General Motors & Ford-It’s the cars “Stupid”
part II
Richard C. Stoyeck
StocksAtBottom.com
August 3, 2006 We’ve already stated our belief that that 2007
will see Americans buying several hundred thousand less cars than they
will purchase in 2006. We are looking for 16.8 million vehicle sales
this year. Let’s get into the numbers, and see what the
implications are. When you, or I buy a car for our personal use, we
pay on average about $25,000 per car. The car rental companies in the
United States purchase more cars than any other group. They buy
American cars, and pay an average of $15,000 per car. We don’t
see any big profits from this market segment.
Let’s look at the dealerships, and sort out how the Japanese
do against the Americans. A Chrysler dealer last year on average sold
about 225 cars. If you were a Ford dealer, you averaged almost 700
cars per dealer. GM’s Chevrolet dealerships came in under 650
cars per dealer. Would you be surprised to learn that Toyota sold more
than 1600 cars per dealership last year?
Now you know why American car dealers are complaining and going out
of business. In the last year GM lost 200 plus dealers while Ford lost
40, and Chrysler lost more than 110. This is happening on our home
turf, folks. This is not the Japanese and the Americans slugging it
out on European soil for control of European markets. This is the
American consumer choosing to buy Japanese over American made products
on American soil. People are voting with their feet.
Here’s the next big question. If American car dealers are
closing their doors at this rate, what kind of shape can the rest of
them be in? Can the owners be putting big bucks into their dealerships
while their friend’s dealerships are folding up? We think not.
Will the friendly banker be willing to finance their car inventories
when the bank sees other domestic dealers closing their doors? We don’t
see it. This means that American car dealers can only finance through
the car manufacturer’s financing arm, and that’s not good
when the dealer has only one choice. We estimate that half of Ford’s
dealers are not making a penny. We think for General Motors, it could
be as high as 25% are unprofitable. What’s the customer
experience going to be like in a dealer that’s losing money on
every car he sells? Is anybody listening in Detroit?
Every time GM loses a point of market share, they have to implement
plans to dismiss 20,000 people from their jobs. We see the necessity
for GM to cut another 60,000 jobs that they haven’t announced to
establish break-even 12 to 18 months from today. With all the talk
about GM in the news in the last 60 days, has anybody at GM or Ford
uttered a word about their real problem, QUALITY? The American
consumer does not want to buy American made cars in any quantity that
would allow Detroit to make money.
We believe that GM will be unprofitable until 2008 at a minimum,
and 08 can only be profitable if they maintain market share, and we
see continued declining market share. The Chairman has verbalized
nothing that deals with the issue of quality, and upgrading the
consumer’s consciousness to consider GM cars when it comes to
quality. Even Mercedes marvels at Japan’s ability to produce the
quality they do for the dollar it costs. Mercedes doesn’t
understand how Japan does it at their price points.
We took a close look at Ford (where “Quality is number 1”,
and “Ford has a better idea”), and found their restructuring
plan isn’t substantial enough to get the job done. They call it
the “Way Forward Plan”. We call it the “Lost in the
Wind” plan. They are taking total charges of $3.4 billion in 06.
They expect to be profitable in 08, why, we ask? What’s going to
change between now and 08? They believe they can save almost $6
billion in costs. We don’t see it, and if they were able to do
it, don’t you think Japan would jump on the bandwagon and do
whatever they have to do to drag their already low costs lower.
Did you know that when GM, or Ford produce an interesting car,
Japan buys the car immediately, rips it apart, part by part in Japan,
and than takes any interesting technology and applies it to their cars
almost immediately. Japan can put out a car in one-third the time it
takes GM, or Ford to design a car by committee. South Korea can go
from design to showroom in even a shorter time span.
Ford’s restructuring efforts in our opinion are clearly
overstating the bottom-line results. We see a headwind coming, where
Ford thinks it’s got a tailwind at its back. It’s going to
get tougher for Ford, and this is being overlooked because GM and its
troubles are getting the headlines. With the employees departing from
both companies how do you think the guy down on the assembly line is
feeling? Do you think he’s a loyal, lets get it done type of
individual? Do you think he’s wondering if he’s going to be
there 2 or 3 years down the road? Will his pension benefits be safe?
Will he ever get a pension? Will he even have a future at either of
these two companies that were once the unquestioned leaders of
American managerial know how?
Henry Ford wrote the book on manufacturing, and GM’s Alfred P.
Sloan wrote the book on building a company that is still studied at
Harvard Business School, and MIT today. Somehow in the last 3 decades,
the bean counters in Detroit forgot how to make cars. They literally
forgot what business they were in. They instead thought only about the
money. Labor became a cog in the wheel, not an integral meaningful
partner in the process. To turn this American industry around will
involve a different level of intelligence than the intelligence (used
advisedly) that got them into trouble in the first place. Einstein was
right.
Goodbye and good luck
Richard C. Stoyeck
StocksAtBottom.com
