Thursday, July 16, 2009

Happy Re-Birthdays Detroit, and Thanks for the Presents

And, congratulations to the proud parents – the Obamas. You did good.

It was common knowledge that the GM and Chrysler bankruptcies would unleash destructive forces that would propel the US industrial complex (along with everybody else) into a depression and destroy the foundation of the entire motor vehicle industry. This was even outlined in the recovery plans submitted to Congress. Well, all that certainly didn’t happen. What we found out was that we were not as smart as we thought. Rather than debate the nuances of these rebirths now, we need to dig deep for lessons and signals for the future.

For the past 15 years I have had the opportunity to speak with UAW groups about the state of the industry, typically around contract negotiations time. Basically, I’d been telling them how bad things were, and that it was not inconceivable that one or more of the domestics could become bankrupt. It was usually towards the end of my presentations that the “bankruptcy” words rolled out of my mouth. The reactions from the participants differed over time. Early UAW leaders labeled me as a deviant, not to be believed, based on humorous anecdotes I’d use about parenting my teenagers. Starting two contracts ago the UAW groups started to pay attention. During the last round of negotiations, they were finally scared. Still, nobody really believed that bankruptcy could ever really happen. Everybody knew that bankruptcy would result in an industry-wide cataclysm. And, because of this, everybody knew that it would not happen.

But it did. Lightning struck twice. And, remarkably, there was no cataclysm. The speed and efficiencies of the Chrysler and GM bankruptcy proceedings were awe-inspiring, and defied the expectations of even the most naive optimists. Delphi was the benchmark and it set up the expectation that going through bankruptcy court would be a very long journey. But we learned a few simple tricks from the Obama task force; they talked about separating Chrysler and GM into good and bad companies, with the good parts emerging from bankruptcy fast. The bad parts would stay under the protection of the courts for years. That’s what happened. This must mean that Delphi is all bad parts. Maybe that’s why GM spun it off in the first place.

This birthday celebration has meaning beyond the simple re-birth of two industry pillars. Here’s an initial set of take-aways.
  1. The supplier community is healthier than we all suspected. I wrote about this in a recent blog on Bo Andersson. There have been remarkably few unexpected supplier bankruptcies. This recession and the bankruptcies have been like a Geithner “stress test” on motor vehicle suppliers. Most suppliers have, so far, weathered the storm and been able to adapt to a market that contracted by about 35%. The $5Bn bailout helped, but we need to put this in context. In this instance $5Bn helped save an industry; in the case of AIG, $5Bn was just pocket change. So, we do not need to worry so much about our supply base.
  2. We need to be extremely careful about our dealer-ization strategies. Both GM and Chrysler studied this one to death and determined that more dealers do not necessarily mean more sales or more profits. So, we should be extremely careful about adding new dealer points. Toyota’s restricted big-dealer distribution network has been spectacularly effective. We need to start thinking about fragmenting the typical dealer/distributor and looking for separate distribution strategies for whole goods, used, accessories, service, parts, wholesale, and, perhaps, information. The need to service a car or piece of equipment does not always mean needing another full-service dealer rooftop.
  3. There is a way to deal with the UAW. For decades the UAW and “management” were in a Mexican Standoff. The US government pulled the trigger first and left a pretty significant head wound. The UAW will now negotiate, because the “or else” has happened and, now, it is about the survival of their members, not the strike target. Deere, Cat, Ford and others will now be the ones to demand pattern agreements, and will get them. For non-UAW shops, the threat of a successful UAW organizing move is fairly non-existent. We will find that the UAW lost a lot of credibility in the eyes of labor – and not because it emerged as a loser in the bankruptcies, but, because they share the blame in bringing Chrysler and GM into the bankruptcies.
  4. Maybe customers are more resilient than we thought. The theory was that if GM and Chrysler went into bankruptcy, their customers would flee to other brands and the volume losses would be catastrophic. Well, that did not happen – we have not seen anybody dropping off the cliff in market share due to the bankruptcies. In fact, the only real change in market share at Chrysler and GM is from lower fleet sales due to temporarily reduced production and the decline in fleet demand within the industry. June was disappointing, but so were the circumstances inside GM and Chrysler – besides this, GM’s June was relatively better than the Japanese Big-3. A lot has changed in the past week or so. So, retail customers are the kind of fickle people we’ve seen for a couple of decades, not the kind of fickle people who stay away during bankruptcy proceedings. They certainly responded to the big messages that were drilled into them decades ago about quality and fuel economy – pre-recession market share numbers bear this out. But, buying a car or a truck from a financially troubled company has not proven to be a show stopper.
  5. Maybe it’s OK when someone says, “I’m from the government and I’m here to help you.” And, maybe it makes sense to question conventional, common-knowledge auto know-how. There’s no denying it that the Obama Task Force, working with Chrysler and GM management teams, did a spectacular job of cleaning up decades of waste, debt, and management exasperation. Hey, they got Lutz back from retirement, and this is a guy that does not suffer fools gladly. With lots of outside executives and government employees deeply looking into the auto industry, some of the old automotive modus operandi may have been blasted away – or at least heavily questioned. This vaporization of “common knowledge” might be a fast-acting virus and spread. So, expect a lot of questioning about overoptimistic business plans, overcapacity, high fixed-cost break-even, manufacturing plant inflexibility – even the entire business model. Past excuses to change were “we’ve always done it this way… if we do this or that we’d go bankrupt”… well, try again now.
  6. The universe of carmakers is not contracting. Policy wonks and researchers have been telling us that in the future only 5 large carmakers will have the scale to survive; this is nonsense. Nobody wants a major carmaker to go bankrupt. Rather, we may get more companies with the Chinese entering. Economies in manufacturing become less important (more and more manufacturing is at suppliers anyway) while technological cleverness wins (Apple is beating Microsoft with a lot less resource investment).
  7. The government is putting its money where its mouth is. For years the government said consumers need to buy greener cars (i.e. pay more money for smaller, uglier cars). Now it is getting smart. The set-up of the “cash-for-clunkers” program actually makes a lot of sense and will work in achieving a greener car park.
  8. The cheap dollar is good for the moment. A cheap dollar makes it interesting to manufacture cars locally in the US, and more expensive to buy foreign imported cars. For the moment this will be a real tailwind for the newborn companies.
  9. A move away from pure focus on stock market performance will help the rebuilding process. With the government (and the UAW) holding large ownership positions in companies, this will be the opportunity to focus on medium / long term value and investments. This is a move away from the ultra-high attention to Wall-Street shareholders. (After all, Wall Street got us into this mess, didn’t it?)
  10. The Independent Aftermarket will have techs who prefer Genuine parts. GM and Chrysler have or will close about 2,000 stores with about 10 techs per store. This means about 20,000 techs trained by the OEMs will be moving to Goodyear Gemini, AAMCO and the like (OE dealers are not hiring) and these techs are used to installing genuine parts. This is an opportunity to wholesale parts to the independents.
  11. Enormous profits are waiting in the wings for US automakers. GM, Chrysler and soon Toyota have rationalized assembly plant capacity. Further, salaried and hourly staff levels have been reduced across the industry. For the first time in decades capacity has been reduced to long term demand levels for the US market. Once industry volumes get back to 14M to 15M SAAR, OEMs will make good money. Remember that this rather lackluster SAAR does not appear so unreachable when you consider the volumes needed to replace depleted dealer inventories and fleet sales. At 16M SAAR the US auto industry will print money. Cars and Trucks will be sold without discounting and subventing leases, because production will actually be limited at meeting demand.

No comments: