Practical Suggestions for the Auto Industry

A monolith is a geological feature, such as a mountain, consisting of a single massive stone or rock

In some respects, the US auto industry is monolithic. The three major US vehicle manufactures, GM, Ford and Chrysler all face: a difficult credit crunch – both from the lack of credit available to its customers and to the companies; high fuel costs that have almost destroyed the market for expensive, profitable large vehicles; and the impact of the economic recession, low consumer confidence, and low consumer spending. Additionally, the companies have very similar business models.

However, that is where the monolith ends. When considering rescue (or bailout) of the industry –each company’s situation is quite different.

GM, for example, has an approximately 22% share of the US market, is using cash at a very rapid rate; is almost bankrupt; has an impossibly limited lineup of vehicles consumers want; has high labor costs and high legacy costs. Already obtained autoworkers union concessions will allow savings in long term, but the kproblem is not long term, it is now. GM quality is low compared to most imported vehicles and to Ford. From an outside perspective, Rick Wagoner, its CEO, seems almost detached from the reality of current conditions.

Ford, on the other hand, with market share of approximately 16%, has reported cash reserves to last it for six months to a year. although Ford may face bankruptcy, its situation is not as dire as that of GM. Ford has introduced small, fuel efficient, cars (Focus and Fiesta) that consumers seem to like. Ford quality is almost to the level of imports. Ford CEO Alan Mulally joined the company from a career outside the automotive industry, and appears willing to, and is changing, the business model. Were it not for the credit crunch and the recession, Ford could have reached profitability in the near future.

Chrysler (10% to 11% market share) is the anomaly in the industry. Ownership of the corporation is private, unlike public companies Ford and GM. Available analyses indicate Chrysler has no cutting-edge designs or potential big sellers in its Chrysler, Dodge or Jeep brands. There will be no company rescue from vehicle sales – what models they will sell in the future remains a mystery. Chrysler quality is low. The situation at Chrysler is grim.

So, what are the solutions?

Bankruptcy with management change seems the only reasonable solution for GM. Bankruptcy will allow relief from high labor cost, legacy costs and other contractual situations (dealerships.) The government can provide post-petition financing, allowing time for the reorganization. The cost to the government will be far lower than if it provided funds to rescue GM with its present management and business model. As to the problem of the lack of small, fuel-efficient cars, perhaps GM can buy basic models from other manufactures, create its own trim packages, and have something to sell during the time it will take to bring GM small cars onto the market. Some ideas from the two previous postings on this blog could help too.

For Ford, the government’s rescue makes sense. The company is poised for profitability. If credit becomes more available, Ford will sell vehicles. They will continue to revise their business model for greater profitability. All the government will need to do is keep Ford supported for the interim. Loans or loan guarantees seem best.

Chrysler is a lost cause. Reducing the size of the company to a much smaller one, with limited vehicle models and market share, could work. Breaking up the company by selling brands and the factories to build them is another thought. The private owners of Chrysler took an enormous risk when the bought the company. Had the economy not sagged (collapsed) they might have won the bet. Now it looks like they lost. Government intervention with Chrysler makes no sense.

Let me know what you think by sending your comments.

Note: The last two articles meant to elicit comments from readers, and succeeded in doing so. Some comments were serious, some in jest. For example, one email asked, “Do you really want your auto industry run by the same people who run Medicare and the Post Office?” Another said, “First priority will be to entice Steve Jobs to take on GM. Would you please ask him to reserve one of the first iCars for me?”

What do you think?

HAVE A GREAT THANKSGIVING!