Jubak's Journal
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Just call Chrysler the Big One
To become global players again, the U.S. Big Three automakers must become ruthless cost-cutters -- or find a new competitive edge. Only Chrysler looks like it has a chance.
By Jim Jubak
Let's be clear about one thing: What used to be called the Big Three -- General Motors, Ford, and DaimlerChrysler -- will survive. They'll slash wages enough, cut retiree benefits enough and sell assets enough to escape the current crises.
But thrive? You know: Move back to the top of the auto industry, take share from Toyota Motor (TM, news, msgs), make good money for shareholders? No way. Not with the strategies that General Motors (GM, news, msgs) and Ford Motor (F, news, msgs) have proposed so far. Only one, DaimlerChrysler (DCX, news, msgs), has a shot at achieving those goals.
The 19th-century methods that let the Big Three rule the world for a good part of the 20th century won't work anymore. In the 21st century, a manufacturing company can either become Dell (DELL, news, msgs) or Apple Computer (AAPL, news, msgs), or it can slide into decline punctuated by crises. The only U.S. auto company that seems to understand that is what used to be called Chrysler. DaimlerChrysler stands a chance of being one of the global Big Three 10 years from now. (My two other nominees would be Toyota and Korea's Hyundai Motor (HYMLF, news, msgs).)
The incredible shrinking auto giants
The steps that General Motors and Ford Motor have reported recently certainly sound dramatic enough to turn those companies' fortunes around.
GM announced a deal that would save the company about $1 billion a year in health-care payments to retired workers. Add that to the $2 billion in unspecified cost cuts the company recently projected it would achieve by the end of 2006, and it sounds like the company has fixed its problems.
Bought some time is more like it. GM lost $1.6 billion (including restructuring charges) in the third quarter. (Whoops, there goes all that money squeezed out of retired workers.) The company faces an underfunded pension liability that will hit $15.3 billion by the end of 2005. (If the company sells a 51% stake in its GMAC finance subsidiary, Wall Street analysts say it could raise somewhere north of $11 billion. Of course, if General Motors sells its financial arm, it would also be giving up the $675 million in net income GMAC recorded in the third quarter. Without that profit, General Motors would have shown a $2.3 billion loss.)
Related news and commentary on MSN Money
Ford, which announced a $284 million loss for its third quarter on Oct. 20, hasn't announced all the details of its restructuring plan, but the outline sounds remarkably like that offered by GM. Ford will sell assets (the Hertz rental car unit). It will seek health-care concessions like those General Motors worked out with the United Auto Workers. And it will reduce production and the size of its work force. Ford already is on schedule to cut 10,000 jobs by the end of 2005.
And the fixes -- even though GM's plan produced an impressive rally in its share price -- still don't fix the two automakers' biggest problem. Even when they cut prices to levels where the companies are losing money on every car they sell, they can't stop the steady erosion of their market share. GM's share of the global auto market fell to 14.6% in the third quarter, down 0.8 percentage points from the year-ago quarter. And its share of the U.S. domestic market fell to 25.6%, down almost 3 percentage points from the third quarter of 2004. And that's the good news: October sales have started off way down, and Wall Street is projecting that, at current rates, GM will see its share of the U.S. market shrink to just 20.5%, its lowest share of the market since 1980. October-to-date sales at Ford show an even bigger drop.
Fighting the last war
In their plans, the two auto companies don't recognize how much the world has changed for makers of commodity goods -- and, yes, I think automobiles are now commodity goods. No auto company has a significant proprietary technology that distinguishes the bulk of its fleet from that of any other company. Increasingly, individual auto companies buy a significant amount of the product content of their cars from the same suppliers. Lear (LEA, news, msgs), for example, sells its seat systems, door panels, instrument panels and overhead systems to GM, Ford, DaimlerChrysler, BMW, Hyundai, Toyota, Nissan and Volkswagen, among others.
Sound like any other industry you know? Try the PC industry. Except for Apple's computers, PCs all run on Intel (INTC, news, msgs) or Advanced Micro Devices (AMD, news, msgs) processors and process their graphics with chips from ATI Technologies (ATYT, news, msgs) or Nvidia (NVDA, news, msgs). The mother boards and subassemblies inside different brands may even be put together in the same factories.
The PC industry has proved (although some PC makers such as Hewlett Packard (HPQ, news, msgs) don't get it yet) that makers of commodity goods have only two potential routes to profitability. One is to be like Dell, a low-cost producer that increases its revenue and profits by taking market share from less efficient producers. The other route is to be like Apple, which uses fresh and market-savvy design to convince the buyers of commodity products that they aren't buying a commodity product. Design-driven companies, such as Apple, can even charge a premium price for their commodity-market products.
Which of these routes have automakers General Motors and Ford chosen? Both and neither.
On costs, both companies are thinking too small. The cost-cutting strategy these companies are now pursuing is, in fact, equivalent to fighting the last war. These cost cuts are designed to close the gap with Japanese car makers -- just in time for the U.S. car companies to get clobbered by the Koreans and then the Chinese.
If you're a U.S. automaker, you get to be the low-cost producer by cutting wages and benefits to the $20 an hour ($10 in wages and $10 in benefits) that Delphi (DPHIQ, news, msgs) CEO Robert Miller has targeted.
And that's just the beginning. Miller proposes paying that package only to the U.S. workers who do the final stages of assembly. Most of the rest of the work of making the parts for a car would be shipped to low-cost countries. While Delphi took its U.S. operations into bankruptcy, it exempted its Asian operations. Those are hugely profitable -- largely because, while Delphi pays its workers in the United States $27 an hour in wages and, the company says, another $38 an hour in benefits, it pays its workers in China about $3 an hour including medical and pension benefits. And, let me not forget to mention, Delphi also provides a free bus ride to work and free lunch in the factory cafeteria.
Nice auto execs finish last
There's some evidence that both GM and Ford are moving in this direction. Ford has announced a plan to cut costs in its $90 billion-a-year global buying process by offering a smaller group of suppliers large, long-term contracts in exchange for lower prices. The first stage, which covers about $35 billion in Ford buying, would cut the number of suppliers by more than half by 2008. Don't get too excited by that "half" though. There are 5,000 direct suppliers of parts to the auto industry. Ford's goal is to go from 2,500 suppliers now to just 1,000.
But I doubt that the managers at General Motors and Ford are capable of doing what has to be done to turn either company into a global low-cost producer. The opposition to every compensation cut from the UAW, other unions and politicians will be intense. And the management culture at Ford and GM just isn't up to the kind of cold brutality it would take to transform these companies. (All bets are off if either company is either taken over by outside investors or eventually files for bankruptcy.)
Design, as Apple, Nokia (NOK, news, msgs) and Motorola (MOT, news, msgs) among other manufacturers of commodity technology products have demonstrated, is the other solution. Dell sells a desktop computer for $699, and the Apple product goes for $1,299. Apple makes a solid profit because some consumers are willing to pay more for a computer that isn't gray or black and that is actually, well, fun to look at. And, of course, when you can bring the right design to market at a relatively modest premium, you have an iPod -- and you bury the competition.
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