The Great Auto Industry Shakeout

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 company.

--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 business, Lincoln.

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.