Detroit Auto Revival Signaled After Two Bankruptcies
Almost a year after bankruptcies battered the U.S. auto industry, Detroit’s carmakers are up and running again, faster than government officials and analysts anticipated.
General Motors Co. (GM) paid off the last $4.7 billion in U.S. loans yesterday, Chrysler Group LLC posted a first-quarter operating profit of $143 million. Shares of Ford Motor Co. (F), the only one of the trio to avoid Chapter 11, closed today at the highest since January 2005.
“All three are much improved, and it’s not fair to give all the credit to bankruptcy,” said Brian Johnson, a Barclays Capital analyst. “In the desperate days of late 2008, they began making production cuts and product-line improvements. They’ve been remarkably restrained in incentives.”
So-called quick-rinse bankruptcies cleansed GM and Chrysler of obligations with “unprecedented” swiftness, said Jeremy Anwyl, chief executive officer of researcher Edmunds.com. Chrysler filed for court protection April 30 and exited June 10. GM emerged from bankruptcy on July 10, 39 days after entering.
“Despite all the naysayers, you have to look at GM and Chrysler and say their chances of survival are markedly better because they did go through bankruptcy,” Anwyl said. “And Ford benefited as the company that didn’t go through bankruptcy.”
Now, the automakers’ strategy involves paring costs while overhauling their lineups to boost fuel efficiency and quality.
Ford is pushing its Fusion hybrid as an alternative to Toyota Motor Corp. (7203)’s Prius, the top-selling gasoline-electric auto. GM CEO Ed Whitacre said yesterday the plug-in Volt will be introduced in October, a month earlier than promised, while Chrysler said it has 16 “all-new or refreshed” models in 2010.
“Our five-year plan is full of new products,” Chrysler director Ronald Thompson said in an interview. “Reports of our demise have been greatly exaggerated.”
GM and Chrysler, both beset by years of losses, slid into government-backed bankruptcies as the U.S. auto market shrank to its smallest since 1982.
The U.S. put up about $50 billion in aid for GM, the biggest domestic automaker. No. 3 Chrysler received $12.5 billion and gave control and a 20 percent stake to Italy’s Fiat SpA (F), which agreed to share technology and help expand exports.
Results so far from Detroit-based GM and Chrysler improve “the prospect of a faster-than-anticipated exit from government involvement and a return of most of the taxpayers’ investment,” Lawrence Summers, director of President Barack Obama’s National Economic Council, said in a blog post yesterday.
All three companies also benefited from Toyota’s global recalls of more than 8 million vehicles since September. Toyota’s U.S. market share fell to 15.2 percent in the first quarter from 16.3 percent while GM’s and Ford’s rose.
“That’s bigger than getting government money,” said John Wolkonowicz, an analyst at IHS Global Insight in Lexington, Massachusetts.
Challenges remain. While hourly labor costs at the Detroit automakers are down to $55 from about $75, that total still exceeds Toyota’s $50 for U.S. workers. Dearborn, Michigan-based Ford has said it has too much debt. GM is on its third CEO in a year. Chrysler’s quality ranks near the bottom of the industry, according to consumer researcher J.D. Power & Associates.
U.S. industrywide sales are still running about a third lower than the annual average for the past decade, a reminder that demand will be historically weak even with gains this year of as much as 20 percent.
“This isn’t much of a recovery,” said Barclays’s Johnson, who is based in Chicago. “I credit the cost cutting and the capacity reductions.”
GM, which used bankruptcy to lop four of its eight U.S. brands, now has a more competitive lineup with models such as Chevrolet’s Equinox sport-utility vehicle, said Maryann Keller, president of consultant Maryann Keller & Associates in Stamford, Connecticut.
“What has been most surprising at GM is the number of management changes and the surrounding questions of whether they have the right team in place,” Keller said. Whitacre, 68, was chairman when the board ousted Fritz Henderson on Dec. 1, and he has since hired a new chief financial officer and shaken up GM’s marketing leadership twice.
Shedding debt and getting government cash gave GM the resources to take on Ford, which is still burdened with $34 billion in automotive debt, said Sean McAlinden, chief economist for the Center for Automotive Research in Ann Arbor, Michigan.
With that assistance came the tag of “Government Motors” from critics, because GM received the aid in exchange for ceding a 61 percent ownership stake to the Treasury.
GM reported generating $1 billion in cash last year after leaving bankruptcy, a step toward Whitacre’s goal of returning to profit before an initial public offering. First-quarter U.S. market share was 18.7 percent, up from 18.5 percent.
College student Sarah Prial, 22, said she felt secure enough about GM’s prospects that in December she bought a $22,000 Equinox, her first new car.
“All I heard was that American car companies were falling apart, but I’ve never felt so safe in a car,” said Prial, a media-studies major at Sacred Heart University in Fairfield, Connecticut.
Chrysler’s sales slid 5.3 percent through March, trailing gains of 17 percent for GM and 37 percent for Ford. CEO Sergio Marchionne, 57, is counting on boosts from the redesigned Jeep Grand Cherokee SUV debuting in June and the Chrysler 300 sedan reaching showrooms in the year’s second half.
The Grand Cherokee “must be flawless, with quality unprecedented in the history of Chrysler,” Marchionne said in a March 30 speech in New York. He said he is investing Chrysler’s cash, now $7.37 billion, in the Chrysler, Dodge and Jeep lineups.
After being heckled about Chrysler’s government aid during that speech, Marchionne said he felt “a lot more comfortable today than I did 12 months ago, by far.”
McAlinden, the economist, predicts U.S. market share for Auburn Hills, Michigan-based Chrysler will fall to less than 7 percent from 9.2 percent through March. “It will be touch and go to build an IPO at Chrysler before 2013,” he said.
“For Chrysler to have any sustainable future it needs to massively increase unit sales,” Max Warburton, a London-based auto analyst at Sanford C. Bernstein & Co., wrote in an April 15 report. “The firm needs great new product.”
Mulally, 64, sold European luxury lines including Jaguar, expanded the small-car lineup and worked to improve vehicle quality. Ford’s reliability is now “world class,” Consumer Reports said Oct. 27.
Ford may say April 27 it had first-quarter net income of $1.1 billion, the average of 5 analysts’ estimates compiled by Bloomberg. U.S. market share rose to 17.4 percent through March from 14.7 percent a year earlier.
“Ford is doing better than I expected by a wide margin,” said McAlinden at the Center for Automotive Research. “Its reputation with consumers has improved dramatically.”
“There are signs that a turnaround is happening,” Ford Executive Chairman Bill Ford told reporters in Detroit today. “But we’re still, by historical standards, not at very high industry levels. So we’re very pleased, but very cautious.”
The advances at Ford might not have been possible without the aid for GM and Chrysler. A collapse by those rivals would have damaged suppliers, putting Ford’s survival at risk, Mulally has said. GM and Chrysler now employ about 110,000 Americans, and 1.1 million more U.S. jobs are dependent on those companies, McAlinden said.
“We should not forget that the public and the government are ‘paid back’ through the avoidance of income and revenue loss,” McAlinden said. The fallout for “U.S. manufacturing and the U.S. Midwest in particular would have amounted to an industrial Lehman Brothers.”
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