THE AUTOMOTIVE CRISIS: HOW WE GOT HERE, WHERE WE ARE HEADED, AND WHAT WE CAN LEARN (With some implications for Real Estate, Economic Development, and Business Generally) September, 2009 Some upfront housekeeping Thanks are due to:
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THE AUTOMOTIVE CRISIS: HOW WE GOT HERE, WHERE WE ARE HEADED, AND WHAT WE CAN LEARN (With some implications for Real Estate, Economic Development, and Business Generally)
Thanks are due to:
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US Sales: Detroit share falls from 75% in 1985 to ~45% in 2009e
Transplants and Imports
GM + Ford + Chrysler
Source is Bankruptcydata.com; scale is billions of $ of pre-bankruptcy assets
Source: Ward’s AutoInfobank
Source: Moody’s, Company Reports; Casesa Shapiro Group estimates for 2007 Chrysler results and for 2008 Big Three results
Source: company financial statements; all figures exclude financing captive (GMAC)
Source: company financial statements; all figures exclude financing captives; Toyota FY ending 3/2008
Even as the American market collapsed, the Detroit 3 lost share within that market. How did this come about? This is a development that has gone on for years*.
Hypothesis as to the factors behind this weakening:
The truck boom (SUVs and pickups) earned the Detroit 3 vast profits…
… which they used to fund “adventures” rather than reinvest in the core business…
… leading to relatively neglected and uncompetitive car product lines, once the truck boom ended.
* “The Detroit 3 have lost market share in the USA-plus-Canada every year since 1993.” – Dennis DesRosiers
It is hard to overstate the shift to light trucks in the USA over the years (due to regulation, consumer preference, and marketing).
Millions of units sold, US market
Source: Sean McAlinden from Ward’s data
It is also hard to overstate the flood of profits that flowed from the American love affair with light trucks. See the example of Ford’s Michigan Truck factory:
“… [ in 1998 ] the Michigan Truck Plant had become the single most profitable factory in any industry anywhere in the world. It was cranking out 1,040 full-size sport utilities every workday. The factory’s annual production was worth almost $11 billion – greater than the global sales for Fortune 500 companies like CBS, Texas Instruments, Honeywell, and Nike… The factory’s profits from those sales were even more spectacular: about $3.7 billion in pretax profits… while Ford had 53 assembly plants worldwide, the Michigan Truck Plant accounted for a third of the company’s entire profits. There were fewer than 100 companies in the world that earned more than this single factory did in 1998…”
Source: Keith Bradsher, High and Mighty
With profitability assured by the cash flow from trucks, Detroit’s Big Three spent much of the 1990s engaged in all sorts of adventures… not necessarily related to the core business of making cars.
* A move that is considered very sound by many observers.
Partly as a result of the truck boom, Detroit allowed its vehicle platforms to age relative to the competition, which as a result gained share.
Age distribution of NA product platforms 1996-2008
Green = 0-2 years old; yellow = 3-4; red = 5-8 years; black = 9 or more years
Source : Dennis DesRosiers
Context: Critics of the Detroit automakers recite a long litany of explanations for apparently foolish actions: stupidity, evil intent, disregard for the environment, arrogance, refusal to learn, inward focus, etc. I find these assertions unsatisfactory, preferring instead to identify the incentives that can explain seemingly suboptimal behavior.
Thesis: The Detroit automakers suffer from adherence to two core beliefs (one related to demand and one to supply) that drive a wide range of behaviors. The reason they cling to these core beliefs is that they held true for many years, and as large firms can be slow to revise views, they have only recently realized these two have become obsolete.
Prediction: As Detroit goes through its restructuring, obsolete views such as these will be swept from the system, allowing a more successful mindset to emerge… assuming the companies survive the crisis.
Ford-Land Rover exit
Ford-Aston Martin exit
Fiat-Alfa Romeo failure
Daimler-Chrysler etc exit
PSA-Simca etc failure
1: only after many years
2: but Skoda was rebuilt from scratch
3: Piëch has suggested this is not so
4: an alliance, not a merger
NB: “Success” and “failure” assigned according to whether the merger achieved stated goals of the acquirer
NB: I leave it to my audience to evaluate the Japanese M&A track record, e.g. Toyota/Daihatsu
CSM projects a slow but steady recovery to historic levels… I agree
SCRAPPAGE: At present new sales are running below annual scrappage for the first time
since World War II
VMT: Do we think that the current dip in vehicle miles traveled is an inflection point?
OWNERSHIP: What might happen to end the growth in cars per household?
AFFORDABILITY: With any reasonable elasticity of demand assumed,
sales seem likely to rise
Most affordable score since the index was first computed in 1979!
All else being equal, nothing tracks/forecasts OEM market share as well as average
age of an OEM’s model lineup.
If this relationship holds, Detroit’s market share should continue to slip, all else
being equal (dealer counts, government aid, styling changes, powertrains…)
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