You’d never know it, watching the big cheeses at the Detroit Motor Show strutting their stuff. Leaders of U.S. automotive giants like General Motors’ President and CEO Rick Wagoner or Ford’s.

President and CEO Sir Nick Scheele don’t look as though they are presiding over crumbling empires.

The confident smiles from the light drenched podium. TV cameras and photographers focus on the sharp-suited heroes. Journalists elbow each other aside to hear the latest word from on high. “Things have never been better, going from strength to strength, responding to the challenges, confident of our future.”
Not much sign of weakness here.

The performance is impressive, but it is an illusion.

WORLD RANKINGS UPHEAVAL
Over the next 10 years there is likely to be an upheaval in the world rankings of the car manufacturers, despite desperate attempts to delay the day of reckoning with zero interest financing and cash-back offers.

The days of dominance from Ford and GM are drawing to a close. The king is dead. Long live Toyota and Honda, and maybe DaimlerChrysler and VW.

GM and Ford, mainly because of chronic mismanagement, are in danger of losing their lead as the top two car manufacturers in the world. No fine words or the artful presentation of outdated products can put off the day of reckoning much longer.

While the so-called big-two struggle to keep production lines running with ever more desperate measures, Toyota is making huge profits. According to the Financial Times’ Lex column, Toyota is on track to beat Ford’s 1999 record auto industry profit of $7.2 billion. Toyota’s first half profit was bigger than the combined profit of GM, Ford and Chrysler, Lex said.

And it’s not just GM and Ford under pressure. According to automotive industry consultants Autopolis, the global car business is a chronic under-performer and producer of red ink, crying out for radical change.


(Concept cars at the detroit car show)

FALLING OFF A CLIFF
“It’s like a row of houses built near the cliff’s edge. Part of the cliff is falling away, and Fiat is about to fall over the edge. Daewoo is already at the bottom of the cliff. Companies like Ford are pretty close to the edge – Ford’s balance sheet looks bad. GM is pretty vulnerable too with pension and health care liabilities,” said Autopolis economist Graeme Maxton.

“At the back of the row of houses is Toyota with its hugely strong cash reserves, good products and market positions,” Maxton said.

In 10 years time, Toyota is likely to supplant GM as the world number one car producer, according to Maxton, with other strong contenders for leadership including VW, and Renault-Nissan. Ford, GM and even DaimlerChrysler have a much more questionable future.

“Ford and GM will not be the leaders, if I had to stick my neck out, to be replaced by the most obvious candidate, Toyota. Who comes after them isn’t clear. Ford and GM will survive but not as the monolithic entities we see now.”



FORD AND GM BREAKUP?
“If there is a serious recession, Ford and GM could get into financial difficulties and have to change their structures. They won’t necessarily go bust, but they might have to break themselves up,” Maxton said.

The first trigger of the earthquake under GM and Ford could be a sharp downturn in the U.S. market, which could drop by at least 20 per cent in the next 18 months, according to Autopolis. This would also be bad news for the likes of VW, which investment bankers Goldman Sachs says earns about 32 per cent of its operating profit in the U.S.

If the bottom falls out of the U.S. market, Ford might have to seek a buyer for its one third-owned Mazda. Luxury brands like Jaguar, Land Rover, and Volvo, assembled at great expense by Ford and managed by its Premier Automotive Group, could also be on the block. It could spell the end of GM’s expensive stewardship of Saab.



SUV BOOM PUT OFF DAY OF RECKONING
Professor Karel Williams of Manchester University’s business school reckons that this upheaval for GM, Ford and Chrysler would have happened in the 1990s, but was delayed by the boom in Sport Utility Vehicles (SUVs) and pickup trucks which allowed the big three American companies to make huge profits by stamping out vast numbers of these low tech vehicles.

Williams reckons that the global automotive business, including Toyota and BMW, has historically failed to produce acceptable levels of profits.

“Over the whole of the cycle from 1989 to 2003, none of them made 12 to 15 per cent return on capital employed which the U.S. and U.K. stock market requires,” Williams said.

This is because most of the global assemblers compete in an irrational and counter productive way.

MASS MARKET STUPIDITY
“They knock the hell out of each other and give all the benefits away to the consumer. Look at the D class with the likes of the (Ford) Mondeo, (VW) Passat and Peugeot 406. This is absolutely classic. They sell a Mondeo 1.8 at only £9,989 pounds. This illustrates the stupidity of the mass market in motor cars,” Williams said.

Autopolis’ Maxton reckons that the big manufacturers urgently need to rationalise because a proliferation of platforms and components has made it almost impossible for them to make money.

RATIONALISE PLATFORMS
“They (the big manufacturers) need rationalisation across platforms and across models. There are about 150 platforms worldwide, they could rationalise this down to 50. In a perfect world there would be 8 to 10 manufacturers each with 4 or 5 basic products each with a life of maybe 10 years. This whole production of changing every two to three years is incredibly wasteful,” Maxton said.

Companies need to have products selling in big numbers, but with only limited competition.

For example, Manchester University’s Williams said Toyota and Honda generate more than 70 per cent of their U.S. profits by dominating the saloon (or sedan) market with their Camry and Accord models. Williams calls this an “island of profit”. In Europe, BMW, Mercedes and Audi have a similar dominance of the prestige saloon car market.

U.S. manufacturers had the inside track at home with pickups and SUVs in the 1990s, but Japanese competition has already severely dented this. There are no real threats as yet to Toyota and Honda profits in the U.S., or BMW, Mercedes and Audi in Europe, Williams said.

FINANCE HEALTH WARNING
Toyota and Honda have also avoided too close an involvement with another dangerous contaminant – finance -, according to Williams.

“With the exception of Toyota and Honda, all the rest are heavily into car finance, they’ve become hybrid assemblers-car finance houses with on average about 35 per cent of assets and up to 50 per cent in the U.S. tied up not in factories but in money lent to consumers to buy cars,” Williams said.

But this involvement with finance has moved from becoming a solid way to make money to just another way of shifting product - “look at Fiat offering zero percent finance” - and makes companies’ costs dangerously vulnerable to changes in bond ratings and spikes in interest rates.

All the major assemblers find their ability to react to market changes inhibited by strong unions, according to Williams, but GM and Ford are probably in the worst position. In September 2003, Ford, GM, and Chrysler must negotiate a new contract with an obdurate United Auto Workers, so don’t expect any relief there.

FIGHTING CHANCE FOR GM
There are some admirers of GM out there though.

“There’s still a fighting chance that GM will be number one in 10 years time,” said Professor Garel Rhys of the Cardiff Business School.

“I still feel it’s got enough internal strength, enough options, to stay the course, but it’s entering a phase where the likelihood of being displaced is the greatest since they became number one. Ford though exhausted itself on the way to the summit and fell into a crevice. (Ford challenged strongly for the number one spot in 1997/98) Toyota has the capacity and the models and the range of products to take the GM number one position,” Rhys said.

TOYOTA WEAKNESS
Rhys does identify one weakness for Toyota – its lack of brands.

“Apart from (luxury brand) Lexus. It’s only got one real bite of the cherry. History shows that leadership needs more than one bite; GM has Chevrolet and Buick etcetera, VW has got Audi, Seat etcetera. Toyota would be the biggest in the world with one major brand. That could be an Achilles heel, a fatal flaw,” Rhys said.

Rhys said the U.S. companies are paying the price for complacency, happily banking profits from SUVs and pickup trucks in the 1990s, apparently unaware of the imminent assault from Japan and a lesser extent Europe.

“The Japanese have really shown what you can do with these products,” Rhys said.

Stephen B. Cheetham, auto analyst at Sanford C. Bernstein Co agrees that GM and Ford management teams have been asleep at the switch.

“The relative failure of GM and Ford is down to good old fashioned poor management in my view, plus a regulatory environment that has enabled them to make indecent margins on horrible low-tech light trucks, thereby allowing them to ignore their deeper-seated problems,” according to Cheetham.

Tough action is needed.

ACT, OR BE ROAD-KILL
“Ford and GM need to focus on the basics of product, quality and cost. GM has been getting these things more right than Ford recently. Yet they both lag badly on quality, have older products, and a cost disadvantage of around $1,000 per unit. If they don’t fix these things they’re road-kill,” Cheetham said.

Cardiff Business School’s Rhys doesn’t think it will come to that.

Over the next 10 years, Rhys expects a period of digestion, rather than revolution, with the main players under pressure but still remaining independent.

DaimlerChrysler could be a dark horse with the attempt to digest Mitsubishi of Japan and Korea’s Hyundai.

“If this works, DaimlerChrysler could grow enormously and could bear down on GM and Toyota. I don’t think they will overtake, but they could be showing momentum in 10 years to challenge for world leadership,” Rhys said.

The implication is of course that if the strategy doesn’t work, DaimlerChrysler will be in trouble.

In this roughly 10-year period, profits will still be elusive, with buyers having the upper hand.

DESPOTIC CONSUMER
“The sovereignty of the consumer will be absolutely despotic. We won’t see a breakthrough into the promised land of big profits, the companies will all be hanging on for survival like limpets, and this will eventually cause a big realignment, say by 2020, with companies needing to be really global to succeed, so we’ll see perhaps a merger between VW and Toyota, or GM and VW or whatever,” Rhys said.

Professor Williams of Manchester Business School, focussing back on the more immediate years, sees Japanese hegemony busting out all over.

“Toyota and Honda look to be the best bets. I don’t expect their islands of profit (Camry and Accord) to be attacked, they are not under risk from unwise financing. They can’t easily sack workers if times get hard, but that isn’t a problem yet. We are likely to see Toyota and Honda pushing onwards and outwards,” Williams said.

Neil Winton, January 20, 2003

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