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On The Brink

TORONTO, Ont. - Without a government bail-out package, there's little chance of survival for GM, Ford and Chrysler.




TORONTO, Ont. –Without a government bail-out package, there’s little chance of survival for GM, Ford and Chrysler.

However, even if the government does extend aid to the ‘Detroit 3’, it does not solve their structural issues but only buys them more time to do so.

That was the prognosis of respected automotive analyst Dennis DesRosiers, who recently addressed the state of the North American auto sector at the Ontario Trucking Association convention.

DesRosiers said much of the auto-makers’ problems are “cyclical” in nature, and not insurmountable.

“To understand the crisis, we have to split out what I call the ‘cyclical’ variables from the ‘structural’ variables,” DesRosiers explained. “There’s no doubt there are serious structural issues in the marketplace, but the fundamental problem today is cyclical, not structural. We tend to have forgotten this is an industry that is cyclical -it always has been and we believe it always will be.”

DesRosiers said the chickens have come home to roost after years of overzealous purchasing incentives combined with creative financing options which resulted in inflated vehicle sales figures.

The net result was that the inevitable downturn was postponed by about six years and when it did arrive, it coincided with the credit crunch.

Years of overbuying followed by an unexpected credit crisis have “sent the market scurrying down,” explained DesRosiers.

The problem is worse for US car companies, because they’ve also been losing market share to “new domestics” (such as Toyota and Honda) for 16 consecutive years and their cost structure is about 25% higher than their competitors from overseas.

In response, DesRosiers said the Detroit 3 have implemented at three-stage strategy to recover, by: 1) resizing their organizations, collectively shedding 3.5-4 million units of capacity; 2) addressing their cost structures and becoming more lean; and 3) re-investing in product.

“Any sort of financial aid will buy them time to allow their strategy to play out,” explained DesRosiers. So should federal governments in Washington and Ottawa afford them the opportunity?

“A strong case can be made for a bail-out if one believes the primary problems in the sector are cyclical. And I believe they are cyclical,” said DesRosiers.

“One also has to believe the Detroit 3’s strategy to address their loss in market share will work. That’s a little less believable. It appears to be working, but it is tougher to drink that Kool- Aid -I’ve drank that Kool-Aid too many times.”

If a bail-out occurs, and DesRosiers thinks it will in December, he said the Detroit automakers will invest their funding almost entirely into new product development.

“Vehicle companies get themselves into trouble with product and they get themselves out of trouble with product,” he said. Currently, he said US auto-makers are pushing product lines that are not attuned with consumer requirements.

Since foreign car companies will not sit idly by as their US competitors aggressively launch new products, DesRosiers said a product war could result.

“A strong case could be made that the North American auto sector is entering its biggest decade of opportunity and at the same time the biggest decade of threat in its history,” he said.

“We could see a product battle developing of unprecedented proportions… every new product represents an opportunity.”

DesRosiers predicted over the next five to six years, 50-60 new products will be introduced in North America each year. That compares to an average of 25-35 per year a decade ago.

However, despite his optimism on some fronts, he also acknowledged a taxpayer-funded rescue package is no guarantee. While all signs point to a bail-out, DesRosiers pointed out there are still some hurdles to overcome. For instance, “How do you assist the Detroit 3 and not the new domestics?”

He pointed out Honda and Toyota have created about 40,000 jobs in Canada over the same time the Detroit auto-makers have slashed 55,000 jobs here.

“How do you help companies that vaporize jobs and punish companies that are creating jobs?” he asked.

Also, DesRosiers is skeptical that president-elect Barack Obama will be able to negotiate concessions from the unions, after winning the election largely on the backs of pro-union states.

Still, considering there are seven million jobs tied directly to the North American auto sector, which is a US$2 trillion economic engine, DesRosiers is confident a bail-out will occur.

From there, the likelihood of the Detroit 3’s survival will hinge on their abilities to return leaner than ever and ready to re-invest in quality product.

“If they can survive the current cyclical downturn, their cost-cutting will free up billions of dollars in capital which will be invested into new products,” DesRosiers predicted.

The ‘nightmare scenario’

While DesRosiers said he was optimistic the Detroit 3 could survive with government assistance, he also conceded there is a “nightmare scenario” that lurks ominously in the background.

In the US there are 103 vehicles for every 100 residents of legal driving age.

That number is about 74 here in Canada, and we seem to get by just fine.

DesRosiers said there could be as many as 20-30 million extra vehicles sitting in US driveways that aren’t really needed.

In light of the credit crunch, high fuel prices and new realities around mortgages and debt-loads, DesRosiers admitted it is possible Americans could “shed vehicles by the millions” over the next few years.

In that case, used car values would collapse, consumers would buy used instead of new, and the expected two-to three-year downturn could extend to seven or eight years -much longer than any government bail-out money would last.

If the nightmare scenario plays out, DesRosiers said GM, Ford and Chrysler will be history. However, he only pegged the chance of the nightmare scenario coming to fruition at about 15- 20%, since Americans are not likely to give up their love affair with their vehicles.

“Americans feel it’s their Godgiven right to own a vehicle, it’s a cultural issue,” DesRosiers said. “It’s their symbol of success and freedom and it’s really ingrained into them. It would take a baseball bat to knock it out of the American consumer. But maybe that baseball bat is the credit crunch?”

It’s a scenario he wasn’t willing to rule out.

———

-Dennis DesRosiers

“A strong case could be made that the North American auto sector is entering its biggest decade of opportunity and at the same time the biggest decade of threat in its history. We could see a product battle developing of unprecedented proportions,”


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