• Dec 2, 2010
Signs To Watch For As The Cycle Repeats



Detroit's automakers are starting to beat their chests in exultation, and who can blame them? The last 16 months have been nothing short of a miracle. Who would have believed they could recover so quickly?

Dial back the clock to last summer, June of 2009. Chrysler had just clawed its way out of bankruptcy, GM was still bankrupt. And Ford just barely avoided filing, saved only by borrowing heavily before the credit market collapsed.

The good times are just getting going. The next five years could be phenomenal.
If someone had come up to you then and said that in less than a year Ford would be earning over $7 billion and that it would surpass Toyota and Honda in quality, you would have said it was not going to happen.

If they had told you that General Motors would be earning over $6 billion in profits, you would have called them crazy.

If they had told you Chrysler would report an operating profit and come within a whisker of catching Honda in market share, you would have said they're mad.

And if they had told you that Toyota would be battered by criticism for all its defects and quality problems, you would have said that's impossible.

But here we are a year and a half later and the American auto industry has been completely transformed. The Big Three are more competitive than they've been in nearly four decades. Even more amazing, the good times are just getting going. The next five years could be phenomenal.

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John McElroyJohn McElroy is host of the TV program "Autoline Detroit" and daily web video "Autoline Daily". Every week he brings his unique insights as a Detroit insider to Autoblog readers.



Think about it. If Ford and GM can rake in boatloads of money when the U.S. market is running at dismally low sales levels, imagine how much money they can make as the market recovers. If Chrysler can gain market share on Honda with a crappy line-up, imagine what it can do as it places competitive products in its showrooms. Equally significant: As the Big Three recover, they're pulling their suppliers up with them. A rising tide raises all boats. The Motor City is going to rock and roll like no one would have believed possible.

How will we know if the Big Three are losing their way again?
It's not because, as some environmentalists argue, the Obama Administration is finally forcing the Big Three build the small cars that America wants. Don't you believe that fairy tale. Last month truck sales hit 53% market share, the same as in their heyday. And that's not just contractors buying more pick-ups. It's the entire truck market. Even Mercedes and BMW are bragging about how hot their SUVs are selling.

Even so, be careful. This has always been a cyclical business, and there's no reason to believe the cycle has been broken. So how will we know if the Big Three are losing their way again? Here are some pointers.

If the UAW forces a strike at Ford to get back many of the concessions that made Ford competitive, you'll know they're re-sowing the seeds of destruction. By the way, it's easy to predict Ford will be the strike target. As part of the bankruptcy deal, the UAW is legally prohibited from striking GM and Chrysler until 2014.

Keep a close eye on day's supply. If the Big Three let their inventory drift above 60 days' for extended periods of time, you'll know they're losing their cost discipline. Management likes to increase production to boost revenue, even if it penalizes them down the road. It's a sign of short-term thinking, and a move that could force them back into costly sales incentives.

Sometime around 2015 this party will come to an end.
Watch the ratio of cost-of-sales to revenue. If the Big Three let their costs rise as a percent of revenue, that means their break-even point is going up, and that the profitability of their core operations is on the decline.

Beware of their debt levels, and make sure they have a solid balance sheet with short term assets exceeding short term liabilities. You never want to invest in an automaker that owes more than it owns.

Run for the hills if you hear top management bragging about how good a job they're doing. That's the first step in self-delusion. The second step is justifying cost-cutting measures to cheapen the product. That's when you'll know they're back to their former destructive ways.

But at this snapshot in time, the planets are in perfect alignment. The Big Three are going to make more money than they ever have in their history. And yet, I figure that sometime around 2015 this party will come to an end, as supply and demand come into equilibrium.

Five years, that's all we got. Let's just hope that this time Detroit maintains a healthy war chest, because that's when I figure the Chinese will decide it's time to get seriously involved in the American market.

###

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    • 1 Second Ago
  • 64 Comments
      • 4 Years Ago
      Nice to see another well informed poster. Kudos to you Laser, very well said and right on point.
      • 4 Years Ago
      "Let's just hope that this time Detroit maintains a healthy war chest..."

      Well, at least Chrysler won't have to worry about Daimler making off with billions of dollars again. I'm pretty hopeful that Sergio and Fiat will do the right thing and not starve Chrysler of its future profits.
      • 4 Years Ago
      There is no way management and union leadership will be short sided. Why would anyone ever get that idea?




      /sarcasm
      • 4 Years Ago
      Dare I say it...... CONSPIRACY!!!!
        • 4 Years Ago
        My thoughts exactly Mulder....
        • 4 Years Ago
        "....... the American auto industry has been completely transformed."

        Sounds like the same kind of arrogance and boisterous nonsense that came out of Detroit for five decades, culminating in bankruptcy and calamity in 2008. And we wonder why the Detroit 3 is only a shadow of their glory days.
      • 4 Years Ago
      Wont take long for the Big 3 to get another case of the stupids and need another bailout.

      Example: Regal GS

      Chrylser is a lost cause

      Ford has a clue...for now. But it wont last. As long as Americanizing means stripped of features and performance, Ford will always revert back to their old way.
      • 4 Years Ago
      At least you mention some interesting concepts and metrics to watch before you pull a date completely out (I'll say thin air to be kind) ... thin air about "when supply and demand come into equilibrium".

      I was just wondering what the hell that even means and what might have happened to the page (or pages) which might describe your thinking in this area.
      • 4 Years Ago
      Sadly, the statement that Government Motors has earned $6 billion is erroneous. You see, GM went bankrupt and screwed people who had contractual obligations with GM that counted as GM's debt. Furthermore, Government Motors was infused with $50 billion in taxpayer funding, which was given to them in an Unconstitutional means, and Government Motors has been fast and loose with that money moving whatever debts that were left away from the debt column and hidden by the cloak of invisibility of the Taxpayer bailout. So Government Motors' financials are overstated and this is to such a degree that it is quite possible that the American Taxpayer will be screwed to the tune of $20 billion by the time the Treasury Department finishes the sweetheart deal to Government Motors- that means that $20 billion of Government Motors Debt suddenly vanished along with our money! And since Government Motors was swapping out "debt" and "funding" it with our taxpayer money, Government Motors is looking good on paper but is really operationally insolvent.

      And remember that the purpose of this GM bailout was never to preserved jobs or to make GM whole or to prop up the company. The purpose of the GM bailout was to pay back the UAW for their support in the election and to only preserve UNION jobs. If there were any non-union jobs saved, that was completely not important to the structure of the deal - you don't see non-union supplier jobs getting huge paybacks off of shares of Government Motors being sold - that is because they didn't get the sweetheart deal that the UAW got - and like I told you - UAW bailed immediately at a profit while the American taxpayers made not one dime on the deal. UAW sold at $34 and change; the Treasury sold a portion at $33 - even though there was an opportunity to sell at $35 or even yesterday a chance to sell in the high $34's. The American taxpayer was screwed, the UAW rewarded for its support of the regime, and the lie about Government Motors' profitability is perpetuated just as the true cost to the American Taxpayer is hidden from view to most casual observers.
        • 4 Years Ago
        Uh, laser, you do know that it was Bush who approved the original auto bailout and Obama declined additional funding, don't you? Ah, yes, it was a vast right-wing conspiracy to preserve the UAW...
        • 4 Years Ago
        Dude take off your aluminum foil hat. The UAW actually took a huge hit in the deal. And if you really think the whole bail-out was to say thanks to the UAW, you are sadly misinformed.
      • 4 Years Ago
      This article is purely speculation of what could go wrong, with little basis in current facts. Ford or Gm could begin selling Yugos and be equally screwed. Just because old management made these mistakes does not mean they're walking down the same road. GM IPO and politics aside, I see no immediate reason why these companies can't succeed under proper leadership
      • 4 Years Ago
      "If the UAW forces a strike at Ford to get back many of the concessions that made Ford competitive, you'll know they're re-sowing the seeds of destruction."

      This to me is the key factor. As John mentions the UAW can't strike GM/Chrysler for 4 years. If Ford is put in a uncompetitive situation, the backlash will be huge.
        • 4 Years Ago
        You know, I almost wouldn't put it past the Ford family.
        • 4 Years Ago
        Maybe Ford can ask the government for a handout afterward.
        • 4 Years Ago
        John H.

        Maybe not, the Ford family could just put it all into chapter 7 and be don't with having to deal with the UAW - They would still have plenty of money...
      • 4 Years Ago
      "And I saw five fat Escalades come out of Detroit and cruise all over the country. But then five gaunt, ugly Aveos came out of Detroit and gobbled up the five fat Escalades"
      • 4 Years Ago
      Why did the author lumped Ford with GM and Chrysler? Considering the renovated corporate culture of Ford, lumping it together with GM and Chrysler doesn't make any sense at al.
      • 4 Years Ago
      I disagree about the trucks comment. Many of these new trucks are unibodies that weigh less with 6 and sometimes 4 cylinder engines.

      Also the 37.8/28.8 mpg for cars and trucks respectively for 2015 CAFE requirements are having an effect. Automakers now are instituting a wide range of technologies in order to meet this goal.

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