A deteriorating US sales outlook and the precarious state of the Detroit 3 prompts a review of plans submitted to congress this week and preliminary guidance for the December forecast.
General Motors
GM recognizes the need for severe
restructuring actions and is carefully reviewing a range of scenarios.
By 2012, the company intends to consolidate its portfolio of brands,
close nine facilities, phase out up to 30,000 employees and cut its
bloated dealer network by 1,750 to 4,700 dealerships. Altogether, GM
is requesting $18 US billion to support its plan to revamp its North
American operations and return to profitability.
GM's request for an immediate loan of $4 US billion this month highlights the sense of urgency as the company experiences severe cash burn amid the weakest US sales levels in decades. On this front, GM is unable to adequately fund vehicle sales as it no longer owns the controlling interest in GMAC, now majority-owned by a Cerberus-led consortium. As a result, GM's ability to finance light vehicle sales is greatly restricted. Captive financing now accounts for just 6% of GM's retail sales vehicle sales compared to nearly 50% one year ago.
Part of the challenge in confronting ongoing brand and dealer issues has been the staggering costs associated with these actions, which stem from unique state franchise laws that largely favor dealers. Although the size of its dealer body has declined, it has not kept pace with considerable market share declines that have accelerated in the past decade. The bleak demand outlook for 2009 will speed the contraction of GM's dealer body as throughput declines further.
GM's broad range of brands has diluted the impact of its capital investments. The company's brand portfolio contributes to considerable product overlap, increasing competition and reducing vehicle pricing power. Going forward, GM's actions will accelerate further sales declines across the Saturn, Saab, Hummer and Pontiac brands as these brands are de-emphasized or sold off. Volume implications are material as in many cases replacement products no longer materialize. A partial volume offset can be expected for remaining nameplates, while sourcing scenarios will also be reviewed with increased emphasis on US locations.
Any asset sales would yield nominal returns given the limited number of potential suitors for respective brands and or distribution channels, especially in light of tight credit markets and a weak demand outlook.
By accepting government loans, GM must face a new reality in which product actions come under even greater scrutiny. Additionally, GM and Chrysler are reportedly considering pre-packaged bankruptcy as a last resort. Some members of Congress favor such a move, but the implications are grim as GM stated in its plan that such a move would discourage consumers from purchasing GM vehicles. Concerns over the company's health and financial viability are already negatively impacting US sales as seen in the past few months.
Ford
Although Ford is in the best position among the
Detroit 3, it is hardly a healthy company. The plan set forth by Ford
is the most clear and defined of the three plans; the company intends
to reach profitability in 2011.
Unlike its Detroit-based rivals, the business plan that Ford submitted clearly tries to distance itself from the dire liquidity situation that GM and Chrysler are in. Ford stresses that it is asking the government for a "stand-by" line of credit of up to $9 US billion that would only be used should market conditions further deteriorate. It also admittedly claims it is acting in its own best interest in supporting funding for its rivals given the strong interdependency that exists in the automotive industry. Ford claims that there is an 80% supplier overlap and nearly 25% of Ford's top dealers also own GM and Chrysler franchises.
Ford is also taking this opportunity to bring other issues to aid the auto industry to the forefront, such as addressing healthcare and fair trade policies. To spur demand, Ford suggests the creation of incentives for consumers to trade in their older, less fuel-efficient vehicles. This proposal, also suggested by GM, favors the Detroit 3 versus a tax write-off of automotive loan interest, given that the vehicle population of older, less fuel-efficient vehicles is comprised of more Detroit 3 cars.
Ford has already been moving aggressively to transform its product portfolio under the "One Ford" vision set forth by Alan Mulally with the worst market conditions in 25 years conspiring against the turnaround plan. Ford had already leveraged numerous company assets to secure $23.5 US billion two years ago. Following the sales of Aston Martin, Land Rover and Jaguar, it is possible that Ford will sell Volvo to raise additional funding while also focusing on the "One Ford" mission.
Due to the current industry crisis, Ford continues to aggressively reshape its plan and direction with further reduction in workers, factories and dealers planned for the coming year. While GM has focused significant resources and energy toward becoming a "green" auto company with expensive, low-volume entrants, Ford has been quieter, focusing on the core volume vehicles in its line-up before turning to such altruistic ventures. Ford is making further advances toward "green" technologies with the announcement of two new full battery electric vehicles (BEV) beginning in 2010 and also outlines details of powertrain and weight-saving plans to improve fuel economy and vehicle emissions.
Although all the Detroit 3 automakers are being negatively impacted by the publicity surrounding the "bailout," Ford stands to make inroads on GM and Chrysler. With buyer demographics similar among the Detroit 3 and a smaller share of crossover import buyers, several Ford vehicles are likely to experience mild increases in demand.
Chrysler
While Ford outlined a strong plan, Chrysler
failed to provide a concrete plan or direction on how it will survive
aside from pursuing alliances and partnerships. Just as GM is too
large, Chrysler is too small to survive without significantly improved
global economies of scale.
CSM skeptically views Chrysler's plans to launch 24 major products through 2012 due to little-known product development. Chrysler's surprise introduction of several electrically driven vehicles is also viewed with great skepticism given the lack of details surrounding the vehicles and the business plan behind them that make them viable. We are also skeptical of the company's ability to produce over 500,000 units by 2013.
Chrysler's current competitive position is untenable going forward. As such, further volume reductions are being planned for the December forecast that will reflect the early termination of numerous vehicle programs by the end of 2009.
A subsequent filing was reportedly submitted to Congress supplementing its initial case which highlights an increased role of a partner. This latest news becomes more relevant due to reports of scenario planning which include a pre-packaged bankruptcy. In this case, Chrysler's assets would become more valuable to prospective bidders as burdensome liabilities are eliminated.
Demand Outlook
As demand for automobiles continues to
deteriorate, CSM is planning to reduce its US sales outlook for 2009.
With financially strapped Detroit automakers in the news shaking the
confidence of already anxious consumers, US auto sales plummeted to a
26-year low of just 10.2 million units on a seasonally adjusted
annualized rate (SAAR) basis in November. The fourth quarter SAAR is
forecast to total just 10.4 million units, setting the calendar-year
total at 13.0 million units (3.1 million units below 2007).
Production Outlook
Due to a worsening economic
environment and weaker demand outlook, production is expected to
decline further in 2009. US sales have plunged to their lowest levels
in decades, outpacing production declines, contributing to a drastic
inventory build to end 2008. Typically, a 1-million-unit gap exists
between US sales and North American production. Sharply lower 4Q 2008
sales will result in a gap of just 200,000 units between US sales of
13.0 million units and regional output of 12.8 million units. This
amounts to a crushing inventory build of 800,000 units to end 2008
while heading into a dismal US demand environment for 2009.
Summary
If approved, federal funding for the Detroit 3
would carry numerous stipulations placing priority on US
manufacturing, which is expected to influence previous production
plans over alternate locations in Canada and Mexico. The impact is
considerable with countries competing against one another in order to
maintain existing production.
The UAW is also working closely with GM, Ford and Chrysler and has stated its willingness to grant a number of concessions, including suspension of the jobs bank and delaying payments into the UAW-managed retiree healthcare funds.
As US production accounts for a dominant share of North American output, Canada and Mexico will face additional pressure as future investment at GM and Ford is linked to US facilities. Mexico is forecast to see production increases in the mid- to long-term horizon with plans for several new plants, but US government support is expected to make some vulnerable US operations more attractive. There is also potential for these actions to stretch through the supply chain with profound effects on low-cost sourcing efforts for automotive components in the form of value-added metrics.
US federal aid will not come easily. Along with provisions and high-level scrutiny, OEMs will need to perform to task over a timeline in order to receive full funding. The funds will be disbursed in stages along the timeline, with each stage requiring particular metrics to be met to ensure funding. This controlled distribution of funding protects the government from failing to perform while providing a mechanism with which to monitor OEM progress.
If you have questions regarding this article, please contact Mike Jackson at mikejackson@csmauto.com or Joseph Langley at joelangley@csmauto.com.
