Rising Big Three Look For Sustained FlightBy Dale Buss November 8, 2011
After they had brought Ford Motor Co. through the tough recession of the early Eighties, Philip Caldwell and Donald Petersen seemed to almost beg for the next downturn so the CEO and president could demonstrate how thoroughly theyd transformed the company. Just think if Fords old dynamic duo were running the automaker today instead of CEO Alan Mulally and Chairman William C. Ford II: They would see the company now occupying a pinnacle that they couldnt even have imagined 30 years ago. And along with General Motors and to a lesser extent Chrysler, a re-ascendant Ford stands at the base of an even higher peak. Whether the traditional American Big Three can turn their hard-won recent gains into long-term achievements of an even bigger magnitude will largely write the story of the U.S. auto industry over the next decade.
While not exactly inviting such a challenge the way Peterson and Caldwell did a generation ago, GMs chief financial officer, Dan Ammann (top), did sound a confident tone in recent comments to securities analysts. Were not relying on heroic market-share gains, he said. Were not relying on substantial economic recovery. At the old GM, Amman told the Wall Street Journal recently, it was more about, How do we get to next year? not What do we do next year? Now, he added, the company can look forward three to five years and make sure were taking the actions we need to take to drive profitability and success.
What do Amman and his counterparts at Ford and Chrysler see? They behold fundamentally overhauled business models that now rely on streams of worthy new products, hugely improved cost positions, a scaled-down number of brands to support, an increasingly cooperative union, robust profitability, a steady discipline in matching production to real market demands, forgiveness by American taxpayers and consumers for the 2009 bailouts, and beyond that a certain growing market mojo that varies with each of the Big Three -- but clearly energizes them as a group. At the same time, their main competition -- Japans Toyota and Honda -- havent been in such a weak a position in the U.S. market for a generation. The opportunity to build recent but potentially transitory improvements into long-term gains in sales and market share, in brand reputation and in consumer goodwill, is right in front of the Big Three as is the chance to re-attain the upper hand in their home market for years to come.
Its difficult to overstate what theyve already accomplished, whatever the future brings. Three years ago, Detroit ran up billions of dollars in losses as gasoline prices spiked through the summer and sales soared for the Japanese brands on which Americans had come to depend to deliver fuel economy and overall value for the price. But just four years later, huge chunks of the U.S. market are in different hands than they were in 2007, comprising the most massive overall shift in the mature American marketplace in decades and certainly the fastest significant exchange of share.
And while Korean and German brands also have taken advantage, the most notable winners in this era have been the U.S. Big Three. Their gradual market-share losses over 40 years intensified last decade so that GM, Ford and Chrysler combined swooned into their biggest declines ever in mid-decade. It had taken Detroit fully 10 years for its U.S.-market share to decline 10 percentage points, from 72 percent, in 1991, to 62 percent, in 2003. But the Big Three lost another 10 percentage points (and, of course, an even bigger proportional chunk of the market) from just 2003 to 2007, according to Edmunds.com data. The Big Threes hold on the U.S. market finally bottomed out at 44.8 percent in 2009.
But beginning last year, the Big Three finally began to reverse the situation, boosting their market share to 45.4 percent. And this year, taking advantage of the natural disaster in Japan in March, they added to those gains: From the first quarter of 2011 to the second, post-quake quarter, Japanese automakers lost 6.7 share points, to 32.1 percent of the market, while the U.S. Big Three combined picked up 3.9 percentage points of the Japanese loss, with Hyundai, Kia, VW and others garnering the rest. And for the year to date through October, the Big Threes share has ticked up to 47.3 percent from 45.2 percent a year earlier.
Question Of The Future
They were in the downturn together, and now theyre thriving off the competition together, said Craig Giffi, leader of the consumer and industrial products practice at Deloitte. Theyre all in dramatically better position than we possibly could have hoped for as the average consumer, or average American, or a policy maker in 2008, when you think about the depth of the problems they had. James Brock, an economist who studies the industry for Miami University, called today the biggest window of opportunity theyve ever had, at least for the last 30 or 40 years. And its ironic: GM and Ford today in the U.S. market seem to be where Honda and Toyota were 30 years ago, and vice versa. Thats how big is the window that I see.
But can Detroit really keep the arrow moving in the right direction again for years to come? The Big Threes ongoing momentum plays out variously with prognosticators. Theyre making good long-term decisions about the business, whereas before they were just trying to maintain share or profitability; they couldnt get out of the malaise, said Gary Silberg, national auto-sector leader for KPMG. Now theyre out of that, and trying to grow. Thats where the optimism is.
Some believe theyll only be able to hold on to some of what theyve recently gained. They might keep half of [what] theyve gained overall, said Sean McAlinden, executive director of the Center for Automotive Research, at the University of Michigan. And even with the difficulty of grinding out share gains in small cars by far the most competitive segment compared with the trucks and SUVs where the Big Three traditionally reigned, McAlinden gave Detroit a shot at reaching a 51 to 52 percent share by 2015. Theres no natural advantage any more that would ever take them back to a 70-percent market share again. But at the same time in this scenario, theyll have the opportunity to keep improving their margins along with their share.
Others also expect even greater things out of Detroit. When Toyota was on a roll, we had them at 17.5 percent of the U.S. market by 2015, said George Magliano, New York-based senior principal economist for the consulting and forecasting firm. Now weve got them at only 14 percent; thats a huge difference. Same with Honda: We had them at about 12.5 percent [in 2015]; now its down to about 10 percent. That all gets dissipated through the marketplace, a lot of it to the Big Three. Do we have GM at 20 percent where theyd like to be? No, but theyre at 19 percent [in 2015]. Ford is at 16 percent, which is still good because the market is bigger. And weve got Chrysler at 10 percent in 2015, which is phenomenal because at one point we had them down to 5 percent. Heres a look at the reasons for a continued rosy outlook for Detroit:
Ford especially, and then GM, and to a lesser extent Chrysler set the stage beginning several years ago with a focus on better products, beginning with new models such as the Chevrolet Malibu and Ford Fusion, incorporating a handful of significant themes including fresher designs and enhanced fuel economy. That drew many Americans back to their showrooms just as Japanese brands became troubled. When customers turned and looked, Detroit had the product, and that was a fundamental pivot point, said Mike Jackson, CEO of AutoNation, Americas largest automotive retailer.
As Silberg put it, To get consumers to switch over to their brands was going to take a longer time. But with Toyotas recalls and the production issue for the Japanese this year, there was a catalyst in the U.S. market where consumer realization about the Big Three got expedited. They said, This GM or Ford car is kind of nice. Thats really what the Detroit Big Three have now versus the Japanese that they didnt have before. Thats their advantage now, and its up to them to continue the momentum. Detroits situation now reminds Neil De Koker, president of the Original Equipment Suppliers Association, of what happened in the early Eighties when people decided to try Japanese products and found they were really good. That started their acceleration. Now, I think were going to see similar long-term growth and acceleration of the Big Three.
Detroit has been relatively unimpeded in nudging up prices lately because of the absence of Japanese competition, demand for some of their small fuel-efficient vehicles, and the fact that they have continued to load up even compact and subcompact cars with elevated levels of content, from push-button starts to infotainment devices, that American consumers have been willing to pay for. Moreover, the Big Three and the rest of the industry have had to cover major increases in the costs of crucial commodities ranging from steel to palladium.
For the most part, GM and Ford have moved to vehicles with higher prices and have let Hyundai have the bottom end, Brock said. Said David Cole, chairman emeritus of the Center for Automotive Research: When you consider what the domestics have done in terms of cost structure, it gives them the ability without compromising profitability to really put in features and technology, which was exactly what competitors did to them when they had the advantage on costs.
The draconian cost cuts of a few years ago did more than just eliminate baggage that enabled each of the Big Three, in its own way, to survive: The dramatic structural transformations also made each company a much better bet to survive the next downturn. Detroits breakeven point today likely is down as low as 10 million units a year, Silberg estimated, lower by four to five million units than just a few years ago. Moreover, a return to profitability has imbued each of the Big Three with cash kitties that they will use, in part, to make themselves even stiffer competitors. They could withstand a downturn and manage it much better today, De Koker said.
In fact, some argue that any new bout of prolonged sluggishness or even a softening of the U.S. vehicle market could actually accentuate Detroits position relative to its competitors rather than undermine it. Theyre all in this highly competitive market in more or less of a Mexican standoff, said Richard Hilgert, automotive analyst for Morningstar. Whos going to blink first? As Lyle Otremba, vice president of sales and engineering for Cooper Standard, a major supplier, put it, The break-even points of these companies have been lowered. Said Silberg: Any new economic reversal would be terrible for everyone, but the good news for the Big Three is that they are pretty well positioned to weather it.
New contracts with the UAW have affirmed the Big Threes recent dramatic reductions in labor costs, have baked in annual labor-cost increases for each of only about 1 percent for the next four years, and in fact have created a growing strategic advantage versus the competition in an area where GM, Ford and Chrysler not long ago were hopelessly behind. The Big Three also seem newly committed to crucial strategic and operating principles such as keeping product-development spending constant despite economic troubles. GM, for instance, plans to decrease the number of engineers it has working on non-vehicle projects by 25 percent, and re-assign them to what Mary Barra, the companys product chief, has called essential work. And GM is cutting the number of vehicle platforms by more than half, from 30 to 14 by 2018, to help get products to market faster and cut duplicate engineering and design for cars sold in different versions around the globe.
As another example, Detroit also is getting around to finally cutting dependence on fleet business. In the days of 16-million units a year, about three million of them were fleets, and the Big Three didnt profit from them at all. But so far, the Big Three have shed about 750,000 annual sales of fleet vehicles, calculated Doug Scott, senior vice president of GfK, which consults for automotive brands. That has helped them to close factories and get their acts together, he said. And Scott believes the Big Three can make still more gains in this area. I think there are at least another quarter-million fleet vehicles that could be gotten out of their systems, and no one would miss them. There is more right-sizing that could be done. They could even get it to the point where they could make a few dollars on fleet vehicles.
Collectively, the Big Three have never taken such a huge risk on such unconventional leadership as they are now. And at this point, the gambles seem to be working out well for each one of them. Ford took the risk first, of course, by recruiting Mulally, a non-car guy, to its helm from a top position at Boeing in 2006; and he already is being hailed as the auto industrys most visionary CEO of the new generation. The whole renaissance began with the arrival of Mulally, Jackson said. Chrysler now is headed by a charismatic and fast-moving new leader, CEO Sergio Marchionne, who has been making bold moves in the vein of the companys previous hero of Italian heritage, Lee Iacocca and in a decided departure from the unimaginative leadership offered under previous owners Daimler and Cerberus.
GM has benefited from continuing to mix the best of the old GM with new leadership. The company is still benefiting from having given free rein to the ultimate car guy, Robert Lutz, several years ago to transform its product lineup. Yet GM was forced by its 2009 bailout to scrap the old-school leadership represented by previous CEOs Rick Waggoner and Fritz Henderson and, under federal-government prodding, turned sharply in the non-traditional direction of leaders from the telecommunications industry, including current CEO Dan Akerson.
Im absolutely impressed by that approach, said Walter Friederichs, global leader of the automotive practice of Russell Reynolds Associates, the New York-based executive-recruitment firm. Im not saying the future leaders of the auto industry will be IT guys; that would be ridiculous. But [the digital realm] is a major area for differentiation by American car companies, because American companies on a global scale have by far the biggest credibility in this area. So its a good move for GM to highlight this area in its leadership.
Almost unimaginably from the perspective of even a couple of years ago, Detroit actually is laying the groundwork for exporting mainstream vehicles even small ones around the globe now. In the meantime, theyve taken huge steps toward actually globalizing their product platforms instead of just talking about it. GM used to have a big advantage in this area, but they sort of threw it away, said Friederichs. Now theyre trying to re-establish with their platform strategy sort of what VW is beat at right now: making sure they use their entire global leverage, including engineering and design. And of course the globalization is more forced by Fiat.
And of course theres the fact that both GM and Ford have diversified their markets away from North America to the extent that strong sales abroad could help either or both of them weather a renewed economic storm or revived competition in their home market. GM might be up to 80 percent non-North American sales by 2018, McAlinden predicted, meaning that North America starts to fade in importance as a long-term proposition. Strong and mostly rising sales in emerging markets including Brazil, Russia, China and India would provide some balancing no matter what happens in the U.S. markets alone, Otremba argued. That will drive even some success in the United States for them. Because theyre focusing their growth in other parts of the world, theyll have success, and the money to reinvest, and so on. Even if the U.S. market is flat, theyll pick it up in other markets.
New Positives, Absent Negatives
One by one, Detroit has been vanquishing or at least addressing traditional weaknesses and creating new points of leverage vis-a-vis its competition. Manufacturing-quality levels, for example, now are pretty much on a par across the industry and now barely figure in the minds of American consumers when they consider a Big Three nameplate versus an import. GM, Ford and Chrysler also are finally embracing suppliers as partners. The bailout imbroglios of 2009 forced a level of cooperation that was unusual, Otremba said, and everyone realized they couldnt do it alone. They had to really work together as partners. Added De Koker, of the suppliers association: Weve got a lot of years of tough relationships to overcome, but improvements are being demonstrated. The people running the [OEMs] today are aware of the importance of good relationships with suppliers and what it truly means to have partners.
At the same time, Detroit is going to the mats to improve fuel efficiency of its vehicles across the board, and the
Chevrolet Volt arguably has been the most impactful innovation in electric vehicles, including any hybrid. In California, for instance, where the Big Three are staging a push, the No.1 trade-in vehicle for Volt purchasers is a Toyota Prius hybrid. That accounts for about 20 percent of our Volt customers there, said Alan Batey, vice president of Chevrolet sales. Thats a big number. And a raft of new joint ventures including one between Ford and Toyota seem likely to ensure that no significant, or determinative, gap in technology or costs will open again on the EV-technology front between the Big Three and the erstwhile Japanese pioneers.
Providence dealt a severe blow to the Japanese people and economy, and the islands automakers, in March 2011. But at the same time, it gave the U.S. Big Three a golden opportunity to extend their gains. So did Toyotas safety-recall problems and loss of brand equity in 2010, and the laziness of both Toyota and Honda in refreshing their product line-ups over the last few years. So much of Toyota and Hondas decline isnt because of quality issues, or unintended acceleration, but because they made the ill-advised decision to lengthen their re-styling cycle to match the Americans, said George Hoffer, adjunct economics professor at the University of Richmond and a long-time student of the auto industrys product cycles. In so doing, they lost market share.
Some evaluators go further. If GM and Ford used to have big-car-company disease, now Toyota and Honda are suffering from it, argued Brock of Miami University. Their success has bred its own failure; they became big and bureaucratic. That has been a big reason for the quality problems and overall malaise theyve demonstrated. Toyota got fixated on being the biggest in the world; they didnt learn a damn thing from GMs being the biggest in the world.
Whatever the precise magnitude of the turnabout, the paradigm shift has been profound. Scott said that one scenario from a couple of years ago would have been for Toyota to get going full-speed ahead again, and it could have become a Ford-Toyota race in the U.S. market. But Toyota has faltered, and it has played out to the short-term benefit of all the domestics. For the long term, one huge headwind for the Japanese is that the yen-exchange rate looks perfectly awful for years to come, McAlinden said. Also, even though Hyundai-Kia is maxed out capacity-wise right now, theyre terrified of the economy, and building another assembly plant in the U.S. would be a big deal for them.
For such reasons and more, many expect Detroit to continue to shine. All in all, as McAlinden said, were very optimistic. As Jackson put it: These were companies on a 20-year market slide pick a year when you want to start on their way to oblivion. Now theyve taken share for the second or third year in a row. Its really quite something. Its a genuine, authentic renaissance; theyre fully back in the game; and theyre getting full consideration from the American consumer. It will be a long-lasting comeback.
The Big Three have stepped successfully through a window of opportunity in 2011, picking up sales, market share, momentum, and even favorable new labor contracts. But can they take bigger advantage in a way that will reshape their fortunes, and the U.S. auto market, for the long term? Are GM, Ford and Chrysler capable of leveraging their new advantages in product balance, profitability and marketing into a reversal of decades of relative decline? "Rising," a new series by AutoObserver, looks at their chances.