- Apr 30, 2012
Will Detroit Three Survive and Thrive?
As you probably know, Chrysler has reported its best quarterly profits in 13 years, has just introduced a very nice new Dodge Dart compact sedan and continues to gain sales and market share. GM has also been highly profitable with a string of solid product hits, though it has not gained share working with just half of its former eight U.S. brands.
As you also know, both of these iconic American car companies were upside down four years ago and likely would have been dissolved – along with millions of good U.S. jobs – had both the Bush and Obama administrations not decided to invest taxpayer money in saving them.
Now, with election season heating up, we'll be hearing much from both sides on the GM and Chrysler "bailouts." Democrats will rightly claim credit (though it began under Bush) for saving the U.S. auto industry and millions of jobs. Republicans will correctly counter that they did it all wrong (stiffing private investors, destroying thousands of dealer businesses for no good reason and handing Chrysler to Italy's Fiat) and for the wrong reason (to save the UAW).
"Let them fail," conservatives crowed then, and still. "That's how capitalism works." But there was no private capital in late 2008 for business loans or bankruptcies, so federal support was the last resort. Ford had sufficient capital to weather the crisis only because it had run out of money two years earlier, when it still could (and did) mortgage itself for working capital.
"Let them fail," conservatives crowed then, and still. "That's how capitalism works."
There has been no end to political rhetoric about creating new jobs, but little knowledgeable discussion around saving those millions of auto (and industry-dependent) jobs that we already had. What very few outside the industry – including financial gurus and media pundits – understand is how this industry is a huge, fragile, interdependent house of cards.
If GM had failed, so would have most of its 3,690 (at the time) suppliers, beginning with the 2,000 in the U.S. that operated 4,550 facilities in 46 states. And, since most also supplied key components to other automakers, that would have brought down virtually all U.S. auto production, including transplants. Don't believe me? Both Ford and Toyota said so at the time.
Vehicle assembly, powertrain and parts plants nationwide would have shut down, and a plant town whose plant has died is a jobless ghost town whose out-of-work residents, including owners and employees of the small businesses that depended on plant workers' incomes, can't afford to move because their homes – like their hopes and dreams – are worthless. U.S. dealers of all brands, with no new cars, no credit and few credit-worthy customers, would have dropped like flies. Without auto advertising, media of all types would have suffered and many would have died. The predicted initial loss of three million jobs would have been just the beginning. Can you spell depression?
Whichever political side they may be on, Americans should be extremely grateful that we still have a U.S. auto industry, and one designing, developing, building and selling the best products it ever has. And, at least for the moment, making good money in the process.
Whichever political side they may be on, Americans should be extremely grateful that we still have a U.S. auto industry.
But can Detroit's newly-revived success and prosperity last in the face of relentless high unemployment and economic uncertainty? Based on its current and soon-to-come highly competitive products, we believe so... at least for a while. After that, it depends.
General Motors was on an accelerating product roll well before its bankruptcy. Pre-Bob Lutz, there was little wrong with GM quality as defined by things gone wrong. Its primary problem was exteriors so bland, interiors so cheap and powertrains so old that its products required big incentives to sell, failed to meet sales targets and lost major money.
Lutz's lasting legacy lies in wresting away design from vehicle line executives (VLEs) and returning it to the designers, then winning the battle with financial types to invest much more money in interiors, powertrains and features to make its products segment leaders, or at least fully competitive. Witness the popularity and profitability of most mainstream GM products today – Sonic, Cruze, Malibu, Equinox, Silverado, CTS – and there's more good stuff to come: the 2012 Buick Verano, (next-gen) 2013 Malibu, Cadillac XTS and ATS, the 2014 Impala.
Ford, too, has offered mostly outstanding product – Focus, Fusion, Escape, F-150 – with strong profitability almost since CEO Alan Mulally arrived, took out those (risky) multi-billion-dollar loans and invested most of that money in product development. Unlike its Detroit rivals, Ford still has to service that debt, has a tougher labor situation and has far to go to revive its Lincoln luxury brand after selling Volvo, Jaguar and Land Rover and scuttling mid-range Mercury – but I'm confident that it will. Look at the '13 Fusion and Escape, for example.
The biggest question used to be Chrysler, still a full-line U.S. automaker employing many thousands of Americans, but now under full control of Italy's Fiat and its CEO, Sergio Marchionne. Its designers and engineers have done a masterful job of redesigning and/or upgrading most of its products, especially the Chrysler 300/Dodge Charger full-size sedans, Jeep Grand Cherokee/Dodge Durango SUVs and Jeep Wrangler off-roader. But its U.S.-market Fiat 500 subcompact has struggled (as is its parent company in economically chaotic Europe), and its plan to kill one of two still-successful minivans is questionable. But look for that new Dodge Dart, the hoot-to-drive Fiat 500 Abarth and sharp new 2013 Ram pickups.
Longer term, so much depends on the next election. Will a new administration and Congress be business-friendly or (like these) overtly hostile? Will they continue to strangle business with high taxation, runaway litigation and over-regulation? Or will they lighten up on all three "awful-ations" and encourage businesses of all sizes and types to invest and grow?
Longer term, so much depends on the next election.
Will the U.S. (and global) economies and private-sector employment recover from decades of irresponsible spending and crippling debt? And will any full-line maker (see previous columns on Ford, Chrysler and GM 1,2) be capable of meeting corporate average fuel economy (CAFE) mandates slated to increase by four-plus percent per year for the next 13 years with products that are desirable, affordable and profitable?
We'll hold our collective breath, and hope.