Crisis at Detroit Three drives industry rethink

[doh]

http://ctv2.theglobeandmail.com/serv...N/ctv-business

GREG KEENAN, From Monday's Globe and Mail




The crisis threatening the future of the Detroit Three will radically reshape the industry even if the talks between Chrysler LLC and General Motors Corp. don't bring about a merger.

“What we're witnessing is the utter collapse of an outdated business model that developed for a much different era when the North American market was vastly less competitive,” said John Casesa, a veteran auto industry analyst and now managing partner of Casesa Shapiro Group LLC in New York.

That model consisted of expensive labour and auto makers that were global in scope but granted their regional operations almost complete independence to develop their own vehicles, instead of sharing resources and best practices throughout the company.

Detroit only began working on redesigning that model a few years ago, and now it's probably too late, Mr. Casesa noted.

“I think these events will lead to a much smaller North American-owned auto industry,” he said. “Detroit's domination is over.”

That could be through a Chapter 11 bankruptcy filing by one or more of the companies, mergers, takeovers by offshore players such as Fiat SpA or Renault SA seeking to jump into North America, or forced marriages by a U.S. government determined to create a national champion.

“The accelerated remaking of the domestic auto industry is proceeding down an irreversible course,” said industry consultant Bill Pochiluk, president of AutomotiveCompass LLC in West Chester, Pa.

The talks of merger and whispers of looming bankruptcy filings come amid a global credit crisis that has hammered three companies already struggling to stay afloat.

The credit crisis is the third of a series of towering waves that have swept over the Detroit Three in the past decade.

The first wave – gradually at first and then more rapidly – was the erosion of their long-standing market domination in North America.

They started adjusting by restructuring and slashing work forces and manufacturing operations earlier this decade.

The second and third waves battered the companies in rapid succession this year, even as they were still rebuilding from the damage caused by the first.

The second wave was the sudden spike in gasoline prices to more than $4 (U.S.) a gallon this spring. That sent sales of pickup trucks plunging and obliterated demand for traditional sport utility vehicles, which had been the source of any profits the companies were making.

The credit crisis is the third wave, and it threatens to wipe out their financial resources and send them over the edge.

GM, for example, unveiled a plan this summer to boost its financial reserves by $15-billion by the end of next year through a combination of cost-cutting, asset sales and raising of new capital.

That plan assumed – then thought to be a grim scenario –vehicle sales of 14 million this year and in 2009 in the U.S. market.

But sales are tanking below even that level, with two forecasts predicting sales barely above 13 million.

There were reports over the weekend that Ford Motor Co. is seeking to sell its 34-per-cent holding in Mazda Motor Corp. of Japan in another effort to raise cash.

Rating agency Standard & Poor's warned last week that Ford and GM could deplete their financial resources by the end of the year. That sent those companies' shares tumbling to record lows.

All three Detroit auto makers took the unusual step Friday of denying that they are planning to file for Chapter 11 bankruptcy.

But the credit crisis has effectively eliminated their ability to raise money, which means GM won't be able to finance a merger with Chrysler, industry sources said.

“No bank is going to come anywhere near this,” said one source. “If a bank was to do it, what bank? Where's that money going to come from?”

Chrysler, which Daimler AG sold to private equity fund Cerberus Capital Partners LLP, appears to be in the worst financial shape of the three because of its lack of global scope and heavy reliance on the now-collapsed pickup truck and SUV market.

[mgescuro]

Originally Posted by doh

Detroit only began working on redesigning that model a few years ago, and now it's probably too late, Mr. Casesa noted.

“I think these events will lead to a much smaller North American-owned auto industry,” he said. “Detroit's domination is over.”

Detroit's domination has been over for quite some time.
They just refused to realize it. Plus the union has also failed to realized it, forcing the Big 3 to remain non-competitive.

GM and Chrysler's strategy has been ineffective and outmoded. And while GM has started reversing it's strategy this decade, it's really about a decade too late. They couldn't afford any stumbles on their brand turnarounds, yet every single one has failed.

Originally Posted by doh

But the credit crisis has effectively eliminated their ability to raise money, which means GM won't be able to finance a merger with Chrysler, industry sources said.

Look for a Chapter 11 filing by one or more of the Big 3 by end of Q1 next year. That's my guess.

[nadepalma]

No doubt tough times are ahead for all of the American car manufacturers.

GM really needs to signal that they are going to make the tough choices. They can talk all they want about merging or partnering with Chrysler, but they need to get their own operations in order as well. They should start by culling the brands they don't need, paying off the dealers, and driving their sales channel strategy down from four to three.

That would be a good start.

Then instead of looking to "buy" Chrysler or "merge" with FoMoCo, they should seek to cooperate more on technology. The 6speed auto-box between Ford and GM was a good start. But what about cooperating on hybrids, electric cars, CVTs or dual-clutch boxes, engines or platforms? They could compete just as fiercely with each other to market their own brands, but still cooperate on much of this.

Pooling their resources between the three brands might make better sense at this point than any equity swaps.

[mgescuro]

I think Ford's strategy -- thought I don't fully agree with it -- is actually more comprehensive and more widespread than GM.
Ford seems to be overhauling the fundamental problems at FoMoCo, and using a more widespread, global strategy.
Whether they are doing it in time, remains to be seen, as they started fixing their problems later than even GM, and they have less money than GM.

However, Ford isn't making the same mistakes as GM. Ford is bringing over their global cars to the US. The question is, how "modified" will they be from their global counterparts? Will there be a "premium compact" or will that level remain outside of US borders? And if, for some reason, the desire for a premium compact does arise, how soon would it take for Ford to launch it in the US?

My money's on Ford to finish the turnaround before GM because they are simply making the right choices and cutting where it is needed instead of hiding behind PR spin and rhetoric -- even though I don't agree where the cuts took place at Ford.

[steve333]

Originally Posted by nadepalma

No doubt tough times are ahead for all of the American car manufacturers.

GM really needs to signal that they are going to make the tough choices. They can talk all they want about merging or partnering with Chrysler, but they need to get their own operations in order as well. They should start by culling the brands they don't need, paying off the dealers, and driving their sales channel strategy down from four to three.

That would be a good start.

Then instead of looking to "buy" Chrysler or "merge" with FoMoCo, they should seek to cooperate more on technology. The 6speed auto-box between Ford and GM was a good start. But what about cooperating on hybrids, electric cars, CVTs or dual-clutch boxes, engines or platforms? They could compete just as fiercely with each other to market their own brands, but still cooperate on much of this.

Pooling their resources between the three brands might make better sense at this point than any equity swaps.

I agree 100%. Just co-develop technologies together to save money.
As for GM, Saturn just needs to be killed off. Period. Opel vehicles could be split between Buick and Pontiac.
Opel Corsa=Pontiac LeMans
Opel Astra=Pontiac Sunfire or Buick Skylark
Opel Insignia=Buick Regal or Invicta
Opel Meriva=Buick whatever
Opel GT=Buick Riviera or Bengal

[johnnyl321]

[quote=nadepalma;1535287]No doubt tough times are ahead for all of the American car manufacturers.

GM really needs to signal that they are going to make the tough choices. They can talk all they want about merging or partnering with Chrysler, but they need to get their own operations in order as well. They should start by culling the brands they don't need, paying off the dealers, and driving their sales channel strategy down from four to three.

That would be a good start.
QUOTE]

There's an awful lot of dealerships that would have to be paid off. How would they know what to offer? I've read that GM has something like 6500-6700 dealerships in the USA alone!!

[fp115]

Originally Posted by nadepalma

No doubt tough times are ahead for all of the American car manufacturers.

GM really needs to signal that they are going to make the tough choices. They can talk all they want about merging or partnering with Chrysler, but they need to get their own operations in order as well. They should start by culling the brands they don't need, paying off the dealers, and driving their sales channel strategy down from four to three.

That would be a good start.

Then instead of looking to "buy" Chrysler or "merge" with FoMoCo, they should seek to cooperate more on technology. The 6speed auto-box between Ford and GM was a good start. But what about cooperating on hybrids, electric cars, CVTs or dual-clutch boxes, engines or platforms? They could compete just as fiercely with each other to market their own brands, but still cooperate on much of this.

Pooling their resources between the three brands might make better sense at this point than any equity swaps.

Two mode is being shared and other technologies are currently being discussed.

[Chaz_23]

One thing I hope will change is this media-induced insanity of always seeking the newest, latest, and greatest, which is causing car makers into a hysteria of coming up with new models, new news, fake news, more power, more space, more useless electro gimmicks, etc. They need to cool it, it'll save them lots of money in the long run.

[akenaten]

Originally Posted by Chaz_23

One think I hope will change is this media-induced insanity of always seeking the newest, latest, and greatest, which is causing car makers into a hysteria of coming up with new models, new news, fake news, more power, more space, more useless electro gimmicks, etc. They need to cool it, it'll save them lots of money in the long run.

There has to be some way to dump Saturn,Pontiac,Saab and Hummer.


In the end though maybe ricky bobby will just take a multi-million dollar payout and dump the whole thing.

Then America can make Consumer Reports happy and all drive Camccords.

[bone]

Originally Posted by mgescuro

I think Ford's strategy -- thought I don't fully agree with it -- is actually more comprehensive and more widespread than GM.
Ford seems to be overhauling the fundamental problems at FoMoCo, and using a more widespread, global strategy.
Whether they are doing it in time, remains to be seen, as they started fixing their problems later than even GM, and they have less money than GM.

However, Ford isn't making the same mistakes as GM. Ford is bringing over their global cars to the US. The question is, how "modified" will they be from their global counterparts? Will there be a "premium compact" or will that level remain outside of US borders? And if, for some reason, the desire for a premium compact does arise, how soon would it take for Ford to launch it in the US?

My money's on Ford to finish the turnaround before GM because they are simply making the right choices and cutting where it is needed instead of hiding behind PR spin and rhetoric -- even though I don't agree where the cuts took place at Ford.

I agree. It would not surprise me, as much as I would hate it, to see both GM and Chrysler fail completely. Ford has the benefit of a more globally centred focus spearheaded by a real leader in Alan Mullally. GM and Chrysler are in disarray because of the ineptitude of senior management over the last 30 years. If GM would make the difficult decision to immediately cut down to two N.A. brands ( Chev and Caddy) they might have a chance.

[fp115]

Originally Posted by bone

I agree. It would not surprise me, as much as I would hate it, to see both GM and Chrysler fail completely. Ford has the benefit of a more globally centred focus spearheaded by a real leader in Alan Mullally. GM and Chrysler are in disarray because of the ineptitude of senior management over the last 30 years. If GM would make the difficult decision to immediately cut down to two N.A. brands ( Chev and Caddy) they might have a chance.

How do you figure it would be possible to cut brands without billion dollar lawsuits? Figure that out, please as everyone begs for someone to just enlighten us on it.

[FoMoCo Fan]

Originally Posted by fp115

How do you figure it would be possible to cut brands without billion dollar lawsuits? Figure that out, please as everyone begs for someone to just enlighten us on it.

Bankruptcy

[fp115]

Originally Posted by FoMoCo Fan

Bankruptcy

Bankruptcy is just not an option! Why would GM go into that state just to eliminate a few brands? That is something that simply makes no sense, this will be a process that has to be phased out or ultimately done through another deal.

[doh]

My question is "After the Big 3's scramble to switch their focus to small fuel efficient cars, abandoning the SUV and full size truck market."

Now that Oil prices are coming back down, will demand slow or not? Will demand once again jump for pick ups, while the Big 3 cannot keep up to demand?

[fp115]

Originally Posted by doh

My question is "After the Big 3's scramble to switch their focus to small fuel efficient cars, abandoning the SUV and full size truck market."

Now that Oil prices are coming back down, will demand slow or not? Will demand once again jump for pick ups, while the Big 3 cannot keep up to demand?

No, none of it will stop, CAFE is still coming up.