Jubak's Journal Recent articles: • 5 stocks for the post-Greenspan world, 10/26/2005 • 3 big trends will haunt Bernanke, 10/25/2005 • 5 tech stocks to buy before the rally, 10/21/2005 More... | Jubak's Journal 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 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 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 Sound like any other industry you know? Try the PC industry. Except for Apple's computers, PCs all run on Intel The PC industry has proved (although some PC makers such as Hewlett Packard 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 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 Design -- or, to be more precise, unappealing design -- is part of the cost-problem at General Motors and Ford Motor. It's reflected in the size of the incentives that the two companies have to offer customers versus the incentives at Japanese competitors. When General Motors tried to cut back on incentives -- going to no-haggle value pricing instead -- sales dropped off a cliff. So in recent days, the company has gone back to the rebate game. Buy a Buick Rendezvous and get $2,500 cash back; buy a Chevy Tahoe and get $3,500 cash back. The incentives at Ford are roughly comparable: $2,000 cash back on a 2006 Explorer. The Big One The only one of the Big Three that has shown any ability at this game is DaimlerChrysler. At a time when both Ford and GM lost big bucks, the Chrysler unit of the company showed an operating profit of $1.2 billion for the first nine months of 2005. Chrysler was able to bring products to market that hit very different design targets for specific parts of its market. On one end was the Hemi V-8 engine for the raw-power truck market, extending the company's "Ram-tough" position. At another, the elegant Chrysler 300 set a sales record in September -- without significant incentives or discounting. Not that Chrysler doesn't have its work cut out for it. The company's average incentive per car was $3,861 in the first three quarters of 2005. DaimlerChrysler has had its design mistakes. The Dodge Neon comes to mind. In Europe, the company's urban Smart car hasn't raked in profits. But the company has had more hits than misses: Maybe because the German end of the company has experience and success with niche markets that sell on design -- why else buy a Mercedes? Or because the company has such a variety of clearly different brands -- the difference between a Chrysler 300 and a Mercedes S class is much clearer than the difference between a Chevy and a Pontiac. DaimlerChrysler is the only one of the Big Three that seems to understand that time to market is critical for a design company. In 2006, Chrysler plans to crank out 10 new models, up from three to four per year in 2000. And it has cut its capital-spending budget to $30 billion in 2005 from $42 billion in 2001. And DaimlerChrysler, again maybe because it is an international company in the way that Detroit born-and-bred General Motors and Ford aren't, has been more successful than General Motors or Ford at adopting the manufacturing efficiencies of a Toyota. All of the Big Three have studied Japanese manufacturing systems for years, but DaimlerChrysler's Chrysler unit has been the most successful over the last three years at using these methods to boost productivity, achieving a 19% jump in manufacturing productivity. And, of course, these times being what they are, DaimlerChrysler hasn't been shy about moving manufacturing to low-cost countries such as Mexico where workers earn $5 to $6 a hour instead of the $26 Chrysler pays its union workers in the United States. I think investors might be able to make good money trading GM and Ford over the next decade as the companies lurch from crisis to crisis. But if you'd like your profits to come with less volatility and from long-term growth, then I think DaimlerChrysler is only one of the Big Three for you. Updates Sell Arris Group I added Arris Group to Jubak's Picks for its volatility. And volatility is exactly what I got -- although I had been looking for upside volatility in an end-of-the-year technology rally rather than the downside plunge since I bought the shares. On Oct. 27, Arris Group closed at $7.85, below my stop loss limit of $8.05, triggering the sale of the position. After the market's close on Oct. 26, Arris Group reported third-quarter earnings of 18 cents a share (after two cents a share in stock options expense), a penny above the Wall Street consensus. Revenues of $201 million were at the high end of analyst projections of $197 million to $201 million. The problem -- and the reason for the stock's plunge -- was guidance for the fourth quarter. The company lowered projections for the fourth quarter revenue to $180 million to $190 million (from a prior $185 million to $200 million) and earnings to 15 cents to 18 cents (from a prior 17 cents). Some customers, the company said, have recently reduced their forecast for fourth quarter purchases as they manage year-end inventory. This kind of minor -- very minor -- reduction in guidance wouldn't produce the kind of decline that it did in most markets, but the current stock market is extremely nervous about higher interest rates and is inclined to sell first and ask questions later. I have a 16% loss in this position since I added it to Jubak's Picks on Oct. 21. (Full disclosure: I will sell my personal position in Arris Group three days after this column is posted.) No more China on the cheap Is China's economy slowing? Overheating? Growing comfortably? Don't look to China's official statistics for an answer. According to the National Bureau of Statistics in Beijing, the Chinese economy grew by 9.4% in the quarter that ended in September. That follows 9.5% growth in the second quarter and 9.4% growth in the first quarter. No way. The September drop in China's trade surplus should have produced more volatility than that in economic growth, since so much of China's economic activity hinges on exports. Reports from China's version of the Purchasing Managers Index confirm a slowdown in manufacturing in the third quarter. Western investment companies estimate that growth slowed to 8% to 9% in the quarter, still high, but a bit slower than earlier in the year. China's reported growth almost always mirrors the growth targets set by Beijing, since local officials and managers at state-owned companies know that the quickest way to the top is to report results that meet official targets. 6 winners for tech's hard times Yahoo! 4 stocks with real value in real estate Better-than-projected earnings and a 3-2 stock split, too -- it's been a good October for owners of Rayonier Editor's Note: A new Jubaks Journal is posted every Tuesday, Wednesday and Friday. Please note that Jubak's Picks recommendations are for a 12-to-18 month time horizon. See Jubak's CNBC Picks for shorter six month recommendations. For picks with a truly long-term perspective see Jubak's 50 best stocks in the world or Future Fantastic 50 Portfolio. E-mail Jim Jubak at jjmail@microsoft.com. At the time of publication, Jim Jubak owned or controlled shares of the following equities mentioned in this column: Arris Group, Yahoo! and Rayonier. He does not own short positions in any stock mentioned in this column. | |||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||
MSN Money's editorial goal is to provide a forum for personal finance and investment ideas. Our articles, columns, message board posts and other features should not be construed as investment advice, nor does their appearance imply an endorsement by Microsoft of any specific security or trading strategy. An investor's best course of action must be based on individual circumstances.