The Detroit Three ... Two? One?

[doh]

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

By BARRIE McKENNA and GREG KEENAN , From Saturday's Globe and Mail




WASHINGTON, TORONTO — The time has finally come to unload the old Toyota Prius you bought back in 2008.

So you take the plunge and get the new Version 2.0 of GM's wildly popular Volt electric car. It's faster, roomier and cheaper than the original Volt, and its plug-in technology is a generation ahead of the Prius.

But instead of heading to a car dealership, you use your iPhone to go to www.gm.com. A few taps and you've bought yourself a $25,000 Volt, ready for pick-up at your nearest Wal-Mart in two weeks.

Welcome to 2013. The dark days of GM's bankruptcy are a distant memory. Freed from rich union contracts and a bloated dealer network, the new General Motors Corp. is lean, mean and the king of green.

The rest of the industry is virtually unrecognizable.

GM is also a whole lot smaller. The company has shuttered five assembly plants and its once-massive Oshawa, Ont., operations have been scaled back to one assembly plant. About a third of its 64,000 hourly jobs have disappeared. The company that used to have a dealer in every town now limits its outlets to a single store in the each of the 50 largest U.S. cities. Instead, it has a network of retail partners, including Sears and Wal-Mart.

There's no Pontiac, GMC, Saturn, Saab or GMC dealers. You can buy a Chevrolet or a Cadillac in North America and a Buick in China.

The car maker's U.S. market share has stabilized at about 10 per cent, a far cry from the 21 per cent it enjoyed in 2008.

But GM does make money, after erasing the nearly $2000 (U.S.) per vehicle cost edge once enjoyed by Toyota and Honda. The big winners are the Chinese, who acquired a 20 per cent stake in GM in 2009, helping dig the auto maker out of bankruptcy and bankroll the Volt.

Ford, meanwhile, has become a specialty maker of trucks and sport utility vehicles. With its partner Tata Motors Ltd. of India, the company turns a profit by hanging on to about 7 per cent of the market.

Windsor, Ont., once the heart of Canada's auto making industry, is trying is to market itself as a retirement community — "Florida North." The Ford engine plant provides the only auto manufacturing jobs in the city. The Chrysler minivan plant will reopen in a few weeks as a giant indoor paintball emporium and arcade.

Chrysler is gone, dismantled for parts after its own misadventures in Chapter 11 bankruptcy protection.

Think this is all improbable?

The dire straits facing the Detroit Three auto makers have created fertile conditions where even the improbable now seems possible.

This we do know: GM, once an industrial powerhouse, is burning cash at an alarming rate and hurtling toward bankruptcy. Chrysler is in equally bad shape, if not worse, and Ford will run out of cash by the end of next year without a government bailout. Car and truck sales have collapsed. And with predictions of a long and painful recession, the light at the end of the tunnel looks a long way off.

"GM will be a shadow of its former self. I don't think it will be recognizable," predicted Gary Chaison, an industrial relations professor at Clark University in Worcester, Mass.

And the same goes for the rest of the industry, he said.

"I'm not sure they're going to be down to the Big One, but the Big Two is quite possible," agreed Lawrence Hrebiniak, a management professor at the University of Pennsylvania's Wharton School. "You're going to see some bankruptcies. They're going to have to restructure themselves."

Automotive Armageddon?

The economy would clearly take a hit if one or more of the three failed.

After years of restructuring, they aren't the Big Three any more. But auto making still makes up a significant chunk of the U.S. economy — nearly 4 per cent of gross domestic product (GDP), accounting for a 10th of industrial output. Including suppliers and dealers, the industry sustains nearly five million jobs.

The industry-funded Center for Automotive Research in Ann Arbor, Mich., has estimated that a bankruptcy would cost 2.5 million jobs and take a bite of up to $300-billion a year out of the economy — 2 per cent of GDP.

Michigan alone, where unemployment is already well above the national average, could lose 60,000 jobs. Governments would be left with tens of billions of dollars worth of pension liabilities.

A bankruptcy could also trigger a second round of the credit crisis, JPMorgan Chase analyst Eric Selle suggested in a recent report. The Detroit Three make up about 10 per cent of the high-yield bond market and account for $290-billion worth of credit default swaps.

Pleading for $25-billion in emergency loans, GM chief executive Rick Wagoner warned lawmakers of a "catastrophic collapse" of the U.S. economy, with millions of jobs lost as the company's failure ripples across the country.

But others say it need not be the Armageddon scenario laid out by Mr. Wagoner and the heads of Ford and Chrysler in dramatic testimony in Washington this week.

The end of the Detroit Three does not mean the death of the North American auto industry.

The Japanese, South Koreans and Europeans — all of which have growing manufacturing operations and supply networks in North America — are heading into this recession with traction.

Without the constraints of union work rules, they are nimbly responding to the current downturn by laying off workers and curtailing production — something the Detroit Three can't easily, or cheaply, do.

While the Detroit Three have been begging for government aid to ride out the sales collapse and the credit crisis, foreign auto makers have been hunkering down. In Vance, Ala., Daimler AG's Mercedes-Benz factory has cut output, reduced shifts and offered buyouts to its 4,000 workers. Toyota similarly announced this week that it would temporarily suspend production at its plants in Indiana, California and Kentucky for two days in December.

The foreign companies are also cutting back in other markets. Toyota said yesterday that it would cut 3,000 temporary workers, mostly in Japan, as it adjusts to a lower production environment.

Right now, the foreign transplants, with eight assembly plants and 113,000 hourly and white-collar U.S. employees, are overwhelmingly concentrated in the South and West. That compares to roughly 239,000 at the Detroit Three, mainly in the traditional heart of U.S. auto making in Michigan, Ohio and Indiana, according to the Center for Automotive Research.

Unencumbered by the legacy costs of the Detroit Three, the foreign car makers are far better prepared to weather the downturn and thrive during the inevitable recovery. A recent Deutsche Bank study found a still yawning gap between the total hourly compensation (wages and benefits) of GM and Toyota workers in the U.S. — $71 versus $47.

That's why the auto industry will continue its southward drift when it emerges from the current slump. New foreign-owned assembly plants are coming online in states such as Mississippi, Georgia and Tennessee, where wages are lower and union protections weaker.

With each passing year, the transplants will buy more of their parts in North America, saving the wider industry from the economic calamity predicted by GM's Mr. Wagoner.

And if bankruptcies really do break the back of the UAW, the non-union car makers may again see the Northeast as an attractive place to assemble vehicles, suggested economist Peter Morici, a business professor at the University of Maryland, who testified this week at a Senate finance committee hearing that was considering $25-billion in loans for the Detroit Three.

"If the unions are weakened, you might see the Japanese move into the Northeast," he said.

Amid all the turmoil, the Chinese, and even Indian auto makers, are salivating to get into this market. They may see boundless opportunity in the troubles of GM, Ford and Chrysler.

India's Tata Motors and China's Chery Automobile Co. have demonstrated their intent to crack the U.S. market. Tata recently bought Ford's Jaguar and Land Rover Brands and reportedly kicked the tires at GM's Hummer division, which is for sale.

Chery put off plans to sell cars in the U.S. this year. But officials insist they'll be here within five years. Both Tata and Chery have also talked to Cerberus about acquiring parts of Chrysler's business in recent months. A new generation of foreign auto executives could wind up calling the shots in Auburn Hills.

Minimizing the impact

If foreign auto makers were to pick up the slack — or the Detroit companies were to emerge healthier and looking more like their foreign competitors after a stint in bankruptcy protection — much of the impact on the broader economy would be transitory.

Bankruptcy might prove to be the best solution. "If they don't get the government aid, that may actually be a good thing," Prof. Hrebiniak said.

It's already happened to the steel and airline industries. GM might see a glimpse of its future in U.S. Steel and UAL Corp., parent of United Airlines.

Both are survivors of industries that have become much smaller and leaner, in part by clawing back union contracts.

"You can run a small car company and make money," the University of Maryland's Prof. Morici pointed out.

Then there's the dealer mess. Drive down any suburban commercial strip in North America, past the big-box stores and fast-food outlets, and you'll typically find acres of real estate occupied by car dealers, often selling near-identical offerings. Across the United States, there are more than 20,000 of them, far more than the industry needs to sell 10 to 15 million cars a year.

The dealer glut is a legacy of restrictive laws in dozens of states, which prevent the auto makers from selling directly to customers, backed up by threats of costly lawsuits from franchisees.

The king is GM, with more than 6,700 dealers, or nearly five times as many as Toyota. And the average Toyota dealer outsells his GM rival by a factor of three-to-one vehicles a year. All told, the Detroit Three have more than two-thirds of all dealers, but their cars account for less than half the market.

Experts argue that sustaining and supplying all these dealers with models has compounded the Detroit Three's inefficiencies. The current crisis is an opportunity to blow up the dealer system and find a cheaper way to sell cars to consumers.

GM could just as easily showcase its pared down roster of models at a Wal-Mart or Sears store, employing a single salesman.

What about Canada?

So what will all this creative destruction mean for the Canadian industry?

It could be a good thing for the parts industry, which has been forced by circumstances — notably, tightened border security and a wildly fluctuating Canadian dollar — to become more efficient, said Christopher Sands, a senior fellow at the Hudson Institute who studies North American integration.

The same isn't true of the Detroit Three's Canadian assembly plants, which remain highly vulnerable. Mr. Sands worries they could become pawns in the high-stakes political game now playing out in Washington.

"There is a real risk now that the auto companies, in order to get money out of the Congress and the U.S. Treasury, will sacrifice Canadian manufacturing and ship work to U.S. plants," Mr. Sands said.

"That's a cold calculation."

The landscape doesn't favour Canada. There is overcapacity, in North America and globally, "and that is only going to get worse," Mr. Sands pointed out. The logic of the hard-won 1965 auto pact — that Canada should build one car for every vehicle sold in the country — "may not be enough" in the current environment.

There's a problem inherent for Canada in a restructuring of the North American industry, agreed Michael Robinet, vice-president of global vehicle forecasts for CSM Worldwide Inc., an automotive consulting firm based in Northville, Mich.

Asian auto makers will build more vehicles in North America, Mr. Robinet said, "but the vast majority is going to be focused on Mexico and the southern United States."

The debate in the U.S. Congress this week over a Detroit bailout showed that politicians from states that are home to offshore-based assembly plants can be unfriendly to the Detroit Three. When the time comes for new investments next decade, that lesson will not be lost on offshore manufacturers, which derive no political advantage in the U.S. from boosting investment in Canada.

Count Mr. Robinet among those who believe there will only be two Detroit-based auto makers.

Some of the market share will be replaced by imports arriving from China and India, perhaps brought into Canada or the United States by U.S. or European auto makers from plants they have in those emerging markets, or through alliances with Chinese or Indian manufacturers.

Offshore-based companies could be helped by an inevitable resurgence of gasoline prices that will help keep sales of compacts and subcompacts front and centre, he points out.

"There's probably going to be some room in the market for that kind of a vehicle — a low-cost, developing markets car that meets federal standards for safety and fuel economy," he says.

That's not the $2,500 Nano from Tata, but maybe a Nano-plus.

Car of the future

And that brings us back to the Volt. GM knows it must build the car of the future in order to have a future.

GM executives are convinced the Volt is that car. The plug-in (estimated cost: $40,000) will be able to go 40 miles without a drop of gas, reaching top speeds of 100 miles an hour. Later versions would presumably perform even better.

GM vice-chairman Bob Lutz, the company's straight-talking product development czar, has likened the Volt to the company's "moon shot."

[Buickman]

this build 'em overseas and sell 'em on the net philosophy is exactly what Red Ink Rick has been up to and why he has purposely driven GM into the dirt. problem is, lying to investors about it happens to be a crime. therefore he belongs in prison.

[K-1]

Originally Posted by Buickman

this build 'em overseas and sell 'em on the net philosophy is exactly what Red Ink Rick has been up to and why he has purposely driven GM into the dirt. problem is, lying to investors about it happens to be a crime. therefore he belongs in prison.

Evidence, please.

[2002 Caddy]

Originally Posted by K-1

Evidence, please.

You can start by reading the annual reports back to 1999/2000... You know the ones that said they were going to build great small cars... the ones that said the loss of market share was over... the ones that said that we were going to build the best, most efficient cars ever... The ones that said the financials of the company were strong...

Turns out NONE of it was true... Both Rick and the Auditors need to answer some questions in front of a Grand Jury.

[K-1]

Originally Posted by 2002 Caddy

You can start by reading the annual reports back to 1999/2000... You know the ones that said they were going to build great small cars... the ones that said the loss of market share was over... the ones that said that we were going to build the best, most efficient cars ever... The ones that said the financials of the company were strong...

Turns out NONE of it was true... Both Rick and the Auditors need to answer some questions in front of a Grand Jury.

I believe there's a disclaimer in there about "forward-looking statements" too.

Regardless, I was asking for proof of the "build 'em overseas and sell 'em on the net philosophy" comment. Should have been more specific, I guess.

[sigma]

Originally Posted by K-1

I believe there's a disclaimer in there about "forward-looking statements" too.

Regardless, I was asking for proof of the "build 'em overseas and sell 'em on the net philosophy" comment. Should have been more specific, I guess.

There is no evidence and the most recent UAW contract contradicts his statements. You know where the UAW was promised the Cruze/Astra, the Volt, unspecified subcompacts at Hammatrack, Lordstown (and i'm forgetting the other one right now)? Yeah. Whoops. There go the conspiracy theories.

[Blair1955]

How would this GM pre-packaged bankruptcy work and what would become of the retirees?


Blair

[1G6]

I like how this article shrugs off the calamity that would result from foreign entities controlling even huger swaths of the country than they currently do.

[sigma]

Originally Posted by 1G6

I like how this article shrugs off the calamity that would result from foreign entities controlling even huger swaths of the country than they currently do.

It's a Canadian newspaper.

[Joe in T.O.]

Originally Posted by 2002 Caddy

You can start by reading the annual reports back to 1999/2000... You know the ones that said they were going to build great small cars... the ones that said the loss of market share was over... the ones that said that we were going to build the best, most efficient cars ever... The ones that said the financials of the company were strong...

Turns out NONE of it was true... Both Rick and the Auditors need to answer some questions in front of a Grand Jury.

GM does build great small cars, the Cobalt and Pontiac G5. People must think GM still builds the Chevette.

[wildgoosechase]

Originally Posted by sigma

There is no evidence and the most recent UAW contract contradicts his statements. You know where the UAW was promised the Cruze/Astra, the Volt, unspecified subcompacts at Hammatrack, Lordstown (and i'm forgetting the other one right now)? Yeah. Whoops. There go the conspiracy theories.

Isn't there another round of negotiations comming in 2010, which is also the launch date for the Cruze? Since the Cruze will truley be a global car, won't the US version be essentially the same as the one allready built in Korea? Go ahead and strike, we will just import them untill you conceed. Just like Honda Civics, most people won't even know where they are built, or care.

[t-rex]

Originally Posted by Joe in T.O.

GM does build great small cars, the Cobalt and Pontiac G5. People must think GM still builds the Chevette.

GM's small cars have a bad image BECAUSE GM built the Chevette...

[Lichtronamo]

Originally Posted by Blair1955

How would this GM pre-packaged bankruptcy work and what would become of the retirees?


Blair

The pension goes to the Federal Government: http://www.pbgc.gov/ I believe they pay a fraction of the orignial pension, but its still something (unlike everyone else losing their 401Ks).

Health care goes to Medicaid, but I don't know what happens if you're too young to qualify. It might be lost.

[Stéphane Dumas]

Originally Posted by t-rex

GM's small cars have a bad image BECAUSE GM built the Chevette...

the Chevette wasn't all that bad compared to its predecessor, the H-body Vega/Astre. The irony is I still see sometimes some Chevettes who are still on the road.

[2002 Caddy]

Originally Posted by Joe in T.O.

GM does build great small cars, the Cobalt and Pontiac G5. People must think GM still builds the Chevette.

People who think the G5 is a good car have never driven a G5... People who think it is a great car have never driven anything else...