international, including the Big-3. While their headquarters are in Detroit, the Big-3 have less footprint in the U.S. than the Japanese automakers. In my book, the U.S. automakers are the ones that create jobs in the U.S. by building plants in the U.S. Using this measuring stick, the Big-3 are ‘foreign’ automakers.

So, God bless the automakers, with U.S. assembly plants[i], who are turning out quality cars that rank high in safety, quality, reliability, and customer satisfaction. Maybe you have heard of them. They are Honda, Toyota, Nissan, BMW, and Hyundai.

Risk Assessment
The potential for the Big-3 to lose more market shares to other international automakers are increasing every year. As more fuel-efficient cars enter the market, such as the VW Up! and the Fiat 500, the Big-3 will be forced to close more of their existing assembly plants to retool to build smaller, fuel-efficient cars. Additionally, they will be financially strapped as they sit on growing inventory of SUVs and light trucks that just won’t sell. Making matters worst are the SUVs and light trucks coming off leases. They will add to the bulging inventory of large vehicles that consumers will shun. So, between market loss, closure of plants, retooling, and ever-growing inventory of un-sellable vehicles, expect to see more news of Big-3 taking billion dollars more in losses.

Ed Kim
Practical Risk Manager

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