The Great Auto Industry Shakeout
The bailout of America's auto industry--General Motors, Chrysler, their
finance units, their parts suppliers, Cash for Clunkers, etc.--is
costing American taxpayers more than $100 billion. Let's put that in
perspective: It's enough to pay for every car and truck sold in America
for the first half of this year. For now, nobody really knows what we
taxpayers will get for our money. Everybody hopes (or should hope) that
GM and Chrysler become viable companies once again, but in truth,
whether either company makes it is far from certain.
On paper, the new General Motors--shorn of excess debt, dealers,
employees and brands--should be in great shape. But none of that painful
cutting will matter unless the company can restore the faded luster of
Chevrolet and Cadillac, its two core brands. The two others, Buick and
GMC Truck, don't matter nearly as much.
GM has some excellent engineers, as demonstrated by such worthy cars as
the Cadillac CTS and Chevrolet Malibu. But for decades the engineers
have been ham-strung by a corporate culture bereft of accountability.
While GM was racking up tens of billions in losses during this decade,
the only guy who got fired was former CEO Rick Wagoner--and it took
President Obama to do it. Thus it was puzzling when new CEO Fritz
Henderson's first round of executive appointments all were promotions
from within. In other words, there are new people in key positions but
no new blood.
Chrysler's road is tougher yet. The company's new-product pipeline is
bare, after a decade of mismanagement under Daimler and aimless
meandering under Cerberus. Fiat, the company that controls Chrysler, has
a proven CEO in Sergio Marchionne. But Fiat has zero record of success
in the U.S., and international mergers can be tricky in any case. The
ill-fated DaimlerChrysler was Exhibit A.
At the macro level, Cash for Clunkers has given all car companies a shot
in the arm, but the auto industry needs more than that. It's a
"feel-good business," as the saying goes in Detroit, and the stock
market's recent rally surely helps. But the Reuters/University of
Michigan Consumer Confidence Index--the economic indicator that's most
closely watched by auto executives--remains in the "feel awful" range.
All that said, it's worth noting that automotive history is filled with
unexpected reversals of fortune--both good and bad--of epic proportion.
To cite a few notable examples:
--Hardly anybody expected Chrysler's miraculous revival under Lee
Iacocca in the early 1980s. But the company repaid its $1.5 billion of
government-guaranteed loans (alas, the price of bailouts has risen
dramatically since then) in 1983--a full seven years early.
--Nissan's descent to near bankruptcy in the late 1990s was stunning. So
was the company's roaring recovery under Carlos Ghosn in 2001. Nissan's
profit margins for several years after were the highest of any major car
--The industry's next improbable rags to riches story came at Fiat
(yeah, the same Fiat that's running Chrysler), which rose from the
near-dead in 2005 and 2006 under Marchionne. The company's recovery was
about as predictable as, well, Toyota losing more money than General
Motors in the first quarter of this year. (That really happened.)
In short, predictions are perilous. Honda and ailing Toyota both have
new CEOs, which adds uncertainty to their respective outlooks. Ford
looks poised to emerge as the largest and most profitable American car
company. But because Ford avoided bankruptcy, unlike General Motors and
Chrysler, the company is sort of like the guy who is stuck with making
his mortgage payments, while the next-door neighbors are getting
subsidized housing. Ford also has the weakest luxury brand in the
Perhaps the best news for automakers is that great swaths of excess
capacity have been removed from their industry. As for the companies
that will emerge from this great shakeout to become the biggest
individual winners and losers, well, stay tuned.