General Motors & Ford-Its the cars Stupid
August 1, 2006 When Bill Clinton ran for the Presidency in 1992,
his platform was basically, its the economy Stupid.
When we look at the state of the American automobile industry, we
believe both companies are on the wrong track. General Motors stock
bottomed at $17 per share, and is now trading in the $30s.
Everybody is excited about chopping employees, closing plants, and
potentially hooking up with Renaults formidable Carlos Ghosn.
This is all financial engineering, which is great for what it is, but
its not what car manufacturing is all about. Its all about
cars, does anybody remember that GM, and Ford make cars.
What gets you into trouble is what has to get you out of trouble.
The 25 year problem with American car companies, is that we
manufacture cars that are less than desirable. Is anybody listening
out there? If you look at sales patterns on the East coast, and West
coast of the United States, you will see that Japanese manufacturers
dominate both coasts in sales. The car companies are selling to
long-time loyal Americans that buy American in the Midwest and
Southeast. They are not selling on the basis of quality, and bang for
the buck. They cant compete on that level.
The problem comes down to this. The Japanese companies have
mastered zero defect manufacturing. This means the car comes off the
assembly line perfect. There are no (zero) problems to be fixed at the
dealer level. When a person takes delivery from the showroom, he rides
out with a car that doesnt have to come back until the first
major service. The reason why so many Japanese companies have
instituted free oil changes on their vehicles is because the cars run
like toasters. They run for tens of thousands of miles with nothing
going wrong. People were not even changing their oil, so if most cars
were leased, the companies had to make sure that at least the oil got
changed. Cars are designed for the first buyer, to have zero problems,
and the Japanese have mastered this.
Contrast this management decision with Detroits way of
thinking. The cars go into the showrooms with defects. Detroit has
made a conscious decision to fix these problems after the customer
takes delivery. The customer will then bring the car back with a list
of problems, and fix it at the dealer level. There is no comparison
between consumer satisfaction with domestic cars, versus Japanese
The Chairman of General Motors is a throwback to an age that no
longer exists. Einstein said, We cant solve problems by
using the same kind of thinking we used when we created them.
This is what we are experiencing at GM, and Ford. William Clay Ford
Junior, the current Chairman of Ford has done restructuring after
restructuring to no avail. Ford is still losing market share. What
about market share, Bill?
Every time GM loses a point of market share, they create for
themselves an additional $1.4 billion in pretax losses. Our work shows
that the automobile industry may be sliding into recession in 2007,
and then where is this industry going to find itself? Lets take
Last year in 2005 if you look at GMs automobile operations as
a standalone business, they went through almost $7 billion dollars.
This year aside from restructuring costs, we think they burn another
$4 billion, plus $4.5 billion in 2007. The announced restructuring
only amounts to $4.5 billion in savings. They are still bleeding, they
are still losing market share. Over the next couple of years, you have
to add upwards of $900 per car for raw materials, and costs imposed by
Washington regulators, and GM isnt alone. Ford will burn through
$4 billion this year, and almost $4.5 billion next year in 2007. How
do these guys keep their jobs?
For GM we cant see where what they save from restructurings
which is $4.5 billion in cash can offset the cash burn rate they have
created. They are still hemorrhaging cash while LOSING MARKET SHARE.
Do you have any idea how tough it is to turn around a gigantic company
like either of these companies while they are still losing market
share. It would be tough to do it in a fabulous economic environment.
Lets look at two points here. The first is when you break
down the automobile companies by divisions; GM and Ford make a lot of
money from selling light trucks. GM by itself made almost $1.5 billion
income last year from this division. The year before that, they made
twice as much. We see this division taking a real hit next year for
both GM and Ford. Gas prices are going to wreak havoc with the sales
of these vehicles, and housing starts will be down. Look at the
homebuilding stocks and their declining prices (more like an
avalanche), and you will see where housing is going next year. Huge
numbers of these trucks are sold to people in the construction
industry. Figure it out for yourself.
Whats going to happen is this. Quickly, GM and Ford are going
to have to start selling passenger cars, and what you call crossover
vehicles. They are going to get clobbered. The Japanese get between
$900 and $3800 more per passenger car than the guys in Detroit. This
means the Japanese care are loaded down with extras that we just cant
put in our American built cars. This segment includes SUVs.
We are looking for 16.8 million cars to be sold in the United
States this year 2006. Contrary to what GM and Ford believe, we think
next year is down a couple of hundred thousand cars, and neither of
these companies is budgeting for that experience. Housing prices in
this country are sideways to down. People will not be extracting cash
from their houses in the form of home equity loans to be buying cars
next year. They will not be feeling good about the price of their
house, and therefore consumer sentiment will suffer. The first hint as
to whether we are right will be if there is a Democratic watershed
coming in the Congressional elections this November. If the Democrats
take control of either chamber of the Congress, it will be prelude to
a down automotive cycle in 07. That will be your indicator. Watch for
Goodbye and good luck